Category Archives: VC

Term sheet making and taking

In venture capital, sometimes you have the luxury of being a term sheet maker. In other words, you get to have a strong say on the terms at which you’re investing in a company.

The conditions under which this is more likely to occur are when there is limited competition for the deal, you have a unique ability to add value to the company which is recognized by the founder, you’re investing a relatively large check size, and, better yet, a combination of multiple of these conditions.

But often, these conditions aren’t present. There are multiple bidders at the table, each of these bidders is in a position to add value to the company or at least this is what’s perceived by the founder, and your investment amount is relatively small.

When this is the case, you often have to take the term sheet that is put forth by the company. In other words, the company dictates most of the terms.

While this is suboptimal from an investor perspective, not doing these deals would mean missing out on some great companies. In fact, some of the conditions which produce an environment where you need to accept being a term sheet taker are the direct result of the quality of the company. For example, higher quality companies attract more bidders to the table and this gives the companies a stronger say on the investment terms.

When this is the case, if you really want to be part of the company, you have to take the term sheet on the table.

Rinse’s Series B round

Rinse is a tech-enabled laundry and dry cleaning managed marketplace where we’re investors. The company recently announced the closing of its $14M Series B round of funding led by Partech Ventures.

Now that Rinse has solidified its playbook for expanding into geographies and bringing these geographies to contribution margin profitability, it will be using the new funding to apply the same playbook to grow to 10 new US cities. Rinse is currently operational in San Francisco, Los Angeles, and Washington DC, and among the 10 new cities that it will expand to are New York, Chicago, and Boston.

We commend the Rinse team for their decision to achieve operational excellence with their existing model before rolling it out to new cities. This requires patience and this patience eventually pays off.

We also thank Partech and Rinse’s existing investors for continuing to support the company on its exciting journey.

Providing ranges in a negotiation

In a negotiation, it’s important to develop a view on the range of outcomes which your counterpart will accept. You can either do so indirectly, by building up a view based on a combination of placing yourself in your counterpart’s shoes and interpreting the signals that they’re sending you, or do so directly by asking them. This post is a short observation on the latter approach.

For the sake of simplicity, let’s assume a single variable negotiation where that variable is the deal value. When directly asked for the value at which they’re ready to do a deal, many people respond by giving a range.

The problem with this answer is as follows:

If you’re a buyer, the upper limit of your range indicates what you’re willing to pay and your counterpart can ignore the lower figures. It’s then up to them to try to get you to pay more.

Similarly, if you’re a seller, the lower limit of your stated range reveals what you’re willing to sell at. Your counterpart can then try to get you to sell at a lower figure.

As a result, if you’re asked for the terms at which you’re ready to do a deal, and you feel comfortable sharing this information, it’s better to simply share a specific figure.

If you’re not, you might want to ask the same question directly to your counterpart. Maybe they’ll respond with a range.

Hasan on BloombergHT

My partner Hasan recently gave an interview on BloombergHT.

In the interview in Turkish, Hasan talks about the startups we’ve invested in, his intercity trucking managed marketplace Webnak, and the current state of tech startup investments across the world.

I couldn’t embed the video in this post but you can watch it in the first 14 minutes and final 3 minutes of the 23 minute video at this link.

The investment memo

An investment memo is a very useful tool to help collect your thoughts in advance of an investment decision. It’s basically a document that summarizes the important factors which help inform an investment decision.

In the context of a startup, these factors include a minimum of the team, the market, traction (if the company has it), and the investment terms. It can also include case-specific factors like likely future expansion areas and regulation.

Rather than invest solely based on consuming the information presented by the company you’re evaluating, the advantage of investing based on an investment memo that you prepare is that it forces you to articulate your understanding of the company. Doing so may help you identify¬†weaknesses in the argument you’re trying to make which may lead you to reconsider your conviction in the investment,¬†holes in your knowledge which you need to go back and address, or alternative approaches to areas like the team, market, and investment terms which you may want to discuss with the company.

In terms of format, investment memos tend to come in the form of Word documents or Powerpoint presentations. I prefer written text because it promotes substance over style and forces you to articulate your thoughts at the level of depth enabled by sentences rather than the more superficial level which results from using bullet points.

And an investment memo doesn’t need to be long. If you’ve done your research and thought about the startup at length, 2 to 3 pages of crisp text written in half a day is all it takes.

The resulting improvement in the rigor of your thinking and the quality of your investment decision makes the time investment well worth it.

KPI’s, company before investor

After an initial meeting with a founder, if an investor decides to dive deeper into the startup’s performance, there are two ways to go about it. You can either request specific KPI’s and analyses that you’d like to use to evaluate the business, or request that the founder share the company’s KPI dashboard.

While the former approach may make you feel better because of the sense of control that it provides over the process, I prefer the latter. The reason is that the company’s KPI dashboard shares how the founder evaluates and seeks to improve his business. Whether you agree with it or not, since the founder will be driving the business forward, understanding how he thinks about and measures the company’s performance is more important than how you would do it.

That said, after initially getting the company’s KPI dashboard, you should certainly ask for the additional KPI’s and analyses that you believe are necessary to evaluate the business. If these are different than what the founder presents, the ensuing debate might help you uncover the reasons for the differences.

The founder might convince you as to why his approach is better, you might end up helping the founder, or you might realize that your views are too far apart to partner.

An order of magnitude difference in performance

I was recently comparing the metrics of two companies which were founded at similar dates and operating in the same space.

Despite this similarity, there was a 15-fold difference in the companies’ core performance metric. This order of magnitude difference was the result of just two key choices which differentiated the approaches of the two companies.

Very often we look for operational improvements to gain a few percentage points here and there. And these are indeed important.

However, they only become important after you have made the right choice in those areas that create an order of magnitude difference in performance. Such areas often exist. And given the large payoff they offer, it’s worth spending time to think about what they are for your business.

Use case-specific natural interaction limits

Based on the use case which a company serves, there’s a natural limit to the number of interactions which it can have with the vast majority of its users or customers. For example, most people will check their social media profile once to a few times a day, go grocery shopping once or twice a week, and buy clothes somewhere between once a month and once a year.

These use case-specific natural limits should inform the frequency with which the companies serving these use cases attempt to attract users or customers to their service through private mediums like notifications and messages (I’m excluding email from this analysis because email lists have abused the medium to such an extent that email is fast approaching a public communication channel). While one attempt a day is reasonable for a social media site, it’s too frequent for the vast majority of grocery and clothing sites.

Despite these use-case specific natural interaction limits, many companies attempt to engage their users or customers far more frequently than suggested by their use case. Unless you’re part of the 1% of customers who shop for clothing each day, this is irritating. Such companies lose more from the 99% they irritate than the 1% which accept their attempted engagement frequency.

The ideal solution is to segment your users or customers to deliver relevant messages tailored to their personal usage or purchase frequency. If you can’t do that, it’s best to respect the natural limit to the number of interactions inherent in the use case you’re serving.

Companies that fail to do this likely incentivize their marketing team based on short-term usage or purchase metrics without taking into account the long-term user or customer churn that these actions cause. So this is the problem that needs to be addressed.

Dismissing, fast and slow

Assuming I see a deal but don’t invest, I arrive at this outcome in one of two ways. I either dismiss the deal at first glance or I decide not to invest after doing in-depth research.

The regrets come almost exclusively in the former group.

The reason is that if I decide not to invest after doing in-depth research, it’s usually for a good reason. I know what I don’t like about the opportunity and I feel comfortable with the level of thought I’ve put into stress testing whether what I don’t like will meaningfully impact the outcome or not.

However, if I dismiss the deal at first glance, I haven’t even given it a chance. And the reason for this is usually because of a heuristic I’ve used to judge the opportunity. The heuristics I use reflect my biases and it’s these biases that sometimes lead to big missed opportunities and hence regrets.

Knowing this, it’s important to keep an open mind when evaluating new ideas. If I feel like I’m dismissing something too fast, it likely reflects a personal bias that could be blinding me to a great opportunity.

You regret what you never gave a chance more often than what you knowingly said no to.