Markets are important. They have an outsize impact on a company’s trajectory. A small but growing market with the potential to be large is great. And rapidly growing markets can be good, but only absent cutthroat competition that erodes margins.

When founders are looking in established or growing markets, they should think about white space. In a market that isn’t new and that’s dominated by legacy companies, there may be a segment of the market that the incumbents aren’t worried about. It could be too small, perceived as having too-low margins, etc. Whatever the reason, the incumbents are happy to let smaller start-ups take the business. The flaw in the incumbents’ approach is the failure to realize what’s possible. Can this small white space become massive? Can a growing trend overtake and upend the legacy businesses? By the time the possibilities play out, it can be too late for the incumbents. The once-small start-up has become a force to be reckoned with, forever changing the industry and taking incumbent market share.

Scrappy founders who see a problem they’d like to solve in a market with incumbents shouldn’t let the thought of competing with incumbents immediately deter them. Instead, they should consider whether there’s a white space that could serve as a noncompetitive beachhead. If you find one of these in a great market, you may have found a great entrepreneurial opportunity.

This week I was talking with a founder friend who’s building a new organization. The organization has ambitious goals and is trying to do something that hasn’t been done before. We spent time talking about the team he needs to accomplish this. He feels like a few critical pieces are missing. We ultimately landed on these team-related things as being missing:

• Incentives – The organization has a clear mission and vision and a defined set of milestones, but the team has started to slip on achieving the milestones. I dug in and realized the team isn’t incentivized to achieve them. Said differently, the team isn’t aligned to mission. They get compensated regardless of performance. Recreating the compensation structure to include payouts based on achieving milestones will align and motivate everyone. It may also help attract high-caliber people for open roles on the team.
• GSD person – Many small but important things have slipped through the cracks. Sometimes they weren’t caught until it was too late, causing the team to miss milestones. My friend realizes he needs a GSD (get stuff done) person. This person is strategic enough to have high-level conversations but able to execute on high-priority strategic projects. They’re a generalist, meaning they can dive into any area and figure it out. They will report to the CEO and be given the authority to ruffle feathers in the name of getting stuff done.

When you’re trying to do something that hasn’t been done before, sometimes you don’t know what pieces you need, and you figure it out as you go along. It’s like building the plane while you’re flying it. My friend is doing exactly that with his team. I’m curious to see what he implements and whom he hires. I think these two changes will have a significant positive impact on his organization.

Today marks the end of my one-hundred-forty-first week of working from home (mostly). Here are my takeaways from week one hundred forty-one:

• Duh – Sometimes what you’re looking for is already right in front of you. This week was a reminder of that.
• YouTube – If you want to learn from someone who’s somewhat prominent and not in your network, look them up on YouTube. They may share what you want to know in a video. Or better yet, they might drop their email in one of the videos. You can email them and refer to having watched their talk, which is somewhat flattering and better than a cold email.
• Home stretch – Two weeks until Christmas. I’m being more intentional about my calendar for the next two weeks. I want to stay focused on getting some important things completed.

Week one hundred forty-one was a focused week. Looking forward to next week!

One of the things I like to learn about a founder is their origin story. How were they raised, and what were they doing in life that illuminated the problem their start-up is solving? Sounds simple, but the origin story can be a leading indicator. Today I listened to a few fund-of-fund investors critique an emerging venture capital fund’s pitch deck and give guidance about how emerging managers can best pitch limited partners (LPs).

A consistent piece of advice for all the funds of funds was that emerging managers should lead with their story. The pitch deck shouldn’t jump right into thesis, investment track record, or how much the manager is raising. It should start with background on the manager—what their journey has been and how led them to raise their own venture fund and come up with their investment thesis.

LPs are buying a portfolio of to-be-determined portfolios of investments. Ideally, they’d look at previous fund investments to gauge what a manager’s future portfolio of investments might look like. However, many emerging managers won’t have an investment track record. When that’s the case, LPs are investing in the managers. They want to get to know who the managers are, how they think, and why they are the way they are. Understanding what makes them tick will give LPs more comfort around the person they’re backing and the nonexistent portfolio they’re buying.

This feedback makes a lot of sense, and it was a reminder that emerging VC fund managers are basically founders. Telling an authentic, compelling story—as a manager or founder—can be the key to getting early believers on board.

I listened to a fund of funds investor give her perspective on how her team and other large institutions have changed how they evaluate venture fund managers. Their focus has shifted from increasing portfolio valuation (i.e., markups on start-ups) to distributions (i.e., cash returned by exiting start-ups). Part of the reasoning was around private market valuations’ lag in correcting and its impact on portfolio allocation.

Venture capital investments are private investments, so finding their correct market price usually happens when new funding rounds happen. If a company last raised in 2021, the company’s valuation is usually marked at the 2021 fundraising-round price. Public companies’ valuations are adjusted in the public markets every day, and many have been on a downtrend in 2022. Because venture investments are slower to be marked down, some institutions are over-allocated to venture capital relative to their entire investment portfolio.

For example, venture capital might have accounted for 8% of an investment portfolio in fall 2021 when valuations were high. The max allocation for venture capital in the investment portfolio is 10%, so that 8% allocation was below the limit. As the public equities in the portfolio decreased in value in 2022, venture capital values remained flat (they continued to be marked to their 2021 level because companies are avoiding raising in this environment). That means venture capital might now account for 12% of the overall investment portfolio, which is above the max allocation.

Given this dynamic, the fund-of-funds investor said her team is now more focused on distributions: how much capital have fund managers returned to their limited partners (LPs). For those overallocated in venture capital, distributions are an ideal way to increase cash allocation and reduce their venture capital allocation. Managers who have returned or are returning cash are viewed in a positive light.  

She mentioned that part of a venture fund manager’s job is to know when to sell. Given the rich valuations in 2020 and 2021, her team is looking closely at 2017 or older fund vintages that didn’t use the rich valuations as an opportunity to distribute capital back to LPs.

Very interesting how the LP focus has changed from valuations/markups to cash returns. I suspect this focus will be top of mind for more venture fund managers and trickle down to CEOs of their portfolio companies. This, combined with a tough IPO market and other variables, could make 2023 an active year for acquisitions.

I talked to a founder friend who’s been working on a project for over a year. Part of the project’s economic viability centers on reimbursement from a project sponsor organization. My friend has been keeping the project sponsor up to date and is in regular communication with them. The project is now in its final phase and should finalize before year-end. The last part is to be reimbursed and close everything out.

My friend just learned of staffing changes at the sponsor organization. The organization isn’t sure if it’s going to reimburse him (and others) as agreed because of lack of protocol adherence by the dismissed staffer. The staff change is out of his control, but it’s materially affecting him and the cash flow of his business. My friend is in a tough spot. He spent six figures of capital out of his company coffers (a significant amount for a company of its size) in anticipation of being reimbursed by a certain date. That won’t happen now, and the reimbursement might not ever come through.

When I talked to my friend, he was taking it in stride. He realizes the precarious situation he’s in and is actively trying to figure out how to resolve it. I noticed that he’s not letting the situation paralyze him—he’s taking whatever action he can in hopes of resolving it. My gut tells me that his action-focused approach will help him find an acceptable resolution to this sticky situation.

Part of being a founder is dealing with the unexpected. The key is to continue taking action to move toward the desired outcome, whatever curveballs come your way.

I’ve spent time thinking about how to create a solution to a problem I see. There are a few points I’m not quite sure how to resolve. I learned about some solutions close to, but not the same as, what I envision and was able to get connected with someone who helped create some of them. He’s familiar with the points I’m struggling with. Based on his experience, he laid out some possible paths and explained the pros and cons of each. That conversation was a huge time saver. It filled my knowledge gap and helped me understand what my next steps are.

My takeaway is that when I’m trying to do something, I should find out if others have done something similar and try to learn from their experiences. I don’t need to reinvent the wheel.

One of the patterns I see in venture capital is fund managers, especially emerging managers, drifting downstream to invest at a later stage as they have success. Managers naturally invest at a later stage as they raise larger funds. More on that here and here.  I understand venture fund managers' desire to raise larger funds, but I see things differently.

Meeting companies at the earliest stages of their formation is a massive opportunity for outsize impact and financial returns. It helps accelerate the success of founders, whose solutions can have a positive impact on society and address overlooked problems. When investments at the time of company formation are successful, they generate outsize returns for founders, employees, and fund managers and their limited partners. Those returns are, hopefully, recycled into other early-stage investments.

Raising larger funds and benefiting from the additional resources generated from increased management fees makes sense, but I think that doing so must be balanced with the risk of not being at the fountainhead of company formation.

I listened to an early-stage founder pitch his company this week. He’s passionate about his space, has founder–market fit, has built a great solution, and has acquired a material number of paying customers. I assumed he was positioned for rapid growth. But then I realized that may not be the case.

The founder’s core product is software that solves a specific problem for a specific type of organization. In his pitch, he explained that he’s branching out into other types of offerings to support his target customer: professional services, coworking, and a variety of other unrelated business lines. Each of these non-software business lines will require a different skill set that this founder will have to learn or hire for. He’ll also have to devote resources to incubating and growing each of them. If he executes on all of them, he and his team will likely be spread thin. And the core software solution won’t grow as fast as it could.

The key to success is to focus. Do one thing extremely well. Once you’ve achieved outsize success, then you’ll have the resources (and time) to diversify into other areas.

Regardless of the path this founder takes, I have no doubt that he’ll be successful. If he chooses to focus, I think he’ll turbocharge his path to success.

Today marks the end of my one-hundred-fortieth week of working from home (mostly). Here are my takeaways from week one hundred forty:

• Investor perspective – Investors view the world and founders through different lenses. I participated in an event where a group of investors provided feedback on a few founders. It was interesting to see how each investor’s perspective informed their analysis of each founder and their market. Sometimes substance was overshadowed by other things; conversely, sometimes lack of substance was overshadowed. External validation also swayed some investors’ analysis of a founder, although I believe that wasn’t intentional.
• Home stretch – We’re in the final weeks of 2022. The year has gone by quickly. I want to make these last few weeks in the year count.

Week one hundred forty was a busy week. Looking forward to next week!