What Do VCs Talk About?

Each quarter, the Panache leadership team converges on a Canadian city for a week of strategy and planning meetings. As Canada’s only national early-stage VC, our partners live in four different cities (Vancouver, Calgary, Toronto and Montreal), so it takes extra effort for us to get together. When we do, we make certain that the time is well-spent.

But what do VCs talk about when they get together behind closed doors?

“Question #1: If it’s -10ºC outside, why don’t we have pants…?”

Here are some of the things we talked about last week in our 2023 kickoff meeting:

2022 Review

2022 was a wild year by any account. We spent a full day discussing last year, including:

• A high-level review of the performance of each of our funds.

• A post-mortem on the fundraise for Panache Fund II.

• A brutally honest “highlights & lowlights” review of every aspect of Panache (what we did well and where could we improve).

• A deep dive into the macroeconomic changes that took place in 2022 and our hypotheses for 2023.

Portfolio Companies

At each Panache offsite, we review our portfolio and the 100+ companies in it. Last week, our discussion focused on identifying companies impacted by ongoing changes in the macroeconomy and opportunities for us to help. Questions we asked included:

• Which companies in our portfolio have had their core business affected by economic changes (e.g. interest rates) and how does that impact their path forward?

• Which companies do we expect to face the most challenging fundraises in Q1 and Q2?

• Which companies may want or need to explore M&A in the near-term?

• What are the common challenges currently faced by our portfolio companies and is there anything we can do to help?

Finance

Venture Capital firms are complicated organizations with lots of moving pieces. But like every other company, we have revenues and expenses and have to make ends meet. Led by our fearless CFO (aka my Toronto Partner, Prashant Matta), we dug into our financial performance for 2022 and discussed, debated and disagreed on our budget for 2023 (seriously guys, I need more money for overpriced Vancouver coffee and Lululemon pants).

Actual photo of Prashant Matta

Investment Strategy

We started investing out of Panache Fund II when startup valuations were near their peak. The investment model we built for the fund (the mathematical model that we use to drive our investment decisions) very much reflected those valuations. Since then, the fundraising landscape has changed significantly and valuations have mostly returned to historical levels.

We discussed the impacts on our investment model and whether or not we wanted to revise our strategy as a result:

• Should we invest in more companies?

• Should we invest more money in the same number of companies?

• Should we change our target ownership percentage?

• Should we change the amount of money we hold for follow-on investments?

• Are there any industries that we are more/less excited about given the macroeconomic shifts?

Investment Process

As a firm, we’re constantly trying to streamline and improve our investment process. How can we be more responsive to founders? How can we reach conviction on an investment in the shortest amount of time without skipping any diligence steps? Where can we trim the fat?

Last week, our focus was on our investment committee meetings, the weekly meetings in which the entire Panache team comes together to discuss potential investments. In particular, we brainstormed ways to more effectively surface key questions partners and associates have earlier in the diligence process, in order to reduce the number of times we need to go back to founders with follow-up requests and shorten the overall investment process.

Operations

Continuing with the theme of efficiency, operations is a key topic that we discuss at our partner meetings. Last year, we undertook a complete rebuild of our internal CRM and communications systems to better support our work and our ability to review more than 3,000 startups/year across Canada.

Last week, we discussed our infrastructure roadmap and the improvements we want to make in 2023. Areas of focus included our outbound infrastructure (the systems we use to identify potential entrepreneurs across Canada), our data analytics infrastructure and our portfolio support systems.

Marketing and Events

As Canada’s only national early-stage VC, it’s important that we be present in our communities and at startup events across the country. We recently brought on an amazing head of marketing and community and have big plans for 2023. Expect to see us at major events, like Collision and Startupfest, as well as smaller activities across the country.

We also firmly believe that support for our portfolio companies shouldn’t stop at the border. That’s why we made a strategic decision last year to start playing offense on the international stage. Our ambitions for 2023 are even bigger — stay tuned!

Panache hosted 100+ US VCs at an event in San Francisco in September

Partner Dynamics and Mental Health

Just like startups have cofounder dynamics, VCs have partner dynamics. As anyone who works in a distributed team knows, it’s even harder to manage interpersonal relationships when you’re not in the same office. To ensure that we prioritize this, we dedicate a full day every quarter to strengthening our partner relationships, which includes a half-day session led by an executive coach from the US who specializes in VC partner dynamics. We also talk openly about our mental health and that of the broader team and ways that we can prioritize everyone’s well-being while ensuring that we each perform to our peak.

Canada Can't Afford a Flight to Fear

As 2023 kicks off, an industry-wide funding pullback is in full effect. VC investing in North America was down a whopping 63% in Q4 2022 year-over-year and now the VC echo chamber is trumpeting far and wide about the impending “flight to quality”.

Merritt Hummer of Bain Capital Ventures defines this phenomenon as follows:

 A “flight to quality” for the venture industry means a reversion to revenue models that are profitable and predictable. 

Broadly speaking, “flight to quality” refers to a consolidation of resources towards companies that are considered to be of higher quality and, thus, lower risk. In the startup world, companies that are seen as being of higher quality will find themselves attracting a higher share of venture capital dollars in 2023 while others struggle to raise. But what is “quality”?

In Merritt’s definition, “quality” is defined in terms of a company’s revenue model, not the company itself. This distinction is important, since the vast majority of high-growth startups do not become profitable until many years in. True innovation takes time and money, which is why venture capital exists in the first place. Thus, a “flight to quality” in venture capital does not (and should not) be interpreted as a flight to profitable or near-profitable companies only.

Unfortunately, in countries outside of the US, that’s often the case.

A Bit of History

Like most countries not named America, Canada’s venture capital industry evolved from traditional investment banking and later-stage private equity. In contrast to the inherently risk-taking approach of US venture capital firms (the origins of which you can learn about in the excellent book VC: An American History), most early Canadian VC firms historically relied on spreadsheets, numbers and traction to make investment decisions. The predictable result was a deeply conservative industry, in stark contrast to our neighbours to the south.

The American approach to venture capital has its roots in 18th century whaling

A corollary of the “top-down” evolution of venture capital in Canada was the emergence of an industry far more focused on later-stage investing than is found in the US. Canada has plenty of investors who are willing to jump on board once a company has product-market fit, but at the Pre-Seed stage there are embarrassingly few VC firms across the country.

To be clear, Canada’s venture industry has matured significantly over the years. Today, there are many more early-stage firms than there were 20 years ago, but that number remains frighteningly low. So while Canada’s tech industry has reached unprecedented heights in recent years, our innovation pipeline is at serious risk of a catastrophic slowdown if more than a handful of those investors flee the risk-taking necessary in Pre-Seed and early Seed for “safer” waters.

The Challenge

The last time we faced a real pullback in the VC industry was in 2008, following the US housing crisis (for those keeping score, that’s 15 years ago!). Plenty of investors are pontificating on Twitter about how “great companies are founded in tough markets,” but the reality is many of them have never seen a bear market, much less invested in one.

Many of today’s investors have only ever known a world where follow-on funding was relatively easy to come by. A world in which many of their companies were able to raise subsequent rounds, even if they missed their numbers (including, heaven forbid, investments where the investor glossed over diligence or FOMO’d into a bad deal). Now, those same investors are at a crossroads: do they continue to invest in risky, pre-revenue / pre-product-market fit startups or become more conservative and wait until there are more numbers to analyze?

For a VC who hasn’t experienced a bear market before, it can be very tempting to give into fear and flee to the safety of numbers. When times get tough, the siren’s song to “go upstream” (invest in later-stage companies, where investment decisions require less subjectivity) becomes loud. All the more so if the firm is still relatively unproven and some of their early winners are suddenly looking like duds.

In the US, there are so many VC firms that dozens — or even hundreds — of individual investors could move upstream without meaningfully impacting the ecosystem. It happens all the time. But in Canada, if more than a handful of our preciously few early-stage investors abandon Pre-Seed, then there will be no startups to invest in at the later stage. That’s how precipitous our position is right now.

You might think I’m over-reacting, but as I sit here in Vancouver, I can literally count on one hand the number of VCs in my city who are actively writing Pre-Seed checks. If even one of us pulls back from investing, the long-term impact will be significant.

The Opportunity

As much as we talk about great companies being founded in tough markets, it’s also true that great investors are forged in difficult times. Some of the best-performing early-stage funds of all time are from the last recession (2008 - 2011 vintage). The problem is, the short-term incentives for venture firms can drive individual investors to more conservative behaviour when times get tough. When capital is scarce, VCs can still make a lot of money by being safe, “okay” allocators of capital rather than leaning in to the opportunity to be great (and risk making mistakes).

The reality is that while becoming a more conservative investor can give the illusion of a short-term safety net, over time the returns of conservative firms reverts to the mean. The performance of such firms becomes more and more mediocre as vintage-defining outliers emerge in the portfolios of the investors who were willing to take risks. Marvin Liao, who has led investments in more than 400 early-stage startups around the world, recently noted:

It’s pretty safe and easy to just invest on traction or the 2nd or 3rd time successful founder. This is unsurprisingly the strategy for many established VC funds and angel investors. And this is also why many of them don’t drive good returns on their investments.

So as we look ahead to 2023, here’s to hoping that Canada’s early-stage investors continue to take risks and support our country’s most ambitious founders.

Our country simply can’t afford a flight to fear. And we won’t own the podium if we don’t take the shots.

I Hate Investor Updates

When I was a founder, I wrote weekly investor updates. Every Sunday night, I dutifully spent 1-2 hours in front of my computer writing them.

And you know what? I hated every minute of it.

Plenty of founders will tell you that writing regular investor updates helps them to gain clarity about their business. That the process allows them to step out of the day-to-day grind and look at the big picture. That may be their experience, but it wasn’t mine.

My experience was that writing investor updates was a tedious, time-consuming pain-in-the-ass.

My todo list was seemingly endless, yet every week I had to spend 1-2 hours writing an investor update. As the years went on and the challenges we faced grew more frequent and complex – I dreaded Sunday night even more.

But no matter what, I sat down in front of my computer and wrote an investor update.

Every. Single. Week.

I still have every investor update I ever wrote

If you’re thinking to yourself “but Chris…nobody forced you to write those updates,” you’re absolutely correct.

My investors didn’t demand it. There wasn’t a clause in our investor docs mandating weekly updates, yet every single week I did it.

I hated it, but it was one of the most important, impactful things I did as a founder.

Why Investor Updates Matter

If my investors didn’t demand weekly updates and I hated doing them, why did I persist on writing them week-in-and-week-out?

Because consistency breeds trust. And trust is one of the most important things a founder can develop with their investors.

When someone invests in your company — whether they’re an angel investor or a VC — they’re taking a massive leap of faith in you as a founder. For as much diligence as they might do, at the end of the day they’re trusting that you will do the things that you said you would. Investor updates provide them with a window into the businesses.

When I first became an investor, I was surprised by how varied different founder’s approaches to investor updates were. Some founders sent weekly updates. Others sent monthly ones. A few sent quarterly updates.

Many founders sent no updates at all.

I quickly found myself spending more time with the founders who kept me in the loop. I knew what was going on with their businesses (at least, at a 10,000 ft level), so I could reach out when I thought I could help. Many would ask questions or share requests with their investors, and I would jump in where I could.

And when things got tough and founders needed extra help, I already had a strong understanding of the underlying circumstances.

At least, for the ones who sent updates.

Which Brings Us to Today

Today, we’re in a really tough market.

Many companies are facing serious challenges. Revenues are falling, runways are shortening. A significant number of companies will need to raise capital this year having not hit their milestones.

So what does that have to do with updates?

When the times get tough, one of the first things to go for many founders is the investor update. Weekly becomes biweekly or monthly.  End-of-month updates start coming a few weeks late, and so on. As a CEO, it can be tough to garner the energy to write an investor update when it feels like you’re under siege, so many skip it.

The thing is, investors notice it. Immediately.

The best investors want to help when things get tough, but in order for that to happen, founders needs to keep them in the loop. Which means providing regular updates. No matter what.

Making Investor Updates Work for You

When things get hard, it’s easy to justify prioritizing something urgent over your investor update. Which makes it crucial that you do them in a way that works for you.

In my case, certain aspects of my updates became automated over time. Manually-calculating metrics turned into spreadsheet calculations, which eventually turned into database queries and then real-time dashboards. That helped reduce the burden and allowed me to focus on the important part of the update: the narrative. Aka my interpretation of what was going on.

Of course, that part of the update can be like leg day at the gym: no matter how consistently you do it, it still sucks every time.

But you need to do it. No matter what.

The folks at Highline Beta have a great investor update template

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Investors take a massive leap of faith in you when they invest in your company. Maintaining that level of trust is essential if you hope to rely on them when facing challenges.

The last thing an investor wants to think is that you’re hiding bad news from them. Regular investor updates don’t guarantee that every investor will be there with things get tough, but skipping them almost guarantees that they won’t.

In my case, providing our investors with regular updates gave them the confidence to lead our Seed round when we failed to raise from new investors.

So keep it up. Find the energy and write that investor update email.

No matter what.

The 7 Deadly Sins of Fundraising

Since the ancient days of Palo Alto, scholars have written treatises of the seven deadly sins of fundraising. The vices that many a founder has fallen prey to on their lonely journeys. Let me share them with you, my dear founder, in the hopes that you may avoid their tempting fate.

Envy

The most common sin for first-time founders is envy. Worrying about what others have raised.

“Acme co raised $5M and our product is way better than theirs!”

“My friend’s startup raised a Pre-Seed without even having a working prototype!”

“Our competitor raised at a $30M valuation and we’re lightyears further ahead than they were!”

Whatever some other company might have done is not only irrelevant to you, but it’s likely to be a massive distraction. And talking about them makes you seem insecure.

You aren’t them. They aren’t you. So stop worrying about what others may or may not have done (and stop believing everything you read in TechCrunch!).

Greed

Many a company fell victim to this sin in 2021/22.

Fundraising is a negotiation and it’s easy to want to push the envelope further and further. But if both parties don’t feel good about the end result, then a deal won’t get done. I know far too many founders who wish today that they had taken an offer that was on the table last year.

That doesn’t mean you should sell yourself short, but resist the urge to push for “one more thing” if you feel that a deal is fair for both parties.

Sloth

Successful fundraising requires focus, hustle and a lot of meetings. It’s not uncommon for a Pre-Seed or Seed round to involve 150 or more meetings. High-velocity fundraising is the only way to make the numbers work. If you’re only taking a couple of meetings each week and limping along, you’re shooting yourself in the foot.

Fundraising is a full-time job and you can’t half-ass it. Especially in 2023.

Gluttony

Gluttony is an overconsumption / overindulgence to the point of waste. In 2021, many founders raised more money than they needed, at valuations that deep down they knew were too high. Investors eagerly pushed early founders to take more and more money, and many agreed.

Fast forward to today, and many of those founders are paying for their sin as those same investors are revealing the dark side of VC recycling.

This is unlikely to be as much of an issue in 2023, but you should always be wary of raising too much more capital than you actually need, particularly if it’s done at a valuation that you won’t be able to grow into.

Wrath

When fundraising, it’s inevitable that you’re going to hear ‘no’. In fact, you’re going to hear it a lot. The vast majority of interactions with investors will end without an investment. Many will end with frustration for you as a founder.

Some investors will ghost you. Others will string you along. Unfortunately, it’s also likely you’ll encounter a handful that disrespect you or otherwise treat you poorly. No matter the result — whether you feel that you were treated fairly or not — resist the urge to lash out in anger.

Pride

When meetings start to go well and you’re into third and fourth meetings with multiple firms, it’s easy to get cocky. Resist the urge to drink your own kool-aid and remember that nothing’s done until the money’s in the bank.

The foolish founder gets too far ahead of themself and starts referencing term sheets that haven’t been issued, investors that haven’t committed and promises that aren’t in writing. Get too far ahead of yourself and the entire process can unravel.

Lust

Lust is an intense longing that can lead you astray. For founders, it’s the trap of focusing on one or a handful of investors based on their fame, brand or other appealing features.

In Silicon Valley alone, there are nearly 2,000 early-stage VC firms. By all means go after your dream investor, but don’t ignore the dozens of other investors that could be a good (or better) fit.

Be sure to cast a wide net and look beyond the top names.

Chris Neumann's Top 10 Posts of 2022

When I launched chrisneumann.com back in April, I committed to publishing a new post and accompanying newsletter every Wednesday. No repeats. No missed weeks. No excuses.

I also promised my wife that I wouldn’t do any work between Christmas and New Years (except in the case of a portfolio company emergency). In other words, I’m taking a break.

So here you are, my dear reader: the 39th original post of 2022 and the first annual unapologetic cop-out: Chris Neumann’s Top 10 Posts of 2022 (in reverse order…so there’s a bit of drama):

#10

#9

#8

#7

#6

#5

#4

#3

#2

#1

Thanks for reading!

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See you in 2023! 🥳 🎉 🥂

Take a Break. No Really.

In the startup world, we give a lot of lip service to mental health. And by that, I mean we talk about it – which is a massive improvement over what we used to do – but not much else. On social media, our industry still spends as much time, if not more, fetishizing about a culture of long hours and personal sacrifices.

This warped perspective — that if you’re not working long enough hours and not sacrificing enough personally you must “not want it” badly enough skews a lot of the narrative around what it means to be an entrepreneur. It’s wrong.

To be clear, I personally believe that long hours and some level of personal sacrifices are, in fact, necessary to be a successful founder, but it’s not something we should glorify. It’s not the goal.

A Story

In 2018, Rand Fiskin published Lost and Founder: A Painfully Honest Field Guide to the Startup World. It was a shockingly transparent look back at his experiences as the Founder and former CEO of Moz.

In his book, Rand recounts a session led by Brad Feld at Foundry’s first CEO summit:

Near the start of the session, Brad asked all the CEOs in the room to raise their hand if they had experienced severe anxiety, depression, or other emotional or mental disorders during their tenure as CEO. Every hand in the room went up, save two. At that moment, a sense of relief washed over me, so powerful I almost cried in my chair. I thought I was alone, a frail, former CEO who’d lost his job because he couldn’t handle the stress and pressure and caved in to depression. But those hands in the air made me realize I was far from alone— I was, in fact, part of an overwhelming majority, at least among this group. That mental transition from loneliness and shame to a peer among equals forever changed the way I thought about depression and the stigma around mental disorders.

I was one of the two hands in the room that didn’t go up.

And I was completely floored.

To this day, I can tell you everything about that room inside the Leeds School of Business at the University of Colorado. What the tables and chairs looked like. How they were organized. Where I sat relative to the other CEOs, many of whom I looked up to and most of whom I’d only met hours before. My own nervousness at simply being in that room (the summit took place mere days after DataHero closed its first round of funding).

Most of all, I remember the heavy feeling of anxiety that hung over the room after Brad posed his question. I remember the eyes darting around, looking to see if anyone would raise their hand. I remember watching the first person slowly and bravely raise their hand. And then the second. And then another. And another.

I remember the overwhelming feeling of catharsis that swept over the room as literally dozens of CEOs exhaled their truth. I promise you that there wasn’t a single dry eye in that room, even if not everyone openly cried.

And I was completely floored.

For Rand (and I suspect many others in the room), that shared experience broke down a personal wall built from years of loneliness and shame. In my case, it allowed me to see for the first time something that I had been surrounded by yet oblivious to.

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Truthfully, I had never thought much about mental health before that day. I had been lucky enough to not face the challenges wrought by depression and other mental illnesses. Until that day, I had no idea how lucky I truly was. But that day changed everything about how I see mental health and the importance I place on it as an investor.

Which brings us back to the title of this post: Take a Break. No Really.

It’s the holiday season. A time when most businesses naturally slow down. It’s a time where most people take a break to spend time with friends and family and to reflect on the year.

Unfortunately, many founders find it difficult to truly disconnect. They feel the pressure — both internal and external — to keep working. They forgo time with friends and family for an extra few hours of coding, some more time doing email, or a chance to work on an “important” project that’s been on the back-burner.

I’m here to tell you that it’s more important for you to take a break. Whether it’s for a few days or an entire week, allow yourself the opportunity to truly disconnect from your startup. Spend time with your friends and family. Watch a movie. Read a book. Resist the urge to open up your laptop and check your email. Unless you have end-of-year sales activity going on, I promise that your startup will be fine (and if you do, take a break in January).

That extra few hours of coding, replying to those additional emails, or getting a headstart on that “important” project (which can’t actually be all that important if it’s been on the back-burner all year) won’t change the trajectory of your startup. What will impact the trajectory of your company is for you to take a break.

Rest, relax and recharge for 2023.

You deserve it. Your company deserves it.

Happy holidays.

The Dark Side of VC Recycling

There’s a worrying trend I’ve seen recently. A dark side of VC recycling that has emerged as investors try to recover from the hangover of 2021. A practice that represents the worst in VC and reflects a desperation amongst a handful of large funds to undo some of their investments.

What is Recycling?

When a startup in a VC’s portfolio has an exit, the firm can either distribute the money to its investors (the LPs) or it can “recycle it” and invest it in new and existing companies in the fund. The process of recycling is generally regarded as supporting long-term alignment between VCs and their investors, while also benefiting founders (as the VC has more capital to invest). In theory, it’s a win-win-win.

Here’s a great post about recycling by Brad Feld (Foundry Group) and another from Fred Wilson (USV).

In general, VC’s are allowed to recycle during each fund’s initial investment period (typically the first 3 or 4 years of the fund). After that, all returns go to LPs.

What’s the Problem?

Historically, recycling has been seen as positive for everyone involved: VCs, their LPs and startups. The only downside typically mentioned is that recycling delays the time until investors start to receive cash distributions from the fund (“delaying DPI” in VC parlance).

Recently, a worrisome trend has emerged amongst a handful of multi-stage funds that reflects a dark side of VC recycling: funds attempting to force startups to shut down or sell so that they can recapture and redeploy their investment dollars within their recycling period.

While it’s not uncommon for investors to nudge founders towards an exit if it becomes clear that the company is no longer growing, that’s not what I’m referring to here.

I’m talking about VCs trying to force companies with plenty of runway and whose founders have done everything right to sell or shut down.

Wait…what?!?

Let’s start with some background…

By late-2021 / early-2022 (the peak of the Frothy Times™), a number of large, multi-stage VC firms were deploying significant amounts of capital into companies that were far earlier in their trajectories than those firms would typically invest in. It wasn’t uncommon to see $20M, $50M or even $100M going into companies that hadn’t yet achieved product-market fit.

Contrary to popular narrative, these firms weren’t skipping diligence. Rather, they were intentionally investing in fast-growing companies ahead of the curve. The rationale for these investments was generally based on expectations that the companies would continue to rapidly grow, such that they would soon be able to secure leadership position in their markets and drive substantial follow-on rounds (and, thus, mark-ups for the funds).

By mid-2022, the warning lights of a recession were blinking brightly and VCs around the world were advising their portfolio companies to batten down the hatches. In the board room and across the interwebs, investors were proclaiming the need to cut burn and extend runway.

To their credit, most founders listened.

In fact, many startups extended their runway far beyond what investors could have expected. Many companies that raised in late-2021 / early-2022 found themselves proudly sitting on 3, 5 or even 8 years or runway. You literally could not have asked a founder to do anything more.

Unless you’re a big multi-stage VC.

The Risk of Runway

For firms who invested “ahead of the curve” (aka way earlier than they normally would), extended runways present a challenge. On the one hand, they ensure that the company has enough runway to weather the economic downturn, achieve product-market fit and ultimately become successful. On the other hand, by cutting burn and slowing growth, the expected time horizon for that to happen may be years longer.

That alone isn’t such a big deal (after all, VCs have the ability to extend their fund life with the approval of their investors…and they do so all the time).

What we’re seeing here is a handful of VCs who have serious buyers’ remorse. They are now staring at hundreds of millions (and in some cases, billions) of dollars “trapped” inside what are effectively very risky Pre-Seed and Seed stage companies. Investments that they should never have made to begin with. And they want a do-over.

How do they accomplish that? Recycling.

Are You Serious?

In the past several months, I’ve spoken with multiple founders who took investments from large multi-stage funds in 2021 or 2022 and whose investors have approached them about selling or shutting down the company.

All of these startups have years of runway and are growing and progressing at a solid pace (albeit slower than they were last year).

The founders have done everything they were “supposed to”. They hit their milestones, raised over-subscribed rounds, took preemptive capital when it was “on the table” and now they’re being punished for it by the very investors who pushed them to raise more.

It’s disgusting.

In pushing founders to unnecessarily sell or shut down their companies, these investors are putting on full display their utter contempt for entrepreneurs and their journeys. The arguments they’re making – and the degree of gaslighting they’re employing – is nauseating.

“You can always start another company.”

“Your reputation will be fine.”

“You could use the time off.”

“We’ll make it worth your while.”

The last argument is how they pull it off. In order to convince founders to preemptively sell or shut down their companies, these investors will offer them life-changing money.

All they need to do is give up their entrepreneurial aspirations, screw over their employees, customers and early investors, and potentially ruin their reputations.

And you wonder why people don’t like VCs?

This Can’t be Real…

Unfortunately, it is.

To be clear though, this behavior reflects only a very small minority of VCs. The vast majority of investors at all stages continue to be fiercely supportive of their portfolio companies and champions of their founders.

But those with the misfortune of having investors with buyers’ remorse face a tough road ahead. If you are one of those founders, know that you are not alone. Reach out to your angel investors, founder friends and early-stage investors for support. In most cases, a single VC cannot force you to sell the company, but they can make your life hell. Seek out a support network as you navigate the challenge.

Don’t be afraid to reach out cold to other founders in the VC’s portfolio. There is strength in numbers.

Also know that there are other solutions. If an investor wants their money back badly enough, then that might trump their need to save face (which is very much what they’re trying to do in forcing a sale or shutdown vs. unwinding their investment). Don’t be afraid to ask them a single, direct question:

“What would it take to get you off my cap table?”

If they want it badly enough, they have a price.

The entrepreneurial journey is difficult enough for founders. As investors, we have a duty to make it easier, not harder.

The Elephant in the Room

Every startup has one. In fact, every startup has many.

The proverbial “elephant in the room.”

idiom

a major problem or controversial issue that is obviously present but avoided as a subject for discussion because it is more comfortable to do so

I’m referring to the questions that you desperately hope an investor won’t ask you during a fundraising meeting. You know the ones, those questions that don’t have easy answers. The ones that you can’t point to a number or a chart or your resume to make go away.

The ones that late at night, as you lie awake in your bed whisper to you, “…what if they’re right?”

Ok, maybe that last part is a little over-dramatic. The fact is, every startup has its fundraising elephants. Questions that aren’t easy to answer manifesting as objections that aren’t simple to overcome. For some startups, they’re about market size. For others, they focus on competition. In many cases, you might not even see the elephant sitting right beside you.

So what can you do about it? How can you make your fundraising elephants go away?

Step 1: Find the Elephants

The first thing you need to do is identify all of your fundraising elephants.

Start with the elephants you know about. The questions you desperately hope that an investor won’t ask you. Be honest and harsh with yourself — what are all the holes in the market, the business, etc.?

Next, go to your trusted circle of founders, advisors and investors. Ask them what your biggest weaknesses are. The most significant risks they see in your company. In the case of your investors, ask them the most likely reasons they think you will fail (trust me, they’ve all thought about it).

Finally, reach out to a handful of investors who aren’t familiar with your company and either share your deck with them or ask them for a call/in-person meeting to share your story *. Ask them the same questions: what are their biggest concerns? Why would they not invest? Why do they think you will fail?

This can be a very humbling experience, but it’s incredibly important. You want these people to tear you apart. In some cases, they will identify risks you haven’t even thought about because you’re too close to the business. In others, they will highlight risks you are overconfident about or have internally downplayed.

* This can be done as part of a “dotted line” meeting, with friendly investors you know, or with “lower tier” investors you don’t plan to raise from.

Step 2: Name the Elephants

At this point, you should have a fairly long list of risks (if not, you aren’t trying hard enough).

Group them together into categories such as market risks, competitive risks, execution risks, team risks, etc. Then, formulate specific questions that capture their essence. Here are some examples:

Why will you succeed when all of the companies who tried this before failed?

Isn’t this a niche market?

Company X is 2 years ahead of you and raised $100M in funding. How could you possibly beat them?

You’re a first-time founder with no sales experience, how are you going to get your first customers?

If you’re doing this effectively, every question you write should make you cringe a little. They should feel as though the reader is unfairly judging you, making uniformed assumptions, or even asking lazy questions. You should feel a mix of defensiveness and frustration when you read them.

If you don’t feel that way, then these aren’t your elephants. Dig deeper.

Step 3: Conquer Your Elephants

Once you’ve named all of your elephants, it’s time to conquer them.

The first step is to come up with concise, effective answers to each of the questions/objections they represent. Iterate on these responses with your advisors to make sure your responses address each question in a convincing way. You likely won’t be able to fully “overcome” each of the objections, but your responses should clearly indicate your thinking.

Once you’ve got your responses, decide how to incorporate them into your pitch. There are three ways to do this:

1. Add them to your pitch deck

The first way to conquer your elephants is to tackle them head-on by incorporating them into your pitch deck. In some cases, this can be done subtly (e.g. tweaks to your market sizing slide). In others, it can involve adding an entire slide dedicated to the elephant (e.g. “why we will beat Competitor X”).

2. Pre-canned responses

The second way to overcome your elephants is to practice verbal responses to the questions/objections they represent. Turn your written answer into concise (1-2 sentence) verbal responses. The goal is to know exactly how you’re going to answer these questions when they come up, instead of ad libbing on the spot.

3. Fundraising FAQ

The final strategy is becoming increasingly popular due to its effectiveness and the confidence it projects to potential investors. Take every single one of your elephants and your written answers and put them into a “Fundraising FAQ”. At the end of your initial meeting, tell the investor that you’re going to send them the FAQ with answers to the most common objections raised about your company as a follow-up to the meeting.

This often catches investors off-guard (in a good way) and always leaves a strong impression.

For many founders, avoiding the elephant in the room can spell disaster for a fundraising process. Spending sufficient time before you fundraise to identify them, describe them, and effectively overcome them can dramatically increase your success rate.

10 Ways to End 2022 Strong

Tomorrow is the first day of the last month of 2022. For some startups, December is the busiest month of the year. For others, it’s a time to reflect, recharge and set goals for the new year. Whether you’re sprinting towards the end of Q4 or beginning a slow wind-down into the holiday season, it’s important that you end the year strong.

Here are 10 ways any startup can end 2022 strong:

1. Go All-In on Sales

If December is a big sales month for you (or even if it’s not), considering getting the whole team involved in sales. In this kind of environment, revenue is everything, so be creative. Get engineers and designers involved in demand gen. Have HR and IT field sales calls. Company-wide contests can be a great motivator and help end Q4 strong. The whole company benefits from increased revenue and you get the added benefit of exposing your back office team to the customer front lines.

2. Talk to Your Customers

December is a great month to get feedback from your customers. Reach out to customers big and small, new ones and old ones. Find out what they like, what they don’t like, and what matters to them most. As a bonus, get the entire company involved — from engineers to accountants. Hearing firsthand what customers think and feel provides numerous benefits and can help set context for a strong new year push.

3. Build Your Investor Pipeline

The 2022 fundraising window is closed, but if you’re looking ahead to fundraising in the new year, December is a great time to prepare.

In order to run a high-velocity fundraising process, you need to build a fully-researched pipeline of qualified target investors. For early-stage companies, you’re going to want to identify 80-100 qualified target investors, which takes time. December is a great time to fill your fundraising funnel.

4. Benchmark

Investors won’t start new fundraising processes in December, but many will take “getting to know you” calls. Consider reaching out to 4-6 VCs at the top of your list with a specific ask:

I’m planning to fundraise in 2023. Would you be open to a 20-minute call during which I could share a bit about my business and get your feedback on what milestones we would need to achieve for you to take a fundraising meeting with me in the future?

Providing investors with a dotted line in exchange for fundraising benchmarks is a great trade for both sides.

5. Show Appreciation for Your Team’s Team

Most companies give year-end gifts to their team, but what about the people who support them? If you’re a typical startup, your employees have had their share of late nights and weekend pushes throughout the year. That can often mean cancelled plans and missed events. It’s not just your team members who make sacrifices in pursuit of your dream, it’s their family and friends.

Show your appreciation by giving gifts that benefit the people around them. First and foremost is the gift of time (I’m a massive proponent of shutting down the company between Christmas and New Years whenever possible). But you can also show your appreciation by giving experiences that they can share with their loved ones.

At DataHero, we regularly gave employees gifts that they could share with family or friends. For some It was weekend spa getaways, for others concert tickets. We customized the gift for each employee, taking into account their personal situation.

6. Do Something Fun

The end of the year is an important time for team bonding. Everyone does holiday parties, but what can you do that’s “different”? What can you do to show your team how much you appreciate them? You know your team best. If you’re going to do a year-end event, give it some extra thought and do something that they’ll remember.

Dog sledding is a great way to have fun!

7. Pay Off Technical Debt

If December is a slow month product-wise, it’s a great opportunity to give engineers (and others) free rein to fix things. The key is to leave it up to them. Give your team a week to work on any bug or refactoring project they want, whether or not it’s a top priority. Most engineers find this to be incredibly satisfying, plus the end result is a stronger codebase (whether or not their managers find the individual items to be a top priority).

At DataHero, we gave all engineers two “free weeks” at the end of the year. One focused on technical debt. The second focused on prototyping new features. It was a low-stress, high-productivity way to lead into the holidays, with everyone feeling positive and rejuvenated going into the new year.

8. Cut Costs

This might not be at the top-of-your-list, but December is a great month to go through your expenses and see if there’s any fat to trim. Software you’re not using anymore? User licenses you could aggregate into groups? Pending renewals you can renegotiate? With sales teams trying to hit their Q4 goals, there are lots of opportunities to get discounts and cut your spending going into the new year.

9. Research and Training

We’ve already talked about two types of research (customer outreach and fundraising benchmarking). December is actually a great month for the entire company to learn and improve. Here are just a few of the many ways you can use December to improve your company’s intelligence:

• Read research papers

• Perform competitive intel (learn about your competitors’ marketing plans, try out the latest versions of their products and even reach out to their customers)

• Attend demos for and evaluate potential new vendors

• Attend training courses

• Plan conferences for the team to attend in 2023

10. Recharge

The last, but most important thing for to do in December is recharge. If you don’t have to work during the holiday season, don’t. Give as many people as you can a genuine week off (if December is a busy month for you — such as in retail/e-commerce — shift the week off to early January).

No email. No slack. No thinking about work.

And yes, I’m talking to you too dear founder. Rest, relax and recharge for 2023.

The 2022 Fundraising Window is Now Closed

It’s official. The 2022 fundraising window is now closed.

No, this isn’t a commentary on the current macroeconomic climate. Nor the result of chaos in cryptoland.

Today, is the fourth Wednesday of November. The day each year when Silicon Valley VCs shutter their doors and begin their slow roll to the end of the year.

And where Silicon Valley leads, the rest of the investor world follows.

Let me explain…

Happy Thanksgiving

The end of fundraising season starts with American Thanksgiving.

As Canadians, we like our Thanksgiving. The second Monday of October, we happily get together with friends and family, eat a nice turkey dinner and then go to work the next day. It’s a perfectly enjoyable holiday.

But culturally, Thanksgiving isn’t that big of a deal for most of us. Yes, we get together with our family and friends. But it’s mostly local. Very few Canadians travel for Thanksgiving.

Thanksgiving in the US is different. The day before Thanksgiving (aka today) is one of the biggest travel days of the year in America. Nearly 5 million Americans will fly domestically for Thanksgiving and another 50 million will drive more than 50 miles to visit family. More Americans travel to visit family for Thanksgiving than during the Christmas holiday season — the inverse of Canada.

It’s a huge deal.

When I lived in the US, November schedules were built around Thanksgiving. Some years, I went to “friendsgiving” parties with 50+ people that kicked off with flag football at 9am and went late into the night. Other years, it was hoping from giant family get together to giant family get together, sometimes eating 3 or more Thanksgiving meals in one day.

The next day, is well-earned recovery. Either that, or shopping.

With US Thanksgiving falling on a Thursday, many Americans enjoy a 4-day weekend. In recent years, many companies (especially in tech) have turned that into a 5-day weekend to make travel easier on employees.

When I ran DataHero, all employees got a 5-day weekend around Thanksgiving. This allowed people to travel Tuesday night, thus avoiding the chaos of Wednesday.

Of course, any time you take 5 days off from work, there’s a bit of a “hangover”…

Fundraising Purgatory

If you work in retail, the four weeks between US Thanksgiving and Christmas is the busiest time of the year. It’s also the sprint-to-the-finish for anyone in a B2B business trying to hit Q4 numbers.

But in the land of venture capital, it’s a uniquely slow-moving period that can best be thought of as fundraising purgatory. Put bluntly, it’s where many fundraising rounds go to die.

Why? Well for starters, anyone who was actively fundraising prior to Thanksgiving that hadn’t yet received a term sheet just had their momentum interrupted by a giant speed bump.

Beyond that, most firms spend the remaining weeks of the year focused on closing out as many active deals as they can. The majority of VCs shut down between Christmas and New Years (despite popular belief, it’s the only week of the year where VCs actually disconnect). As a result, they’re working hard to minimize the number of “dangling threads” over the holidays.

This means prioritizing diligence on startups they were actively engaged with prior to Thanksgiving over taking new meetings.

We’re Still Open!

Of course, every VC will tweet until their fingers are blue that they’re still open for business following the Thanksgiving weekend.

And they are….to a point.

Despite my commentary above, many VCs will take introductory meetings and “start the ball rolling” after Thanksgiving. But they also know that unless you’re the hottest-of-hot startups, nothing’s really going to happen until the new year.

Which means they’re just gathering data.

What this Mean for Founders

For starters, the reality is that it’s nearly impossible to get from an initial meeting to a term sheet in the four weeks leading up to Christmas (even though that’s an achievable time frame during other times of the year).

For founders, you are effectively guaranteed that if you start a fundraising process after Thanksgiving, you won’t complete it by year-end. Instead, you’ll be interrupted by 1-2 weeks of vacation time at the end of December. That means any momentum you might have created will be dead. If you’re familiar with high-velocity fundraising, you should immediately recognize this as a problem.

In other words,

📣 📣 📣 If you haven’t started fundraising, don’t start your process until January 📣 📣 📣

If you were actively fundraising prior to Thanksgiving, you fall into one of four camps:

1. If you received a term sheet already, then you’re in great shape. In the best case, you’ll be able to close everything out and have money-in-the-bank by the end of the year. You should strive to get everything done before the holidays — as there is some risk that the round might not come together if it delays into the new year — but that risk is relatively low.

2. If you were already in active diligence with multiple firms prior to the Thanksgiving break (multiple meetings with each firm, deep into the data room, etc.) and feel that you are in a solid position to get to a term sheet within a week or two, you should stay the course. You likely won’t close the round before the end of the year, but you have enough time to get to a signed term sheet.

3. If you have not yet found meaningful traction with investors, you should strongly consider stopping fundraising, focusing on your business for the last 6 weeks of the year, and resuming fundraising in January. There’s still an outside chance you could get to a term sheet but, more likely, you’ll be better served by focusing your efforts on improving the business.

4. If you have identified angel investors or follow-on capital but have not yet “identified a lead,” you should consider strategies to close as many soft-circled investors as possible (such as by offering a discount), so you don’t lose momentum with them. Then, you should focusing on your business for the last 6 weeks of the year. In January, you can look at your balance sheet and decide if it makes sense to resume fundraising immediately or focus on the business for a period of time before going back to market.

What About Canada?

It’s all fine-and-dandy for us to be talking about US Thanksgiving, but what does that have to do with Canadian VCs?

Good question!

Unlike our friends to the south, Canadian investors aren’t necessarily slowing down. My calendar (and those of my colleagues) are booked solid this week and next. But we are thinking about those meetings differently.

Why?

Because as Canadian VCs, we know that any founders we meet for the first time during the period between US Thanksgiving and Christmas are unlikely to be talking to American investors.

That means it’s going to be a less competitive round, likely moving at a slower pace.

And that means that even in Canada, founders who start after American Thanksgiving are unlikely to get to a term sheet by the end of the year. Which means running into that big speed bump in December and a loss of momentum.

So what should you do?

My advice: this is a great time to reach out to a handful of VCs who you want to fundraising from in January and get on their radar. Figure out what you need to achieve in the next 6 weeks to get them excited to look at their round.

It’s a great time to make yourself a dotted line.

On FTX, Sequoia and Why Power Law Works

On Friday, crypto trading platform FTX declared bankruptcy. It was a stunning fall for a company once valued at more than $32B and whose CEO was being lauded as the next Warren Buffet.

One of the threads being discussed across the internet was how FTX’s investors, a list that included prominent VCs like Sequoia, NEA, IVP, LSVP and Tiger Global, could have failed so miserably at diligence. Amongst the many salacious narratives was this one, from a profile of FTX founder Sam Bankman-Fried:

I’m not here to scrutinize or editorialize the diligence process of Sequoia or any other investor in FTX. I have zero direct knowledge of what did or did not transpire in any fund’s diligence process. The vast majority of VCs perform substantive diligence for each and every investment and, while it might be fun to believe, in general they do not “skip diligence”.

In this post, I want to shine a light on how power law VCs think about portfolio construction and why properly constructed funds are able to withstand losses of this magnitude. Moreover, I’m going to share my thoughts on why this ability is so crucial to the rapid advancement of tech that we’ve enjoyed over the past two decades.

Marking Down to $0

Last Wednesday — two days before FTX declared bankruptcy — Sequoia publicly shared a letter that they had sent to their investors about FTX. In the letter, they stated that they had effectively written off FTX entirely by “marking our investment down to $0.”

The letter instantly made its rounds across social media, with plenty of sensational headlines. In reality, the action of marking an investment down to $0 is quite normal for venture capital firms. Every quarter, VCs around the world review their portfolio in advance of preparing a “quarterly update” for their investors. For each company in the portfolio, the fund managers must decide one of three actions to take with respect to the company’s current value:

1. “Mark up” the company (increase the valuation)

2. “Mark down” the company (decrease the valuation)

3. Maintain the company’s current valuation

The process of choosing which companies to “mark up” or “mark down” is dictated by a formal policy that every VC has, called its “valuation policy.” In general, valuation policies are very particular about when, why and by how much a company’s valuation can be changed. These policies are scrutinized by investors and incorporated into annual reviews by external auditors.

Mark Ups / Write-Ups

The most common reason for a company to be “marked up” by an investor is that a subsequent investment occurred at a higher valuation (e.g. Panache invested in a company with a valuation is $5M and, two years later, another VC led an investment round that valued the company at $10M. At that point, we would “write-up” our investment in the company based on the new, higher valuation). This process is referred to as “mark-to-market.”

Mark Downs / Write-Downs

Mark downs typically occur for one of two reasons:

1. A subsequent financing at a lower valuation (i.e. a “down round”)

2. A discretionary write-down by the fund managers

Unlike mark ups, which are almost never discretionary, it is very common for VCs to mark down investments for discretionary reasons. Doing so regularly and consistently builds confidence with the fund’s investors and ensures that the overall fund valuation is never too “optimistic.”

That said, even the process of “discretionary” write-downs is dictated by a formal policy, which defines when, why and by how much an investment should be marked down. Here is Panache’s policy on discretionary write-downs:

Typically, individual mark downs are shared with investors on a quarterly basis (as part of the fund’s “quarterly report). So while Sequoia’s decision to share it’s write-down of FTX immediately and publicly was notable, the fact that it marked the company down was not.

It’s Only $150M

In Sequoia’s letter to investors, they noted that the “$150M cost basis accounts for less than 3% of the committed capital of the fund.” To many casual observers, this statement came across as an excuse:

In fact, Sequoia’s declaration highlights that their investment in FTX was inline with a typical portfolio model for a power law VC.

Panache’s portfolio model (which is codified in the agreement between Panache and our investors) specifies an almost identical limit of ~%3 committed capital into any given company. So while the commentary above may get a lot of engagement on Twitter, the reality is that the two points made by Katie are the literal definition of power law VC investments.

Why Power Law Works

Why does all of this this matter?

Investing a relatively small percentage of a VC fund into a large number of companies ensures that when companies we invest in fail (and to be clear, that’s the majority of the time for an early-stage VC), no single failure dooms the fund.

Last week, I wrote about the 9 different types of startup investors. In describing power law VCs (a category that both Sequoia and Panache belong to), I noted that this type of VC “…expect[s] one or two companies to drive the returns of their fund, while the rest will provide a rounding error.” Put another way, an effective power law VC will generate a meaningful return for its investors even if all but one or two companies go to zero.

Leo Polovets of Susa Ventures once captured this point aptly:

To most people, losing $150M on a single investment seems absolutely absurd. But within the context of power law investing, what’s most important is not the number of dollars invested, but the percentage of the fund that the investment represents. As such, Sequoia’s loss of < 3% on FTX is par for the course.

That fact underscores why power law investing is so crucial to how the modern startup ecosystem operates. If VC funds were not constructed in a manner that could withstand the majority of their investments failing, it would be virtually impossible for founders to raise funding for anything other than businesses that represent incremental improvements to the status quo.

This is why the behavior of “Silicon Valley” VCs often draws such a stark contrast to regional VCs and investors in other parts of the world. In knowing that the fund is designed to withstand an incredible number of failures, the fund managers of power law VCs are empowered to take bigger risks.

The origins of power law investing go back nearly 250 years — this book provides an excellent history of that

Final Thoughts

In writing this post, I’m not absolving any of FTX’s investors of anything. As I stated earlier, I have zero direct knowledge of what did or did not transpire in any fund’s diligence process. Each VC, undoubtedly, will face questions from their investors on the process that led to their investment in FTX. There will be lessons learned.

I’m also most certainly not absolving FTX itself of anything. Individuals and businesses around the world have been impacted by their downfall, and there are likely still more shoes to drop.

But this situation provides an excellent case study in the thought process of power law VCs. The reaction of Sequoia — which, to the general public, can come across as shocking or a dereliction of responsibility — is exactly how power law VCs should invest.

When they see something with potential – even if that potential is unlikely – we want investors to back it. True innovation at scale requires financial resources, which demands investors who embrace risk.

And if they take a big swing and miss, we don’t want them to stop swinging.

To innovate, we must fail a lot. And that includes investors.

The 9 Types of Startup Investors

Many first-time founders think that all investors have the same simple motivation: to make money. But veteran founders understand that there are different types of investors, each with their own motivations.

Believe it or not, there are at least 9 distinct types of startup investors:

1. Friends and Family

2. Angel Investors

3. Angel Groups

4. Family Offices (FOs)

5. Corporate VCs (CVCs)

6. Government VCs

7. Regional VCs

8. Power Law VCs

9. Multi-Stage Power Law VCs

Understanding the type of investor you’re pitching and their underlying motivations can help you to be more successful when fundraising and more discerning when choosing who to invite onto your cap table.

1. Friends and Family

Friends and Family investors are individual investors who knew you before you founded your company. Broadly speaking, they will invest in your startup because they believe in and are supporting you as an individual.

Despite the name “friends and family,” this investor category extends well beyond family members and personal friends. For most founders, the bulk of “friends and family” money comes from their professional networks, including former bosses, coworkers and others from their prior career.

When we raised DataHero’s initial round of funding, 4/6 individual investors were people that I had previously worked with at Aster Data.

In general, friends and family investors perform relatively little diligence, as their investment decision is driven primarily by their prior relationship with you. They also tend to have a lower expectation of financial returns relative to other categories of investors.

2. Angel Investors

Angel Investors are individual investors who did not know you before you founded your company. They will invest in your startup because they believe in your idea and the potential for you and your cofounders to execute on the promise of that idea.

There are two major subcategories of angel investors, with different motivations and objectives:

1. Professional Angels

   Professional angel investors are angel investors for whom investing is their primary means of generating income. While they likely have a reasonable amount of wealth already (since they need capital to invest), they generally take a serious/formal approach to the process of angel investing, often including extensive diligence. At times, their approach to diligence can be frustrating to founders (“Investor X is trying to do Series A diligence for a $25K check!”), but it stems from the fact that they are trying to generate predictable returns from their activity.
   

2. Operator Angels

Operator angels, on the other hand, are angel investors with a full-time job who are investing either to supplement their income or to simply “pay it forward” to their local startup ecosystem. Many of these individuals come from a startup background themselves and have had an exit or two in the past. In general, operator angels will do significantly less diligence than professional angels and will often commit to an investment after a single meeting.

In established tech hubs like Silicon Valley, the primary motivation for many operator angels has nothing to do with financial returns. For some, it’s driven by the social capital they obtain by virtue of being an active angel investor (you can think of this as being akin to the prestige people get in other circles for making contributions to charities, athletic groups or the arts). For others, the motivation comes from wanting to establish an investing track record as a first step into a future career in venture capital. For many, it’s simply a matter of wanting to “give back” and help the next generation of entrepreneurs.

DataHero’s Pre-Seed round included two angel investors: one professional angel (Jerry Neumann) and one operator angel (Mike Greenfield).

3. Angel Groups

Angel Groups (also known as angel syndicates) are organizations that bring a group of individual investors together in order to streamline investment decisions. The basic concept is that the group can perform a single round of diligence on a startup, which the individual investors can then leverage to decide whether or not to invest.

There are a variety of angel group models when it comes to investing. At one end of the spectrum, some angel groups see themselves primarily as facilitators, bringing together startups and investors for group pitches while leaving the diligence and decision making to the individual investors. On the other end, some groups not only manage the diligence, but issue term sheets and facilitate the investment as a syndicate.

Angel groups are often filled with “operators” (people for whom angel investing is not a full-time activity), however, those individuals tend to not come from a startup background themselves. For them, a strong motivation for joining angel groups is to learn angel investing while “outsourcing” the core diligence to the group. As a result, angel groups tend to have more significant diligence compared to individual angel investors.

Angel groups/syndicates are not the same as AngelList Syndicates, which are a particular mechanism for aggregating small checks from multiple individual investors into a single line item on the cap table.

As with many things in life, there is a wide spectrum of quality amongst angel groups and it is critical for founders to understand who they’re dealing with.

“Good” Angel Groups

In the best cases, angel groups fill an important role in local ecosystems by bringing together large numbers of founders and individual investors. They provide first-time founders, in particular, with a platform to speak to many investors at once. In smaller ecosystems, pitching angel groups can be crucial for securing a first round of funding.

In addition, many angel groups provide education and training to new investors, helping to increase the amount of capital and number of angel investors in their ecosystem.

Casey Lau (Web Summit) and I recently led an educational session on Web3 for angel investors from across Western Canada at an event hosted by Angel Forum

“Bad” Angel Groups

Unfortunately, some angel groups have developed practices that are extremely unfriendly – and in some cases, predatory – towards founders. They take advantage of naive, first-time founders, demanding unreasonable investment terms that ensure the investors make money but can often doom the company from the start.

Beware a wolf in “angel’s” clothing

Some of the most egregiously unethical term sheets I’ve ever seen have come from angel groups, with liquidation preferences, clawback provisions and control terms that would be unheard of from other investors. These groups typically gaslight founder concerns and justify their predatory practices using some variation of “we’re taking the most risk, so…”

The most exploitive angel groups charge founders for the “privilege” of pitching to them or insist on fees to “cover the preparation of diligence materials.”

📣 You should never, ever, ever pay anyone to pitch them. 📣

As a founder, the best thing you can do when it comes to angel groups is to source references and feedback from other founders who have pitched them. What was the process like? How were they treated? And, most importantly, did it lead to an investment?

(The second-best thing you can do is to read Venture Deals by Brad Feld and Jason Mendelson, which is the single best resource on the planet for understanding investment terms.)

4. Family Offices

Family Offices are small organizations that manage the investment activities of particularly wealthy families and individuals. A typical family office will employ one or more investment professionals to evaluate and make investments on behalf of the family.

A perfectly normal family of billionaires

In some cases, the family members get personally involved in investment decisions (in which case, the experience is similar to interacting with an angel investor). In others, the investment team performs all of the diligence and manages the investment. Family offices generally have limited experience investing in tech (as startup investing typically represents a small fraction of family office investment activity). As a result, it’s common for family offices to have higher levels of diligence when evaluating startups and less favorable terms when they lead investments.

5. Corporate VCs (CVCs)

Corporate VCs are investing entities that are fully-funded by a single corporation.

There are many different structures of corporate VCs. For example, some CVCs invest from a dedicated pool of money and operate similar to standalone VCs, while others invest directly off of the parent company’s balance sheet. Some CVCs are structured such that investing partners have full discretion to make investing decisions, while others require champions from within the business to support a deal.

Within the landscape of corporate VCs, there are two main categories, based on their primary motivation:

1. Strategically-Motivated CVCs

   Strategically-motivated CVCs, as the name suggests, are focused on making investments that support the strategic goals of the parent company (this is why they are often referred to as “strategic investors”). For these firms, the primary motivation isn’t to generate a financial return from their investment activity but, rather, to secure access to companies and technology that could provide a competitive advantage to the parent company.

   The process of engaging with a strategically-motivated CVC can often feel closer to working with corp dev / business development than trying to fundraise from a VC. There is typically extensive diligence — particularly on the product side — with non-investing leadership from within the parent company often involved.

   Raising money from a strategically-motivated CVC can potentially be advantageous from a sales perspective, however, there is an important drawback for founders to understand: raising money too early from a strategically-motivated corporate VC can potentially preclude any future investment from VCs.

   Why? Because fundraising agreements include clauses that require major investors to agree to any acquisition.

   When you raise money from investors who are financially-motivated, they will generally approve any acquisition that makes financial sense (regardless of who the acquirer is). Strategically-motivated CVCs, on the other hand, won’t approve all acquisitions, such as in cases where the acquirer is a competitor. As a result, taking investment from a strategically-motivated CVC can be seen by future investors as a signal that your value has been “capped” and will scare them away.

   The vast majority of CVCs are strategically motivated. Depending on the stage and industry, the degree of signalling risk varies. The best investors understand the perception that taking their investment can have on a startup and will openly discuss the pros and cons — don’t be afraid to ask!

2. Financially-Motivated CVCs

   Financially-motivated CVCs are corporate VCs whose primary motivation is to generate a return on investment. While they often leverage the parent company to their advantage (such as promising founders access to products and services offered by the corporate as a way of differentiating from other VCs), they are not focused specifically on identifying companies that can deliver a direct strategic advantage to the parent company.

   There are only a handful of financially-motived CVCs. Prominent ones include GV (Google), Salesforce Ventures, M12 (Microsoft) and Decibel (Cisco).

Teradata confidentially invested in Aster Data as part of our Series C, as a precursor to acquiring the company 6 months later.

6. Government VCs

Government VCs are organizations that invest in startups on behalf of government entities. The most prominent of these operate at a federal level (such as BDC in Canada or SNIB in Scotland), but many provinces/states and even some larger cities have VC arms.

Similar to strategically-motivated CVCs, government VCs have motivations that go beyond financial return. Some of these include:

• Economic development / job creation

• Industry support (such as investing in domestic defense companies or certain industries that the government wants to encourage growth in)

• Economic diversification

• Supporting ESG/DEI efforts

The strategic motivations of government VCs generally don’t conflict with or restrict the activities of the startups they invest in, so there’s rarely a risk that downstream investors will be “scared off”. In fact, some government funds can provide a significant boost to a company’s reputation.

There is a wide range of sophistication and experience when it comes to government VCs. The best are run by career investors who operate similar to traditional VCs. Some have easy-to-qualify investing criteria, such as matching programs that can significantly increase the size of a round led by a recognized VC firm with minimal additional effort on the part of the startup. On the other hand, many government VCs — particularly in smaller ecosystems — are operated by teams with relatively little professional investing experience. Such organizations often have overly laborious diligence processes and can also have investment terms that are less favorable for founders.

For early-stage startups, the best way to leverage government VCs tends to be as follow-on investors, with primary diligence and terms led by a financially-motivated investor.

7. Regional VCs

The first of three categories of financially-driven VCs (also known as “traditional VCs” or “institutional VCs”) are Regional VCs. These are venture capital firms for whom the majority of their deal flow comes from a relatively small region.

Regional VCs differ from power law VCs in that their investment strategy assumes that it is unlikely that they will invest in a billion-dollar company within any given fund. In the ecosystem where they invest, unicorns aren’t created with enough frequency or predictability to allow VCs to factor them into their fund model. As a result, they must construct an investment strategy that will generate a return for their investors without a single unicorn in their portfolio.

The most obvious distinction that founders will experience between regional VCs and power law VCs is that the former tends to do more extensive diligence on revenue, sales cycles and short-to-medium term business plans. Regional VCs tend not to focus much on high growth scenarios because they’re discounting the likelihood that it will occur. Instead, their diligence focuses on what they believe to be the more realistic/likely scenarios for the company (typically based on historical performance of companies from within the region). Interacting with regional VCs can sometimes be extremely frustrating for founders, particularly given that the experience can seem at odds with what they read about VCs and fundraising online.

The vast majority of regional VCs are extremely supportive, particularly when it comes to helping promising startups expand beyond their region. However, in small/emerging ecosystems — particularly ones with only one or two VCs — founders should be wary of the terms offered by regional VCs. Similar to “bad” angel groups, there are, unfortunately, “bad” regional VCs who are known to push terms that are extremely unfriendly to founders and would be out-of-market in larger ecosystems.

As with angel groups, the best thing you can do when it comes to regional VCs is to source references from other founders who have worked with them. In particular, find out how they behaved after the investment was made and whether they added or extracted value.

8. Power Law VCs

Power Law VCs are VCs whose investment thesis is strictly based on an assumption that returns in venture follow a power law distribution. These investors expect one or two companies to drive the returns of their fund, while the rest will provide a rounding error.

The majority of VCs in Silicon Valley are power law VCs, whereas the majority of investors in other ecosystems around the world are regional VCs.

Panache Ventures is one of only a handful of power law VCs in Canada. We invest exclusively in companies that we believe could reach a valuation in excess of $1B within 7 - 10 years.

In general, the diligence performed by power law VCs focuses on growth and growth potential. They dig deep into early traction in order to understand how “real” it is, while worrying less about short-term finances and profitability. Their goal is to figure out how big your company can be and how fast you can get there, in order to determine whether or not you are a fit for their investment thesis.

Power law VCs primarily operate in larger ecosystems that are highly-competitive amongst investors. As a result, they tend to offer “cleaner” term sheets with predominantly founder-friendly terms (since issuing non-market terms could cost them the deal in a competitive scenario).

It is important to understand that if you raise capital from a power law VC, you are committing to an objective of building a $1B+ company within 7 - 10 years. For many founders, that is not actually their goal (and that’s okay!). It’s important that you be clear about what type of company you want to build before accepting capital from a power law VC.

9. Multi-Stage Power Law VCs

Multi-Stage Power Law VCs, as the name suggests, are power law VCs who invest in companies at multiple stages (such as Seed, Series A and Series B). The largest and most prominent VC funds in the world are all multi-stage firms, including Sequoia, a16z and Tiger Global.

Aside from the obvious fact that multi-stage VCs have more money and resources than smaller VCs (so can write bigger checks and offer more services to founders), the main difference comes from the fact that they can lead multiple subsequent rounds in a company. It’s not uncommon for a multi-stage power law VC to lead 2 or even 3 rounds in a company they believe will be a winner within their portfolio.

One risk for founders to be aware of is multi-stage VCs investing “earlier” than they typically do.

For example, if Big Prominent VC™ is known to invest in Series A and Series B rounds, but offers to invest in (or lead) your Seed round, that can seem exciting (and in many cases, it is!). But it can also be the case that they’re simply investing a nominal amount of money (to them) so they can get an early look at your next round. This can post a risk to your ability to raise the next round, if Big Prominent VC™ declines to invest (leading other investors to presume that they saw something they didn’t like).

Another risk with taking investment “too early” from a multi-stage VC is that they might not actually be able to add value yet — or worse, could be counterproductive. Many larger funds are used to investing only after startups have product-market fit. If you’re a true Seed stage company that’s still trying to figure it out, you might benefit more from “stage-appropriate” investors who focus exclusively on helping startups attain it.

When diligencing multi-stage power law VCs, be sure to get references from companies that were your exact size and stage when the firm first invested in them.

There are many different types of investors, each with their own motivations, strengths and potential risks. The vast majority of investors genuinely want to support and help startups, but it’s essential that you do your research and always seek out founder references.

Do Your Own (Fundraising) Research

One of the most important steps in preparing for an effective fundraising process is building a fully-researched pipeline of target investors. Identifying and researching 80-100 target investors is tedious and time-consuming, but it’s essential for successful fundraising.

And it’s not something you can outsource.

Anyone you speak with about high-velocity fundraising will emphasize the importance of researching target investors. In our quarterly fundraising bootcamps, every single speaker — investor and founder alike — talks about it. We emphasize and re-emphasize how crucial this is to effective fundraising. Yet there are always founders who want an easy button.

Inevitably, our post-program surveys include at least one founder who submits some version of the following feedback:

I would like your help in identifying proactively who the right subsequent rounds' investors should be. I don’t have the time to list the investors that I would like to be connected to like Chris asks for. VCs know what firms are good for me and my industry, so I expect to get help in finding the right investors. The reality is I don’t have time to recreate that list they’ve done maybe times before.

The thing is…founders aren’t wrong to think this.

From a founder’s perspective, it seems reasonable to presume that their investors should know who the best downstream investors for them are. (Especially if their investor is a loud-mouthed VC who won’t get off his soapbox about how important it is to build relationships with Silicon Valley investors.)

Unfortunately, it doesn’t work that way.

Let’s Start with the Numbers

According to Crunchbase, there are currently 1,430 active Seed and Series A VCs in Silicon Valley.

According to LinkedIn, there are more than 4,000 individuals at VC firms in the San Francisco Bay Area with the title “Partner”. I’m personally connected to almost 200 of those individuals – which is both a lot but also barely scratches the surface.

Here’s the reality:

• In general, most investors only know one or two people at a given firm

• More often than not, the VCs they do know at other firms are the partners who focus on the same area of investment that they do (in my case, more than 50% of the partners I know personally at Silicon Valley VCs focus on enterprise software)

• In the vast majority of cases, two VCs who know each other personally have never actually done a deal together

What this means is that if one of your VCs happens to be an expert in your exact space, then they can potentially list off dozens of investors that would be a perfect fit for you.  Unfortunately, that’s almost never the case.

Take me for example: my background is in enterprise data and business intelligence software. Out of more than 110 portfolio companies across Canada, Panache Ventures has never invested in a single database or business intelligence company 😭😭😭.

Don’t look at me…

This reality has two important implications for founders:

1. While your investors may know a lot about your business, they likely don’t have the expertise to identify the firms that could be the best fit for you. In fact, they likely have never heard of many of the top VCs in your area.

2. While your investors may have developed relationships with 1 or 2 partners at a firm you want to target, they likely don’t know the specific partner you want to pitch. Moreover, they almost certainly have no idea who the best partner is for you at any given firm.

Going back to the example email, our hard-working founder hypothesizes:

VCs know what firms are good for me and my industry, so I expect to get help in finding the right investors. Reality is I don’t have time to recreate that list they’ve done maybe times before.

Unfortunately, this perfectly reasonable expectation is, in fact, completely unrealistic.

Unless you happen to be building enterprise data or business intelligence software, I don’t know which firms are a good fit for you nor do I know the names of specific partners who would be. I might be able to list off a few good guesses, but that’s about it.

Moreover, I promise you that I have never, ever created a list of target investors for anyone other than myself (and that list is now 10 years old!).

If You Can’t Do My Research, What Good are You?

As your investor, there are three things I can do to help you kick off your fundraise:

1.    Fill in the Blanks

While I might not know all of the firms investing in your area, there are likely firms that I have heard of that aren’t on your list. Often, I’m able to supplement a founder’s target list with lesser-known firms or generalist firms that are active in a given area but might not be known to them. If you have a strong, relevant investor syndicate, you could potentially “crowdsource” 30-50% of the names of target firms from your existing investors.

2.     Focusing your List

Almost every time a founder sends me their target list, I immediately see the names of investors that aren’t a fit. Funds that are too small (or too large), ones that aren’t actively writing checks, or ones that I strongly feel that the founder should avoid.

3.     Introduce You to Someone at a Fund

While I rarely know every single partner at a fund, I can usually help you get to someone at a fund through my personal connections. For example, my partners and I recently helped an AI-driven drug discovery company raise a Seed round by sending their (well-written) request-for-introduction emails to our contacts at a variety of Silicon Valley firms with a simple note:

I think this might be a fit for you guys – would you mind sharing with your partner X to see if he/she would like the introduction?

It’s worth noting that there is one important exception to everything I just wrote: if you raise money from a VC firm that is very narrowly focused on your industry, they likely have a more extensive (and more relevant) network of downstream investors. But for most founders — particularly at the Pre-Seed and Seed stage — that isn’t the case.

At the end of the day, fundraising takes a lot of work. And successful fundraising is built on the back of considerable planning and preparation. Identifying and researching your target investors is one of the most important parts of that and, unfortunately, it’s not something I — or any VC — can do for you.

WhatsApp: The Ultimate Fundraising Tool

Before starting a fundraising process, founders need to prepare. They need to create their pitch deck, setup a fundraising CRM and fill their investor funnel. But there’s a secret tool that the best founders use to supercharge their success. And it’s something everyone has on their phone: WhatsApp.

What do you mean Sequoia passed?

Anyone who’s ever tried to raise funding will tell you that it’s a manic process. If you’re doing high-velocity fundraising, you’re taking dozens of investor calls every week. It’s a non-stop roller coaster of pitches, questions, objections, and homework. Before long, the names and faces of the investors blur together and you’re mistaking Taylor from Sequoia with Sequoia Taylor.

When you barely have enough time to pee between pitches, how can you possibly keep track of everything?

WhatsApp 🤯

This WhatsApp thread ended with a $7.5M Seed round

One of the most important resources a founder has during fundraising is their support system. A small group of trusted investors, advisors and fellow founders committed to supporting them and helping them navigate the fundraising process. Their “pit crew.”

Pit crews aren’t just for race car drivers

During fundraising, most founders communicate with their support system infrequently. End-of-day or end-of-week emails, sporadic text messages and so on. But WhatsApp is an ideal platform to supercharge communications and maximize the leverage from your pit crew.

It’s simple:

Step 1: Create a WhatsApp group for your pit crew (make sure to have an awesome group profile photo)

Step 2: After every investor meeting, dictate a 1-2 min voice memo to the group that includes the following:

• High level summary of the meeting

• What questions were asked

• What parts of the pitch did the investor seem excited about

• What concerns / objections were raised

• What are the next steps (including both homework/action items for you and expectations of next steps from them)

Step 3: Profit!

Dictating a voice memo after every single meeting improves fundraising effectiveness in at least three ways:

1. It ensures you retain more details from each meeting, including critical follow-up actions

   Most founders try to write notes in-between meetings, but often don’t have enough time (particularly if a meeting runs late). As a result, notes get taken at the end of the day and details blur together or are lost.

2. Your pit crew can hear your reaction and emotions immediately after each meeting

   This provides an opportunity for your pit crew to cheer you up if a meeting goes poorly or warn you if you might be misinterpreting feedback before you head into the next call. It also helps them sense if you’re being overly optimistic or pessimistic as you move through your process.

3. You have more time between meetings to stretch and reset

   Instead of scrambling after each meeting to write down all of the take-aways, you can dictate a 1-2 minute voice memo while getting a drink, taking a bio break and getting set for the next one.

At the end of each day, you can transcribe the key details from each voice memo into your fundraising CRM. Doing so for all meetings in one sitting is not only more efficient, but it makes it more likely that you’ll surface patterns in the feedback as you reflect on multiple meetings and listen to your interpretations across the entire day.

This WhatsApp thread ended with 5 term sheets and an oversubscribed Seed round

Using WhatsApp to dictate voice memos to your pit crew is a simple yet powerful way to leverage your support system for maximum effect, while ensuring that key details don’t get lost in the blur of meetings.

Why I Won't Promise You an Intro

As an investor, I get asked for introductions all the time. From portfolio companies, from founders I meet day-to-day, and even from other investors. But no matter how much I may want to help someone, I never ever promise to make one.

Sounds like a bit of a jerk move, right? 🤡

To understand why, let’s start with a bit of history…

The Double Opt-In Introduction

In 2009, Fred Wilson proposed a simple yet powerful email etiquette practice which he called the “double opt-in introduction”:

The practice quickly gained adoption amongst VC circles. It wasn’t long before investors were insisting that all introductions be made through double opt-in.

Today, the use of double opt-in introductions in Silicon Valley is near-religious.

Its rapid adoption reflects the fact that the practice exists at the intersection of the two most prized resources amongst VCs: time and personal networks. Making an introduction without a double opt-in is now one of the biggest faux pas you can make amongst Silicon Valley investors.

This may seem silly (what’s the big deal? 🤷‍♂️), but the practice is now deeply ingrained in investor etiquette. The manner in which you communicate a request for introduction now carries a whole lot of weight and signalling.

Signalling Matters

How you communicate a request for introduction says a lot about you, whether you realize it or not.

If you forward someone an introduction request and ask them for a double opt-in, you’re signalling to the receiver that:

• I understand you’re busy

• I respect your time

• As someone in my personal network, I’m protective of access to you

On the other hand, if you make a direct introduction to someone without first getting their permission, you’re potentially sending the opposite signal:

• I don’t understand (or I don’t care) how busy you are

• I don’t respect your time

• I am not filtering access to you

(You may also be signalling “I’m an outsider,” in that you don’t understand the accepted etiquette.)

Why does this matter? Most people have far more emails in their inbox than hours in the day, so we naturally adjust our behavior over time to prioritize the people we want to respond to.

For example, if I receive an email with the subject line “FW: Request for Introduction to Chris @ Panache”, I’m far more likely to respond quickly if it were sent to me by someone who I know is respectful of my time and thoughtful about the types of introductions they send my way. On the other hand, if a person repeatedly makes direct intros to me without my opt-in or forwards me introductions that they know — or should know — aren’t a fit for me (e.g. sending me Series B companies as a Pre-Seed investor), then at best I’ll get around to reading their email later.

More likely, I won’t open the email at all.

Can I interest you in a late-stage growth round?

At first, this may seem silly, but it’s a reflection of the degree to which many investors prioritize and optimize their time. Most of us have long since come to terms with the fact that we’ll never “catch up” on our work (or our email), so we’re constantly looking for ways to improve our efficiency.

So No, I Won’t Promise You an Intro

At this point, it should be pretty obvious why I won’t ever promise someone an introduction. To maintain my personal relationships, I must give the other person the opportunity to opt-out. I need to demonstrate that I respect them and their time enough to allow them to politely decline the introduction (for whatever reason they may have — valid or otherwise).

Moreover, if I want to make the introduction happen, the best way for me to do so is to send a double opt-in email with an explanation of why the connection would be beneficial to the other person. In other words, lobby on your behalf.

How You Can Improve Your Chance of an Introduction

If you’re a founder looking to get an introduction, one of the best ways to increase your success rate is to signal that you understand the dynamics at play. That is, signal to the connector that you understand the importance of time and personal networks.

How do you do that?

By explicitly asking them to facilitate a double opt-in when requesting an introduction.

Arjun Dev Arora has a fantastic post on how to write a great email request for introduction, complete with examples of how to do this. At a high level, it’s actually quite simple:

• Demonstrate that you’ve done your research (show that there’s a specific reason why you’re asking for this particular introduction)

• Clarify why the introduction is of benefit to the recipient

• Explicitly reference double opt-in in your request (e.g. “I would really appreciate if you could forward this email to Sarah for double opt-in”)

As founders, you have to be comfortable with uncertainty, and the etiquette around investor introductions is a great example of that. I won’t ever be able to provide you the certainty of a guaranteed introduction, but if you send me a well-written request that shows you understand why double opt-in matters, I’ll almost certainly pass it along with my thumbs up.

It's Time for Canada to Play Offense

One of the first posts I wrote after launching this blog was a call-to-action for Canadian VCs to spend more time outside of Canada. I deeply believe that to succeed as an investor outside of Silicon Valley, it’s essential to spend time in the Bay Area. If you’re not regularly exposed to what’s happening at ground zero of the global tech ecosystem, you’ll always be at a disadvantage.

You’ll always be playing defense.

It’s a viewpoint shared by everyone at Panache Ventures. As one of only a handful of Canadian VCs founded by former entrepreneurs (we have more exits than we have partners), we deeply understand how important connections to Silicon Valley are when it comes to building global companies. Even in a post-Covid world.

That’s why this week, the full Panache team from across Canada descended on San Francisco.

Because with our new $100M Pre-Seed fund, we’re going on offense.

A Matter of Perspective

One of the biggest differences I’ve observed between Silicon Valley VCs and investors in other countries is the amount of time and effort investors spend building relationships with other firms. Part of this is simply the numbers: there aren’t that many VCs in Canada, so it doesn’t take all that much time to get to know them all. But part of this is also mentality: for many Canadian investors, relationship-building stops at the border.

The average Canadian VC knows at best a handful of US investors. In almost all cases, those relationships are the result of happenstance. They met at a conference, on a cap table, or because an American VC once flew up for CDL (seriously).

The result?

When Canadian founders ask their investors for introductions to Silicon Valley VCs, they either get blank stares or a random collection of unrelated partners that their investor happened to have met over the years.

We don’t think that’s good enough.

Prioritizing Outbound

Every VC firm has an outbound program for identifying promising founders. We’re building one to identify promising co-investors.

We believe that developing relationships with as many investors as possible is one of the biggest ways that we can help Canadian founders. It’s something that every top Silicon Valley VC does. It’s time Canadian investors follow suit.

That’s why I’m constantly traveling across the US.

That’s why the entire Panache team was in San Francisco this week to host an event for Silicon Valley VCs and meet investors one-on-one.

We’re putting in the work to develop relationships with Pre-Seed and Seed investors across North America so that we can rally the best co-investors for the rounds we lead.

We’re expanding our network of Series A and B investors so that when our founders are fundraising, we can open as many doors as possible.

We’re championing Canadian startups across the spectrum (not just the ones we invested in) and encouraging our US friends to look north of the border, to help attract more risk-taking capital into our ecosystem.

Everyone loves gifts (in this case, small batch, limited edition maple syrup bitters)

We’re Just Getting Started

This is just the beginning.

In the coming months, we’re going to roll out even more activities across Canada and the US.

You’ll see us in every major city in North America building relationships that support not only Panache portfolio companies, but startups across Canada.

And we hope that our fellow investors will follow suit.

Because if we all go on offense — if we all look up and out more often — the entire Canadian ecosystem will benefit.

Let’s go Canada!

🇨🇦🚀🔥

Sorry, You Can't Sneak in the Side Door

One of the more common misconceptions founders have is that after being rejected by a VC, it’s possible to get a different outcome by talking to someone else at the firm. That it’s possible to find a “side door” into the VC.

I see this play out quite frequently: 

• Three weeks ago, I shared the “Pitch Me!” button on my personal blog. 10% of the submissions were from founders who had already pitched someone else at Panache.

• Two weeks ago, a trusted friend facilitated a warm introduction for a founder. The founder who requested the introduction didn’t tell my friend that they had already pitched Panache (twice).

• After we announced Panache’s new $100M fund, multiple founders reached out to me who had previously spoken to at least one other person at Panache.

All of these outreaches had two things in common:

1. The founder had previously received a ‘no’ from someone else at Panache

2. The founder made no mention of this fact when they reached out to me

Look, I get it. As a former founder, I completely understand and empathize with the desire to approach an investor from multiple angles when fundraising. In fact, at some point I probably did the same thing.

But it’s not going to work. Let me explain why…

It’s Dishonest

I’m going to start by being very blunt: this approach is dishonest.

It may not seem that bad. In fact, it probably seems like good ol’ fashioned persistence. But inherent in this is an intentional attempt to “trick” the investor. In this fantasy world, the new partner meets you and gets swept off their feet before ever realizing that you’ve spoken to someone else at the firm.

But that’s not how it works.

Have you heard of a CRM? VCs have them too. 😉

The very first thing I do when I receive an introduction to a new founder is look in our CRM. Is the company on our radar? Do we have any information about them? Has anyone at the firm spoken to them before?

If I find prior communication between one of my teammates and the founder – especially if it was recent – then that founder is likely in the hole with me. Why? Because they tried to mislead me in our very first interaction.

Partnerships are Based on Trust

If the person you spoke to previously was an analyst or associate, there is actually a chance you could get a do-over (I’ll get to that later), but if you already spoke with another partner, the result will likely be the same.

Why? Because partnerships are based on trust.

In order for a VC (or any other partnership) to function, the partners have to implicitly trust each other’s decision-making. If a startup was already evaluated by one of my partners, I presume that they were thoughtful in their analysis. Moreover, I trust that if my partner had wanted my input on the decision, then they would have asked me for it. So I’m going to presume that my partner’s decision was the correct one.

That doesn’t mean partners always make the right decision, but trusting in their decision-making is essential to the success of the firm. If partners were to start second-guessing each others decisions, then trust would be lost and the partnership would struggle to function.

No Doesn’t Always Mean No

The flip side of the coin is that not all “no”s are equal.

You might have been rejected very early on, before your value proposition was clear. Your company might have since pivoted, secured a big-name customer or discovered an amazing insight.

Or the rejection might have been from a junior associate or analyst who just didn’t “get it.”

It’s possible to get a second chance, but you have to do it the right way:

1. Go Back to the Original Partner

If your prior interaction was with a partner, then your best bet is to re-approach them with a specific, intentional update that answers the question: “what has fundamentally changed since last time we spoke?”

• If they rejected you because the market was too small, how/why is that no longer the case?

• If they rejected you because you were too early, explain the progress you’ve made and how that de-risks the company

• If they rejected you because of concerns over the product or technology, explain how you’ve overcome those concerns

Of course, certain things aren’t going to change (at least, not from the investor’s perspective). If a VC turned you down because they don’t invest in your space, don’t believe in your thesis or have a competitive investment, absent a hard pivot you’re not to get a different response.

2. Go Back to the Original Analyst/Associate

If your prior interaction was with an analyst/associate and you believe that their concerns were valid, then going back to that person in a similar manner is likely the best approach. They already know you and re-approaching them shows respect for them and their position within the firm.

3. Approach a New Partner

If your prior interaction was with an analyst/associate and you believe that their concerns were not valid (or their understanding of your business was off), then it’s possible to re-approach the firm via a new person, but it has to be done carefully.

First off, if you’re going to approach a new person, it should be someone more senior. Approaching a second analyst/associate is unlikely to change the outcome, for the same reason why switching partners doesn’t work.

Secondly, you cannot (and should not) presume that the analyst/associate’s decision was made in a vacuum. In fact, it’s quite likely that a partner was involved. At most firms, junior team members regularly walk through their deals with a partner in order to get feedback and learn. So while your rejection may have come from the analyst/associate, the actual decision might have been made or influenced by someone else.

Finally, you need to be transparent when approaching the partner that you have already spoken to someone at the firm. If someone in your network is facilitating a warm intro, ask them to telegraph the fact that you spoke with a junior person awhile ago and think that they might have missed something. (Ideally, the partner you’re approaching is an expert in your space, so you can naturally appeal to their expertise and ego.) If you’re approaching the partner via a cold email or other means, be up front about why you were rejected and what’s changed (or what you feel was missed).

VCs Love Second Chances

As investors, a big part of our job is making decisions based on very limited information. And we often get it wrong.

Which is why so many VCs clamor for lines instead of dots.

So if you’ve previously been rejected by an investor and have addressed their concerns, don’t be afraid to circle back with them.

If you think they made a mistake, there’s still a possibility of an investment, but you have to tread carefully and understand that everyone in the firm is on the same team.

Things That Make You Go Hmmm...

I was at the crib
Sittin' by the fireplace
Drinkin' cocoa on the bear skin rug
Gmail rang - who could it be?
Looked at the deck then started to shrug

There are a lot of hidden “traps” that founders can fall into when fundraising. There are phrases that come across differently to founders and VCs, missteps that can lose you credibility with potential investors and phrases that immediately tell an American VC that you’re “not from around these parts.”

And then, there are the things that make investors go “hmmm…”.

These are things that won’t outright kill a fundraise, but can cause enough potential investors to pause that they can meaningfully hurt your fundraising funnel. They can cause VCs to turn down introductions they might otherwise have taken, to slow down their diligence process, or to archive your intro email intending to revisit it…but never doing so.

Here are 5 things that make VCs go hmmm…

1. A founding team with no connection to the industry

One of the most significant questions for investors is “why are you the one to solve this problem?” That isn’t just a question about capabilities, but also one of motivation. Why are you doing this? Why will you commit to spending the next 7-10 years on this problem above all else?

Often the answer is obvious (e.g. from reading the founding teams bios). In other cases, the framing of the problem tells the story (“for the last 10 years, I was frustrated by X…”). But if nothing in the deck links the founding team to the industry in which the problem exists, it can cause investors to go hmmm…

2. Founders who aren’t full-time

When one or more founders aren’t full-time, it almost always causes investors to go hmmm…

To be clear, I’m not talking about situations where founders legitimately don’t have the financial resources to go full-time. I’m talking about cases where one or more key founders with (apparent) resources are hedging their bets.

A non-technical CEO with a CTO who will join “as soon as the money is raised?” Three well-paid cofounders who are “looking forward to going full-time” once the money’s in the bank? Building startups is hard (really hard) and you’re going to have a tough time convincing potential investors to buy-in if your entire founding team hasn’t.

3. No screenshots

Many founders get carried away with pitch deck design. It’s easy to spend so much time trying to make the deck look perfect that you forget to include screenshots of the actual product.

Here’s the thing: if I read a pitch deck start to finish and don’t see a single image of what you’re selling, I assume that it doesn’t exist. My conclusion (right or wrong) is that your product is still a figment of your imagination and that no human being has actually seen it, much less used it.

4. No numbers

A common misconception amongst founders is that it’s possible to fundraise off of nothing other than a “vision.” The myth of the “back-of-the-napkin” fundraise continues to permeate, despite the fact that it’s little more than an urban legend.

No matter how early your company is, it’s essential that there are hard numbers in your pitch deck. If you have 100 beta users, what are some statistics you can show about how they’ve been using the product and what you’ve learned from them? If you’ve made $1,000 in revenue, what are some of the way-too-early metrics around it? Sign up stats, retention rates, unit economics…all of these are fair game to include in a pitch deck, even at a very early stage.

Why?

Because it shows that you’re building something real and that you’re paying attention to what matters.

No numbers in a deck? That definitely makes investors go hmmm…

5. A screwed up cap table

Unfortunately, this is one that hurts a lot of first-time founders.

When investors come across a screwed up cap table (that is, one in which the founding team owns far less of the company than they typically should at a given stage), it definitely makes them go hmmm…

There are a variety of reasons why a cap table can end up “upside down,” but most often it comes down to to angel investors, venture studios and other early investors who believe they should own far more of the company than they have any legitimate right to (at least, if they hope that the company will attract new investors). VCs are genuinely concerned about founder motivation over time — if the founders don’t own enough of the company, are they going to stick around in 5 or 7 years when things get really, really tough?

For a Pre-Seed / Seed VC like me, the question I ask myself when I see a messed up cap table is: do I want to put in hours upon hours of work to help this founder fix it?

And honestly…a lot of the time I don’t.

So remember…try not to give investors unnecessary reasons to go “hmmm…”.

Are You a Line or a Dot?

In 2010, prolific investor Mark Suster wrote a blog post titled “Invest in Lines, Not Dots.” It was a response to the rapidly increasing pace of VC deals being done as the world emerged from the 2008 financial crisis.

The premise was simple: each time an investor and founder meets is a dot. If an investor has only a single data point about you (one ‘dot’), it’s difficult for them to gain conviction on your ability to execute. The implication: if investors only meet you once (during your fundraise), they’re unlikely to invest in you. Therefore, you should meet investors early and often to provide them with additional dots.

Invest in Lines, Not Dots - Mark Suster, Both Sides of the Table

If that sounds like a one-sided argument, it’s because in many ways it was. Back in those days, most VCs were really uncomfortable making fast investment decisions. Investors had historically held all of the power in the fundraising dance and were used to being able to perform weeks or months of diligence before making a commitment.

But times were changing.

Accelerators like Y Combinator and Techstars had come on the scene and were pulling back the curtain on the mystique of VC. More significantly, they were creating fundraising playbooks for founders that were slowly but surely shifting power from investors to founders.

Y Combinator Batch #1

VCs the world over latched onto Mark’s post. “We invest in lines, not dots” became a rallying cry for investors desperate to maintain control over the fundraising process. Almost in unison, investors parroted a powerful warning at founders: “Investor-founder relationships last longer than most marriages. Having a bad investor could ruin your company, so you need to get to know us over time!”

The idea of a bad investor taking down a startup is the stuff of founder nightmares.

Now to be clear, when Mark wrote his original post, there was absolutely merit to this argument.

With the torrent of startup activity following the financial crisis, investors and founders alike were making rushed decisions. There were plenty of cautionary tales from both sides, but the damage was always felt more by founders who had the misfortune of dealing with bad investors (or investors with bad behavior). As a result, investor warnings were largely heeded.

But that was then, and this is now.

Evolve or Die

Over the past 10 years, the power dynamic has shifted more than ever towards founders. And in many respects, it’s a byproduct of the success of VC.

Since 2010, the number of VC firms has exploded, with over 1,000 early-stage firms in Silicon Valley alone. The result has been cut-throat competition, with founders the primary beneficiary. Investors in competitive ecosystems have had no choice but to improve, with speed of diligence the number one priority for top firms. The best VCs can now perform extensive diligence on a startup in a matter of days.

VC competition over a recent YC graduate

Twelve years later, you’ll rarely hear investors in Silicon Valley reference the need for “lines, not dots.”

Why not? Because today, it’s the closest thing you can get to an investor telling a founder outright, “You need to operate on my schedule, not yours.” And that’s not great for competitive positioning.

But outside of Silicon Valley…

If you’re an international founder, however, your pattern-matching radar should be going off 🚨. When you read or hear about ”lines, not dots” today, it’s almost exclusively from investors based outside of the US.

Why? Because of a lack of competition. Absent the level of cut-throat competition present in Silicon Valley, the vast majority of international investors haven’t developed the skillset necessary to perform adequate diligence and reach conviction quickly. Many simply aren’t equipped to make decisions in a rush and are willing to miss out on deals instead (which, to be clear, is the prudent thing to do for a good investor).

Founders Unite

Increasing competition amongst VCs isn’t the only reason why founders today are in a better position than in 2010. A significant change in the dynamic amongst founders has given them a major advantage over investors in one crucial area: references.

Historically, VCs have always had the advantage in this regard. Investors can rely on back-channel references from robust personal and professional networks when making investment decisions. Those reference calls still painted an incomplete picture (especially for investors diligencing first-time founders), but it was generally much better than what founders had: nothing.

Up until recently, when bad investor behavior occurred, founders were reticent to share the details publicly, lest they get blacklisted and their future career ruined. As a result, it was almost impossible for first-time founders with limited networks to reference-check potential investors. Thus, they had no choice but to buy into the argument that they should meet investors multiple times to get to know them.

But that was then…

The Little Black Book

Beyond the fundraising playbooks developed by Y Combinator, Techstars and others, the most significant shift in founder-investor power dynamics has come from the VC equivalent of a “little black book”: Crunchbase.

Imagine that you were thinking about getting married and had a list of every single ex that the other person had. That’s what Crunchbase is to founders.

The other thing today’s founder have? Peers who are willing to spill the beans.

All founders deeply understand the asymmetry that exists in fundraising. Most founders will only ever raise capital once or twice, while investors do this week in and week out.  As such, members of the fellowship of founders are overwhelmingly willing to help each other out — especially when it comes to understanding investors.

To this day, I still get emails from founders titled “Founder Reference for X at Y Firm” in regards to investors in my prior company.

And I respond to every. single. one.

Today, it’s possible for founders to get an incredibly complete picture of a potential investor, including how they acted in both good and challenging situations. With a reasonably amount of work, founders can identify companies that succeeded, failed, blew up, and everything in between on a given investor’s watch. And in most cases, they can reach out to the founders for their side of the story.

So while it’s not possible to completely eliminate bad investor risk, with a reasonable amount of homework founders can bring almost to zero the risk of a surprise bad actor on the cap table.

That’s power.

The result? Notwithstanding trying to figure out whether or not you connect with a potential investor on a personal level (which is still really, really important), there’s virtually zero credibility to the argument that meeting an investor multiple times helps founders to avoid bad investor behavior.

Should You be a Line or a Dot?

At this point, you’re probably expecting me to tell you unequivocally that every startup should be a “dot”.

Not so fast.

If you’re in a position to run a high-velocity fundraising process, then presenting yourself as a dot (a single data point during fundraising), is likely to be the best approach for many founders.

But not every founder can do that.

There are situations where it is in your best interest as a founder to present investors with multiple data points so that they can build a line over time. These include:

• Founders raising Pre-Seed or Seed funding in smaller ecosystems (where you have fewer investor options and most investors aren’t comfortable making fast decisions with limited information)

• First-time founders without strong networks and/or prior experience working at a startup (in this case, meeting investors early can help you understand what they’re looking for at the same time it’s helping them get to know you)

• Larger fundraises (once you get to a certain dollar amount, very few investors will make decisions off of a single dot)

There are other cases where I personally believe that presenting investors with a single dot is the best strategy.  These include:

• Founders raising a Pre-Seed or Seed round in Silicon Valley

• Founders raising a round on a SAFE or similar instrument with no board seat or other terms involved (thus, minimizing the potential impact of bad investor behavior)

But there’s a third option which I believe provides a best-of-both-worlds approach for many founders: the dotted line.

Invest in…Dotted Lines?

Simply put, a dotted line is a hybrid fundraising strategy wherein most investors are presented with a dot while a select few get the benefit of a line.

How to Create a Dotted Line

Six months or more before your next fundraise, identify 5 – 10 target investors that would be your ideal lead. Reach out to them for an initial meeting (this is similar to Y Combinator’s coffee meeting strategy).  Your goal as a founder for this meeting is to get input as to where you need to be when you kick off your fundraise to gain their interest.  In return, you present them with a dot.

Over the next 6 months, touch base with them periodically. Share an update on your progress and ask if their expectations / benchmarks have changed.

By the time you’re ready to fundraise, three things should be true:

1. Assuming you’ve executed against the benchmarks shared by the investors, you should enter your fundraising process with confidence as to where you are in terms of investor expectations

2. Some number of your “preferred” investors have seen you execute over time (they have their “line”) and, if interested, will be able to move quickly with conviction

3. The majority of investors in your fully-research investor pipeline will have limited information about you, putting you at the advantage

From there, you can execute a high-velocity fundraising process with confidence.

Who Should Use a Dotted Line?

For founders trying to raise a Seed or Series A in Silicon Valley — particularly international founders who have previously not raised in the US - I believe that presenting a dotted line is the best approach for fundraising. It provides the confidence of knowing what VCs expect, while ensuring that you have the information advantage with the majority of potential investors.

One important caveat: if, in your early research, it becomes apparent that your metrics aren’t within the “strike zone” of what investors are looking for, you’ll likely want to revert to a line approach to increase your odds of investors building conviction.

At the end of the day, there’s a human element of fundraising that should not be overlooked: nobody likes to make a rushed decision (even if they’re capable of it).

Can You Beat My Friends?

Investors have many different frameworks for evaluating startups. Some focus on the 3 Ts (Team, TAM and Traction), others look for the 3 Hs (the Hacker, the Hustler and the Hipster) while others ask the 3 Why’s (Why this? Why you? Why now?).

Whenever I meet a promising Canadian startup, I focus on a single question: can you beat my friends?

Aster Data, circa 2006

Let me explain.

In 2006, I signed on as employee #1 of a new startup called Aster Data Systems, founded by three friends of mine from Stanford. It’s very likely you’ve never heard of Aster Data, but once upon a time we had a small but significant impact on the tech world: we helped to invent big data.

As fondly as I remember those days, when I think about the many friends I made at Aster Data, I rarely think about what we did back then. More likely, I’m thinking about what they’ve created since. In the 10 years since Aster Data was acquired, our small group of alumni have gone on to found some of the most impactful (and valuable) companies in enterprise software.

And in Silicon Valley, that story isn’t anything unusual. In fact, it’s not even the only time it happened to me.

Meet some of my friends

To give you a sense of what I mean, here are just a few of the people I’ve had the privilege of working with:

If you’re in IT or chatbots, can you beat my friend Vaibhav, who cofounded the conversational AI platform Moveworks (valued at $2.1B)?

If you’re in cloud storage, can you beat Dheeraj, who cofounded Nutanix (NTNX, valued at $4.1B)?

If you’re in data management, can you beat Mohit, who cofounded Cohesity (valued at $3.7B)?

If you’re in business intelligence, can you beat Ajeet, who cofounded ThoughtSpot (valued at $4.2B)?

If you’re in banking-as-a-service, can you beat Itai, who cofounded Unit (valued at $1.2B)?

If you’re in customer data and personalization, can you beat Tasso, who cofounded ActionIQ ($145M raised)?

What’s your point?

Believe it or not, I’m not dropping names for the sake of dropping names.

My goal here is to highlight a simple but important point: if your aim is to be the best in the world, your competition isn’t in Canada.

The Startup Olympics

In a winner-take-all / winner-take-most market, there are generally 3-5 “finalists” once the market matures.

Now, try to think of a global winner-take-all / winner-take-most market where more than one “finalist” was based in Canada.

I’ll wait.

The reality is that tech is a lot like the olympics. Sure, there are plenty of companies founded all over the world, but once everything is said and done, the podium often looks like this:

As a result, whenever I meet a promising Canadian startup, one of the earliest warning flags for me is if they show me a competitive slide with other Canadian companies.

Why?

Because unless they’re building X for Canada, then there isn’t a single other company in Canada that matters.

At least not if their goal is global supremacy.

How good are you?

When I meet your founding team, I’m not comparing you to anyone else in Canada. Instead, I’m assuming that you’re the best in Canada and I’m comparing you to all of my friends in the states. I know how they work and I know what it took for each of them to be successful.

When I’m talking to you, I’m envisioning the founders in your industry who are just like my friends and asking myself:

• Do you have their hustle?

• Do you have their determination?

• Do you have their passion?

• Do you have their storytelling ability?

• Do you have their resilience?

• Can you recruit the absolute best engineers, designers, product managers, marketers and salespeople in the world?

• Can you inspire investors and customers like they can?

• Will you do whatever it takes and go wherever you must go to win?

Because that’s what you’re up against. Not the other founders in your local coworking space. Not the “competitors” in your city, province or even country.

The numbers tell us that in any given tech market, at best one global competitor will come from Canada.

So if you really, truly are aiming to be the best in the world,

…you need to beat my friends.

Game on.