Editor’s note: The following is an excerpt from the author’s book, “Breaking into Venture.”
One night, a policeman is doing his typical evening neighborhood walk. The sun has set, and he’s on high alert for any potential danger as he strolls slowly down the street. Soon, he comes across a professionally dressed man frantically pacing beneath a streetlight, periodically dropping to his knees to look between the cracks of the sidewalk.
He is desperately offering $100 to any passerby who can help him find his misplaced keys. Relieved at the sight of law enforcement, he asks for the policeman’s help and explains that he urgently needs to get home to his family. Together, they search every inch of the sidewalk, the gutter, and the road beneath the light and come up empty. Anyone they have enlisted for help similarly gives up after finding nothing beneath the streetlight.
Frustrated and disappointed, the policeman finally asks, “Well, sir, are you sure you lost them here? Is there anywhere else they could be?”
The man replies, “Well, no, I actually lost them in the park across the street, but the light is better over here.”
This tale encapsulates a concept commonly known as the streetlight effect. Its origins can be traced back to a Turkish parable from the thirteenth century, but the concept has been repeated throughout history in everything from jokes about people who lost their keys to scientific explanations of observer bias in which observers only see what they expect to see. The point is that you can spend a lot of time searching for something, but if you’re looking in the wrong places, you’ll never find it.
Unfortunately, in my early days of venture capital, nobody told me this story, so I immediately started searching for deal flow where it was easiest: in Hong Kong. I had a strong personal network and brand in the Hong Kong region, and I had no trouble finding local entrepreneurs who wanted to pitch Fresco Capital for funding. I spent my days meeting with new companies that were willing to come to my favorite coffee shop on Hollywood Road in Hong Kong, though they were not the businesses I was most excited about or thought were most likely to go on to be massively successful. Soon, I found myself with an extremely packed schedule but little excitement about any prospective investments.
At the end of every week, I would sit back and wonder where the time went. I was growing self-conscious that I had nothing to show for my packed schedule.
You can spend a lot of time searching for something, but if you’re looking in the wrong places, you’ll never find it.
Invest time in places where there is a high concentration of what you are looking for
I had been investing my time in meeting with local entrepreneurs, a strategy that wasn’t producing results. Clearly there was a light shining directly in front of me in Hong Kong, but I had a feeling my keys were across the street in a park somewhere. I knew I had to stop doing what was easy and start looking beyond Hong Kong for deal flow. Along with my business partner, I began to spend my time researching the major hubs of entrepreneurial and tech activity that had a high concentration of entrepreneurs seeking funding. I also hunted for those who had produced big outcomes in the past decade (unlike Hong Kong, which was still early in its journey as a startup ecosystem and did not have as many examples of successful venture-backed businesses). Then I hit the road.
My partner and I spent time in cities like San Francisco, Austin, and New York, as well as London, Beijing, and Singapore. I spent the better part of my first five years in venture capital on a plane (mostly in middle seats in economy, to be exact). On each trip, I was energized by the entrepreneurial buzz in each region we visited and overwhelmed by the number of promising companies we met in each place. My days were equally jam packed, if not more so, than my time at home. However, unlike my experience in Hong Kong, each day of meetings was yielding exciting investment opportunities that I was eager to dig into. Time flew by, and I was finally producing results. I had real deal flow! I just had to get on a plane to go get it.
As a new, small fund, we were on a shoestring budget, so I crashed on friends’ couches or stayed in inexpensive Airbnbs while I was traveling. Especially when it came to navigating the San Francisco Bay Area, I could not have felt more like an outsider. Who knew that Google’s headquarters in Mountain View were at least an hour from downtown San Francisco, and that distance ballooned into several hours during rush hour, which in California started not at 5 p.m. like a person might usually expect, but instead at 3 or 4 p.m.? One trip, in hopes of cutting down on travel times, I picked the halfway point between my meetings and splurged on a budget motel in Daly City. I arrived, suitcase in hand, only to discover that the hotel was located directly across the street from a junkyard filled exclusively with old school desks, and that Daly City was affectionately referred to by locals as “Daly Shitty.”
It certainly wasn’t exactly what I had originally envisioned happening once I was on the other side of the investing table, but it was fun and energizing to be hunting for opportunities, trying to find the diamond in the rough or the next big thing. We were simultaneously in the process of raising our fund, so when we did make an investment, it was a very small amount. We were, however, investing a lot of our time in developing new sources of deal flow. This meant we were gaining access to new investment opportunities in the near term, but we were also building a network that would yield opportunities in the long term. We were building relationships, and we were also gathering experiences along our journey that would serve as data points for calculating how investing our time in certain relationships, activities, and concepts was impacting our fund returns. This feedback loop was essential for further refining and developing our time investment strategies going forward.
Immediately after each trip, I would complete a “travel summary” where I logged how many companies I met, how many were viable investment candidates, and how many I ended up investing in. Later, I could add in what outcomes resulted from each of these companies. I called this process calculating my deal flow ROI. How were my time investments paying off in terms of access? This type of rigorous analysis helped me figure out if I was truly investing my time looking in the right places.
Sarah Smith, a partner at Bain Capital Ventures with whom I’ve shared ideas, drinks, and coffee over the years, holds a similar philosophy. When I asked her opinion on the key to success in venture capital, she pointed out, “It ultimately comes down to where you are spending your time to gain access to new investment opportunities. Of the companies you have met, how many ended up raising successful rounds of funding? That is a good proxy to see if you are swimming in the right pond.” This practice — tracking what percentage of companies you have met go on to raise successful rounds of fundings — is standard at most large venture funds. In fact, they systematically track funding announcements and index exactly what percentage of the funded companies they have met. Indexing every single announcement with that level of precision requires significant resources, but it is easy to simply take the time to check in with yourself on a regular basis. How many of the companies you met in the last year ended up raising successful rounds of venture funding? If the number is fewer than 25 percent, you may need to adjust your sourcing strategies and expand the pool of potential investments you have access to.
Invest time building relationships with high-quality connectors
What I consistently found through my time-investment analysis was that the best investment opportunities were introduced to me by high-quality people — what I call connectors, or people who are highly incentivized (or simply enjoy) introducing investors and startups. Even today, after building a strong foundation of inbound deal flow that yields thousands of potential investments per year, I invest a lot of my time in continuing to cultivate relationships with high-quality connectors. I’ll cover a few key categories of common types of connectors here, but remember that high-quality sources of deal flow can come in any shape or form, so stay on the lookout!
Directors of accelerator programs
Accelerator programs invest a small amount of money in exchange for equity in startups and are therefore incentivized to help the startups grow bigger and faster. The success of these programs is measured by what percentage of their graduating startups get funded. More funded startups mean the program is more effective and the value of its investments go up. Therefore, program directors are eager to put their companies in touch with investors who may participate in follow-on rounds of funding following your initial investment.
Spending your time accessing these folks makes sense because they have their finger on the pulse of which companies are gaining momentum and which ones aren’t; they can confidently point you in the right direction so you don’t waste your time with companies that sound great but objectively might not be doing well.
Angel investors or seed/pre-seed funds
Although it may seem counterintuitive to spend time sourcing deals from other investors, there is a lot of power in building relationships with investors that focus on similar types of companies but don’t have the exact same investment strategy. Perhaps these other funds lead investment rounds and you are more of a coinvestor, or they invest at a slightly different point in a company’s life cycle. Maybe they simply have different strengths and ways of adding value than you do. No one investor can provide everything a company may need to succeed, as each is limited by their strategy, scope, lived experience, and check size. Finding collaborative funds that complement your approach is a great way to access high-quality businesses.
When a company is still an idea on a piece of paper, a founder will usually raise money from friends and family, angel investors in their network, or pre-seed or seed funds that focus on providing funding before the product or business actually exists. These investors work very closely with a founder to make their idea reality and then find additional funding to continue to grow the business. Spending your time with these types of very early investors can help you get to know the DNA of a company you might invest in, and they are also motivated to connect you to their investments because it ensures that those companies will survive and increase their value over time by raising additional capital, also known as a follow-on round.
Regardless of what stage you are investing in yourself, getting to know these earliest investors is an excellent way to access deals through the people who have been there from the beginning and therefore usually know the company best. While getting to know investors from the earliest days of a company’s life is helpful, so is spending time with the investors who are likely to continue funding businesses after you do. Typically, after a company has raised enough capital to get their product off the ground, they search for product-market fit (PMF), or concrete evidence that customers want what they are selling and are willing to pay for it in a predictable way. Finding this inflection point allows founders to quickly shift their focus from figuring out what works to growing what works.
While the name, size, exact stage, and definition of investment rounds have changed over time (the exact parameters of pre-seed, seed, Series A, Series B, and Series C rounds and so on have evolved and continue to evolve in real time), there remains an important distinction between funds that focus on investing in companies that are pre-PMF (known as early-stage funds) and those that focus on investing in post-PMF growth (known as later-stage funds). Later-stage funds look to develop relationships with companies over the course of several years before they invest. This is because once a company finds PMF, it is significantly de-risked and there are many more investors who are willing to put money in, which means it can be much more competitive to gain access to the opportunity to invest. Therefore, later-stage investors will spend years investing their time to gain credibility with founders, well before they are asked (or get) the opportunity to invest.
No matter what exact round of funding you are focused on, and no matter what exact round of funding these later-stage investors are focused on, it is strategically advantageous for them to make high-value introductions to earlier-stage investors who are willing to fund the business until it reaches an appropriate size for them to consider. Investing time with these funds that invest in rounds after you is valuable because they will introduce you to companies they have identified as promising and are eager to invest additional capital into later on — if the companies are able to hit certain milestones that indicate they are ready for scale.
Service providers
Startups need services beyond just investors. They need bankers, lawyers, accountants, and other service providers to help them operate effectively. Many of these service providers seek to build relationships with companies early on, before they are big, with the expectation that if the company grows to be a big, successful business one day, it will end up being a very large client for their firm. A famous example is Amazon Web Services (AWS), a provider of cloud hosting for websites and businesses, which took on Airbnb as an early customer at drastically reduced fees. As Airbnb grew into a billion-dollar business, they ended up paying AWS millions of dollars per year in hosting fees. Because of stories like this, AWS and other service providers have long-term sales strategies to service very early stage startups, even if they have to offer the startups lower fees or flexible payment plans. In a way, they are taking a bet on the long-term success of their clients, and the more funding their clients raise, the more likely their bet is to pay off. Investing time with smart lawyers, bankers, accountants, and service providers who know firsthand if a company is doing well or not, and also want to see that company raise capital from investors, is a great way of generating high-quality deal flow.
Portfolio founders
If you have already invested in a founder, or you already know and trust them, they are a great source of introductions to other high-quality founders. Similar to how scouting works in sports, you have to have a deep knowledge of the game to spot who is likely to be the next superstar. In most cases, founders love making introductions to investors simply because they experienced fundraising themselves and enjoy the process of making it a little bit easier for others experiencing the same challenges. They also may see making introductions as a way of investing in a relationship with you, as an investor. You never know when they might need to ask for money next!
It was a founder who initially introduced me to Jomayra Herrera, who at the time we met was an investor at the Emerson Collective, an investment firm established by Laurene Powell Jobs, who was married to Silicon Valley legend Steve Jobs, co-founder and longtime CEO of Apple. A Florida native, Jomayra was the first person in her family to go in college, and I had a tremendous amount of respect for how she had successfully broken into venture capital. I immediately connected with her thoughtful, no-bullshit approach to making investments. We shared a similar desire and commitment to investing in building authentic relationships first and figuring out their business value later. As a result, we have spent a lot of time collaborating over the years. She was one of the first people I called when I decided to write this book because I knew she was living the principles I wanted to share.
As we caught up over Zoom on a gloomy San Francisco morning, Jomayra emphasized that venture capital is not just about investing money, but it’s about building trust with high-quality people, including your own team, co-investors like me, and founders you know are going to be successful. For example, she knew from the very beginning that she wanted to build a relationship with Ruben Harris, the founder of Career Karma. During her early days as an investor at Emerson Collective, she made a seed investment in the company based on her thesis around the explosion of college alternatives and the need for guidance and accountability for career development platforms in technology.
“I was one of the first institutional investors, and since then, I have spent years building trust with Ruben,” she shared. “I helped him raise his Series A and Series B, spent nights and weekends reviewing materials and making introductions, reviewing candidates, doing whatever I could to make him successful. I invested a lot of time in the relationship.”
During her time at Emerson Collective, Jomayra was economically incentivized to do whatever she could to make Ruben successful, because the firm owned equity in the business and Jomayra’s compensation was tied to the success of that investment. However, when Jomayra left Emerson Collective to join a different investment fund, she gave up her “carry,” the compensation tied directly to Career Karma’s success. At that point, she technically no longer shared the same incentives as Ruben, but she knew her relationship with Ruben was still one she wanted to continue to invest her time in.
“These types of trusted relationships: You can’t build them with the mindset that you will get something out of it, but if it’s the right relationship, you definitely will,” Jomayra told me. “Founders are the ones who will speak about you when you’re not in the room. If you show up for them, they will speak about you in a way that will inspire others to want to work with you or take capital from you. Ruben has made countless introductions to entrepreneurs I have invested in since. He has served as a reference for me when I am working to close a competitive investment.” Jomayra’s investment in the relationship is still paying off today, just not in the way she had expected.
The “no asshole” rule
Besides understanding incentives and calculating a deal flow ROI after several interactions with a new relationship, there is also a certain X factor when it comes to finding long-term partners in your journey of gaining access to the best possible investments in venture capital. This X factor can be as simple as the person not being an asshole. I’ve had plenty of meetings with potential coinvestors or collaborators who started the meeting by sitting back in their chairs and asking, “So … who are you again and what do you want?” Or who answered a call from their friend in the middle of our meeting. My favorite has always been those who drop a lot of names of famous people they know (usually I don’t recognize them) and offer to make connections but never respond to an email again.
Emergence Capital is a multibillion-dollar venture capital fund known for its pioneer investments in business-focused software (also known as enterprise software-as-a-service, or enterprise SaaS) before this segment was widely considered to be an obvious bet. Although it’s not necessarily a household name, Emergence is legendary among aspiring venture capitalists for making only a few investments per year and generating some of the best returns in the industry. They are also famous for their early investment in something that is a household name for most Americans: Zoom. Because his firm’s reputation precedes him, I was excited to interview Joe Floyd, a general partner at Emergence Capital, for this book. Joe and I immediately connected over our time spent in Asia before permanently relocating to San Francisco, and his own experience as an author of the graphic novel Silicon Heroes about the unsung heroism of entrepreneurship.
After spending time working in banking and exploring his roots in Asia, Joe found his way to venture capital more than a decade ago. When he started out his career investing at Emergence Capital, he asked his more senior partners, “What do I have to do to be a great venture capitalist?” He was told, “All you have to do is two things — one, follow through on your commitments, and two, don’t be an asshole. If you do that, you’ll be in the top 10 percent of the greats.” Which brings me to an important point. Even if a connector seems “high-quality” at first, it is not worth your time investing with assholes.
Buried in the minefield of personalities in technology and venture capital, however, there are gems: people who approach your conversations with curiosity; people who really listen to what you are looking for and offer to help; people who are willing to be equally open with what they are looking for; people who teach you something new by sharing their latest interests; and people who leave you feeling more energized than you were before. These relationships — the ones that generate momentum — are the ones to treasure, nurture, and invest your time with. You may not know where they will lead or how they will pay dividends in the long run, but they will be worth it.