Monthly Archives: December 2016

AngelList syndicate leads and Sequoia scouts

I wrote about Sequoia Capital’s Scouts program in a post around this time last year. From the post:

“Basically, it’s a program whereby Sequoia gives its scouts around $100K a year to invest in promising startups. The scouts consist of entrepreneurs that Sequoia has backed in the past, academics, former Sequoia partners, and anyone else that Sequoia believes may have the ability to identify and access great startups.

Most of the gains from successful investments are shared by the scout making the investment and Sequoia’s LP’s. Sequoia’s GP’s and other scouts only get a small fraction. The fact that the returns from the investment go to the scout rather than Sequoia’s GP’s ensures that the scout has sufficient financial motivation to perform well. The scout essentially gets free money from Sequoia with no downside in the case of a poor investment, but significant upside in the case of a good investment. In this way, the scout effectively becomes the GP of an angel fund where Sequoia is the main LP.”

Towards the end of the post, I performed some basic calculations to estimate the economic returns from the Scouts program. Although the specific numbers are certainly off, the conclusion is likely directionally correct. Here’s the conclusion:

“So for a total investment of $70M, Sequoia is sitting on a paper value of $329M. That’s a minimum 4.7X return.”

Although it took me a year to make the connection, AngelList syndicate leads are similar to Sequoia scouts. Just like a scout is effectively the GP of an angel fund where Sequoia is the main LP, a syndicate lead on AngelList is effectively the GP of an angel fund where syndicate members are the main LP’s.

However, there are two main differences.

First, although there is some overlap, the individuals who serve as Sequoia scouts are largely different than the individuals who serve as AngelList syndicate leads. Specifically, everyone can’t be a Sequoia scout but everyone can be an AngelList syndicate lead. The result is that the quality of the average Sequoia scout is higher than the quality of the average AngelList syndicate lead.

However, the second difference between Sequoia’s Scouts program and AngelList syndicates makes up for this apparent disadvantage. Specifically, Sequoia had to invest in each of the deals brought forward by its scouts. On AngelList, you get to choose not only which syndicate leads you co-invest with but also which of their specific deals you invest in. This effectively means that AngelList lets you pick your own scouts, just like Sequoia, while also letting you pick from within the specific deals offered by the scouts you’ve chosen. In other words, AngelList offers both access and decision-making power. Depending on the quality of your decisions, the latter can be an advantage or a disadvantage.

You can argue that none of the AngelList syndicate leads are as good as Sequoia scouts. However, I don’t think that this is the case. First, there are some individuals like Jason Calacanis who served or currently serve as both Sequoia scouts and AngelList syndicate leads. Second, although AngelList syndicates are younger than Sequoia’s Scouts program, they’ve participated in the funding rounds of some equally impressive companies like Uber.

To summarize, AngelList gives you the opportunity to achieve returns similar to those of Sequoia’s Scouts program. You just have to pick the right scouts. And, if you have enough courage and are good enough, you might even outperform them.

Catastrophic care

I recently read the book Catastrophic Care by David Goldhill.

The book provides a great overview of the US healthcare industry with a specific focus on rising healthcare costs in the country which are already well above global averages. The book’s core argument is that while intermediaries like insurers, Medicare, and Medicaid should theoretically negotiate lower healthcare prices for patients than what patients who are at an informational disadvantage to healthcare providers could negotiate on their own, in practice these intermediaries are incentivized to increase their profits by covering more conditions and increasing premiums rather than controlling costs. The solution is to return to a structure where the patient is the payor for all but the truly catastrophic conditions that insurance was originally designed to cover.

If you want to read the full book including data and case studies of specific programs and treatments, you can buy it here.

Startup hype

Some hype is good for startups. Since startups are already underresourced relative to larger companies, some hype helps them attract talent, funding, and initial customers.

However, eventually the startup’s performance needs to catch up to the hype. Otherwise talent leaves, funding stops, and customers who gave the product a try don’t stick around because the product fails to deliver what’s promised by the hype.

In other words, there’s a thin line between hype that helps a startup and hype that will eventually hurt it. If you’re unsure what side of the line you’re on, it’s better to slightly undershoot than to risk overshooting.

Understanding social platforms

In a post around this time last year, I shared VersionOne’s “A Guide to Marketplaces” as an excellent primer on the different types of marketplace companies and their underlying characteristics.

This year, VersionOne published a similar report on Understanding Social Platforms. The report gives a great overview of the different types of social platforms including messaging, private social networks, public social networks, enterprise social platforms, and communities. It also highlights the characteristics which are common across and unique to each platform, and offers ways to think about and measure the performance of different platforms.

You can read the full report here.


There’s a quote from Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, that states “When you get a seamless web of deserved trust, you get enormous efficiencies”. The corollary is also true. When you don’t have a relationship based on trust, you get tremendous inefficiencies because you spend as much time monitoring the accuracy of the statements and the performance of the person you don’t trust. Sometimes you can spend more time on this than on the actual work that you should be doing.

This quote is also very accurate in describing the relationship between investors and entrepreneurs. There’s a lot of information asymmetry after an investment is made, with the entrepreneur knowing much more about their company than the investor. If the investor doesn’t trust the entrepreneur, they can spend more time trying to stay updated on what’s happening at the company and cross-checking the accuracy of the metrics and financial information they receive than actually thinking about how to add value to the company.

Similarly, entrepreneurs may not trust their investor. If they believe that the investor won’t keep information confidential, they may not share it. If they believe that the investor is going to take advantage of their declining cash balance in their upcoming round, they can start fundraising too early and derail the company’s operational performance. In countries like Turkey which don’t have formal share vesting laws, if they don’t believe that the investor will release their shares as they vest, they may not accept an equity vesting arrangement which helps them just as much as investors.

In terms of solutions, legal terms which try to enforce trustworthy behavior do very little. For example, an investor may establish information rights in the shareholders’ agreement, but if an entrepreneur decides not to share information, there isn’t much that an investor can do in practice.

The only solution for investors is to back entrepreneurs whose character they trust. Similarly, entrepreneurs need to take money from investors who they believe they can trust. And deciding whether or not to trust someone is an art, not a science. Reference checks from people they’ve worked with in the past help evaluate whether you should trust someone to a certain extent, but for a reference to be valuable you also need to trust the person providing the reference. Sometimes they, not the person you’re getting a reference on, are the one who shouldn’t be trusted.

At the end of the day, I rely on my gut feeling about someone’s character as the key determinant of how much trust I have in them. It’s been a pretty good indicator so far.


Punching above your weight when recruiting

I was recently speaking with another investor about how successful our companies are at recruiting.

At the surface, one might expect a company’s recruiting success to be tied to the strength of their brand and the financial offer they make to candidates. Traction is a pretty good proxy for the former and the combination of profitability (or a lower net burn rate) and funding are good proxies for the latter. And this is indeed broadly the case. Companies with more traction and a better net funding position are more successful at recruiting.

However, during our talk we also identified several outliers in our portfolios. Specifically, some companies were punching well above their weight by attracting a level of talent that’s difficult to justify by looking only at their traction and net funding position. So there must be at least one, or perhaps more, variables that we’re missing. I think there are two.

The first is the founder’s ability to inspire others to join them in the pursuit of a shared vision. This comes from being authentic, being able to clearly communicate your vision, and caring about the people you work with.

The second is how much time the founder spends recruiting. All else equal, the more time you spend meeting candidates the more likely you are to hire the right people. Together with setting the company’s vision and keeping it funded, recruiting is one of the three most important responsibilities of a startup founder. And some founders have internalized this more than others.

Your traction and net funding position determine your weight when recruiting. Your ability to communicate your vision in a way that inspires others and the time that you dedicate to recruiting let you punch above your weight.

Entrepreneur referrals

I respond differently to entrepreneur referrals depending on who they’re coming from.

For example, two days ago I received a referral who I accepted to meet immediately. The reason was because the referral came from a very strong entrepreneur who has introduced me to other strong entrepreneurs in the past. I touched on how important it is for VC’s to build a reputation for making valuable referrals in an earlier post.

I also regularly receive referrals where I read about the entrepreneur and what they’re doing in the email introduction, but don’t meet in person. The reason for this is that the source of the referral is either someone I don’t know well or someone I do who hasn’t been a source of great referrals in the past.

What this means is that, in exchange for the benefit of being able to prioritize who to meet based on the signaling effect of the person making the referral, I may miss some diamonds in the rough. For example, a strong entrepreneur may have simply chosen to reach out through the wrong LinkedIn connection.

What this means for entrepreneurs is that you should reach out to investors through connections that you know they trust. For example, you may want to complement a LinkedIn search of your mutual connections by browsing the investor’s Twitter profile. I’m using Twitter as an example here but similar social signals are available on other web and specifically social media platforms.

If the investor has engaged (retweeted, favorited, messaged, or replied) with one of your mutual LinkedIn connections on Twitter, they’re likely to have a much stronger relationship with that person than someone who they look connected to on LinkedIn but haven’t interacted with on Twitter. Your chances of being perceived positively are therefore much higher if you reach out through the former connection.

Scheduling work time

I recently read Mike Monteiro‘s piece on scheduling work time in your calendar. It really resonated with me because I started applying a similar strategy about a year ago and the results so far have been great.

I used to only include meetings in my calendar. I soon found out that I was inundated with 4 to 6 meetings each day. This left me with little time to prepare for the meetings and to do the follow up work necessary after the meeting was completed. I was getting many meetings done, but I wasn’t getting much work done.

I then changed my approach to include not only meetings but also spans of time that I dedicate to performing specific pieces of work in my calendar. For example, if I need to research a particular market, I include the number of hours I think I’ll need to do that for in my calendar. If I need to review a term sheet for one of our companies, I include my best estimate of the time that that will take in my calendar. If I need to write an introductory email to help one of our companies pitch their next round to potential investors, I schedule time for that in my calendar.

Scheduling work time in my calendar forces me to dedicate the time necessary to do the work properly rather than to rush through it. As a result I not only get a greater quantity of work done, but the output of my work is also of higher quality.

I also take less meetings each day. For example I’ve taken between 2 and 3 meetings per day during the last week. The lower capacity of meetings that I allow myself to take makes me more selective in accepting meeting requests, and a better contributor in each meeting.

This approach might not work for someone who performs best in the absence of structure. Some people work better in environments where they continually prioritize what they do on a real-time basis. This isn’t me.

If you’re like me and use your calendar as a tool to structure and prioritize what you need to do, scheduling work time could make you much more productive.

Missionary vs opportunistic founders

Missionary founders create value for their customers which eventually produces value for themselves. Opportunistic founders seek to capture value for themselves before creating value for their customers.

Missionary founders know that if one investor doesn’t fund them, another will. Their conviction makes them stick to their business plan despite short-term setbacks. Opportunistic founders change their business plan to accommodate signs of investor interest.

Missionary founders share their company’s upside with their team because that helps them attract great teammates who increase the company’s chance of success. Opportunistic founders preserve their company’s theoretical upside for themselves, thereby practically lowering it.

Both can succeed, but the former do so more often and at greater scale than the latter.