On investment decision-making and writing.
Welcome to issue #14 of next big thing.
Many thanks to everyone who joined for last week's Highlighter Town Hall about my series of essays on the venture capital industry. Here's a recap and recording of the event, in case you missed it.
One of the topics we discussed was the Decide aspect of the venture capital flowchart.
I've been using writing as a tool for my own investment decision-making for a long time, and thought I would explain that further in today's essay.
And for new investments that I've made as an individual investor, I plan to be more transparent about my decisions via a new medium: screenshot memos.
Deciding whether or not to make an investment is the part of my job as a venture capitalist - amongst Find, Decide, Win, Help, Exit - that I obsess over the most.
Why? If you're an investor who is well-networked and has a good reputation, you'll see enough companies in your career to have a great portfolio. The question becomes if you'll decide to pursue and invest in the return-driving companies, and of course win the right to invest if you do choose to.
Some of the great venture investments of years past were highly competitive fundraises, and therefore you had to win over the founders amongst stiff competition from other investors. But a lot of them, particularly at the early-stage, were non-consensus, and therefore could have been won had you made the decision to invest. A legendary example is Airbnb, which Fred Wilson at USV had a chance to invest in at the early stage, but passed. Both Fred and Paul Graham of Y Combinator have publicly discussed this, and their exchange is worth checking out here.
So how do I decide whether or not to invest? I've developed several heuristics over the years.
During a first meeting with a founder, I try to gauge my own excitement. Am I hooked on the presentation such that it’s capturing my full attention? Am I excitedly taking notes and nodding my head? Does the product feel like it could be an order of magnitude better than the status quo? Does the market feel like one ripe for disruption, and big enough to build a big company? Do the founders seem like they can hire A+ talent and make great decisions? Do they have a vision for what this company becomes?
I have a simple framework for summarizing my thoughts after a meeting. I write down bullet points across three buckets: 1) What I Like, 2) Questions/Concerns, and 3) Next Steps.
Most of the time, the next step is to pass on the investment. I sometimes do this during a first meeting, if I know it's not a fit. If I want to think about it further, and conclude "no,” then I'll follow up shortly after the meeting, and try to message to the founders what I like, as well as what my questions and concerns are that lead to me passing.
If I find myself excited about the company after a first meeting - especially if I am thinking about it during the rest of that day, and the following day - then the "Next Steps" are diligence items. The initial diligence is typically around validating What I Like, and trying to find answers to the Questions/Concerns.
Of course, the decision criteria and diligence vary depending on the stage of a company. When a company is pre-product, the key questions I have are about the founders, the market, the idea, and the vision. Once there’s a product, and some early data on traction, the questions evolve to gauge customer love and product-market fit. And when a company is further along, with proven product-market fit and growth, the diligence rests much more on the metrics, the potential for further scale, market comparables, valuation, and other data-driven analyses.
Going from diligence to decision is the part of the funnel that I've wrestled with the most over the years. There are many companies that I've liked but not ended up investing in for one reason or another - usually because there are questions about the founders, or the market, or the product, or some other dimension of the company, or of the fit with my firm's strategy, that give me pause.
Finally, for investment opportunities that I love, and that I keep thinking about and gain elevation on through diligence, I test my own conviction with lots of questions.
If I believe in the opportunity, but the competitive landscape is filled with players, am I convinced that this company is the one I have to bet on? Do all the references add up, or is there something that doesn't? Is the unanswerable question a deal-breaker, or is it just unanswerable? Am I finding myself thinking about the company unintentionally - on a run or in the shower, for example - because I’m that excited about it? If I could only make one investment for the rest of the quarter, or the year, would this be the one? Do the founders seem like founders I would want to work for, or want to send my most talented friends to work for? How excited am I going to be to pick up the founders' call in the early morning or late at night? How proud am I going to be that I made this investment? Is the team on a world positive mission?
Writing as a Tool for Decision-Making (and more!)
An important dimension of my decision-making process is not just thinking about the answers to these questions, but writing them down. In fact, writing is core to my investment process, as you can tell from the above - from notes to feedback to diligence to investment memos. I've found that the easier it is for me to write about an investment, the more conviction I have in it.
My two most important pieces of writing for an investment are 1) an investment memo and 2) the blog post about the investment.
My investment memos have historically been internal. They're typically 3-6 pages in length, and include a summary of the company, key metrics, the investment thesis, key risks, the team, market, competitive landscape, due diligence completed, and the proposed financing. These were important to communicate all the information about a company to my partnership, and tee up the discussion about an investment decision.
The blog posts are external, but I draft these during the decision-making process. It's an important test of conviction for me to be able to express my excitement for a company through an external tone. Upon announcing the investment, sometimes months or years later, I’ve published these posts. You can check out some of these on my Medium, such as this one about The Farmer's Dog Series A, and this one about the Literati Series A.
But perhaps the most exciting part of doing all this writing is being able to share it with the founders themselves. I've found that being transparent in the decision-making process through sharing the unedited investment memo and diligence has helped build trust with the founders I seek to work with. And the blog post about the investment, delivered alongside or soon after a term sheet, is an expression of my enthusiasm for the company's work, as well as my thinking, and a way for founders to more clearly see what our partnership could look like.
Writing has become a tool not just in my Decide toolkit, but in my Win toolkit too.
While the blog post about the story of an investment is fun to write and publish, it often feels overly promotional and not as educational and transparent as I would like. Since I've made a few investments during my fallow time, I thought I would experiment with a new format to talk about them publicly. Inspired by Eric Stromberg's screenshot essays, here's a screenshot memo on my first solo investment: Canva, where I participated in the most recent round.
What's a screenshot memo? It's an investment memo reduced to the size of a smartphone screenshot. It's more transparent than the average blog post about an investment, and it’s easier to understand the investment decision I made as a result.
This one on Canva spells out my investment thesis across five points, and also a few of the key risks, just as I would in a traditional investment memo. The final section - Why Me? - explains three reasons for why this investment fits my strategy, and the reasons for why it made sense for me to invest beyond just the investment thesis (in this case, because of my personal relationship with the company from being a seed investor through my firm, my related investments, and my excitement about companies like Canva that are both consumer and enterprise). It’s worth noting that most of my investments during this time are at the early stage. Canva is an exception at the later stage because of my unique relationship with the team, and it therefore felt important to spell out a Why Me?
I plan to publish these memos to announce investments going forward, and there will be several over the next few months. I may switch up the sections in the memos for different companies, and will be as transparent as I can be in them. I don’t plan to publish them all to next big thing, so you'll have to follow me on Twitter to spot them.
I also would love to encourage other investors to publish digestible investment memos in this format. I'm using the Canva product (unsurprisingly!) to design my screenshot memos, and here's a link to this first memo that you are welcome to use as a template to create yours.
If enough people start to create these, perhaps we can start a library at screenshotmemos.com. Being more transparent about investment decisions can help founders and investors alike, and a more inclusive and transparent venture industry is one that I want to be a part of for many years to come.
Thank you to Cat van der Werff and Cliff Obrecht at Canva for your help and support on the screenshot memo, and to Julia DeWahl, Mario Gabriele, Patrick O’Shaughnessy, and the crew at Type House, for your feedback on the draft of this essay.