Look past the surface

For founders looking from the outside in, (I assume) VCs offer fairly similar products. It’s ultimately a fund of varying size which translates into checks of varying sizes and a stage focus plus a better or worse marketing wrapped around it.

Of course, there’s (often) more to it and a lot of depth behind the claims made. But at the surface level, it’s not easy to differentiate amongst venture firms ( as hard as most of our industry tries).

However, once you dive in deeper and truly unpack how venture firms think and operate, I do find it fascinating how large the variance is across all aspects of the firm - even amongst the most successful and well known ones.

There's no one-size-fits-all playbook for building a successful VC firm. You can be brilliant or average using all sorts of strategies and approaches.

The most obvious differences (that most people pay attention to) are around:

• Portfolio construction (portfolio size, check sizes, follow-on strategy, ownership targets, etc)
• Thesis (thesis driven funds vs anti thematic / founder first funds), and
• Value add (whether it’s a true value add or not is another discussion).

That’s far from it though - there are also huge differences e.g. in terms of how investors:

• Source investment opportunities
• Make decisions (incl. process and decision making power)
• Are set up internally (organizational structure) and what that means re how they spend their time
• and much more.

While founders spend a lot of time unpacking the first three, I hardly ever get asked about the second three when founders looks to do diligence on us.

Let me unpack why I think every founder should spend time understanding the latter three too:

• Sourcing:

How and where I look for investment opportunities says a lot about what I prioritize and find interesting.

In my case, I try to meet founders before anyone else as our goal is to invest first wherever we can and kick off / lead their pre-seed. Which means I’m much more comfortable with things not being as buttoned up as most of my peers are / I often start engaging with founders during the ideation phase already.

As a reminder, at focal, we only invest at the very start, exclusively lead pre-seeds and there is truly no “too early” for us.

Understanding that and how I make decisions (see below) gives you a good idea re what to lean into when we talk.

• Decision making:

Understanding how a firm makes decisions can significantly increase your chances of getting them to lead your round as it allows you spend more time on the areas the respective firm puts most weight on.

Many founders ask about the decision making process (i.e. how long does it take etc). Very few try to understand what the core drivers are behind how we make decisions.

While it’s good to understand the process and the internal sign-off you need to get for the investment to go through (especially at larger firms), I’d argue that it’s even more critical to understand the decision making frameworks of a firm.

For example, for focal, two important things to know re how we make decisions are:

1. We put most weight on founders > market they’re going after / insight > actual idea at the time of the investment.
   
   With it, we look to spend a lot of time with you trying to understand how you think. Part of that is spending a meaningful amount of time during the diligence process on your actual idea at the time - knowing that a lot of it will likely change as you get off the ground given how early we invest.
   
   Why do we do that? Because diving in on the idea and challenging you on your thinking gives us great insight into how you think, how fast you process new information (see the next point re velocity), and how much work you’ve done already to truly understand your customers and their pain points (vs coming up with the idea on a white board).
   
2. As we assess founders, we put most emphasis on their velocity as we believe that speed is what matters most to get a startup off the ground successfully. Specifically:
   1. Learning velocity of the founders (are you obsessed with learning, how fast do you process information, and how fast do you learn from new information)
   2. Execution speed of your team (how fast do you get stuff done)
   3. Shipping speed (how fast can you build great products)

The more confidence you can give us in your ability to get important stuff done fast and with high quality, the more comfortable we can get with a potential investment. Assuming we can underwrite the insight / broader market too.

Thus - knowing how much weight we put on velocity - a small but powerful thing you can do during our diligence process is to have a very fast turnaround time - for email responses, asks, etc. Many of the busiest and smartest people I know are amongst the fastest to respond to important stuff. Always.

I know you have other things going on but if you’re fundraising (which is a full time job) and want an investment from us, this is important. Including on weekends when it matters.

We work hard and are all in on focal and I expect the people we back to do / be the same regarding their own company.

• Organizational structure:

How a venture firm is set up has a big impact on how an individual spends their time. And time is ultimately anyone’s most scarce resource.

First and foremost, it’s important to understand if the person across from you is a “full stack VC” or an investor and where they get support vs what they do themselves.

What do I mean by that?

I call someone a full stack VC if they are both building / running a firm as well as invest. Which is a job description that goes well beyond just finding, making, and supporting investments. It also includes hiring and managing people, raising funds from and working with LPs, setting up and driving internal processes, marketing, comms, legal, etc.

Having a full stack VC across from you has the advantage that they’re often founders of their firms themselves (or are managing partners) and are thus:

• Company builder themselves / have a much better understanding of it,
• Used to being told “no” a lot themselves too and have thus much more empathy for fundraising (fundraising for an unproven venture firm is very humbling, trust me),
• The most authentic representation of what the firm stands for as they’re often the drivers behind what the firm is today.

The downside of working with a full stack VC is that they can get pulled in many directions which can impact their ability to move fast at times. Though especially small firms tend to be very fast (we see speed as critical in venture as speed in startup building - especially if you want to invest first).

In addition, make sure to look at what functions a firm has hired for (ops & platform, EA, finance, etc) when chatting to a full stack VC as that tells you a lot about what they’re not spending meaningful time on vs what they have outsourced.

What I’m calling an investor on the other hand is someone who’s hired at a firm and can focus most of their time on finding, making, and supporting investments. Which is a more narrow role and comes with a more narrow experience yet it does also come with more bandwidth to focus on the core parts of the job.

As you can probably tell, Daniel and I are full stack VCs at focal and thus have a bias towards the former. However, there’s no right or wrong here. Just keep in mind that when you choose a venture firm to lead your round, you’re for the most part choosing 1-2 individuals to work with for ideally a decade plus. Knowing what their experience is and how they spend time is an important part of understanding who they are.

Ask the questions

To sum up today’s post - a lot of founders we come across ask us a few questions during the diligence process but hardly ever go beyond the first fund model, thesis, and value add.

Having explained why asking questions beyond that is important, I can highly encourage you to ask them at some point during the process.

You can’t get them all in during a first call but as you move along with a firm, make sure to ask questions that go beyond the surface level.

Doing so not only tells you a lot about the person you may be working with for a long time but can also be a real edge when it comes to getting them and their firm over the finish line.