I’ve noticed that a number of venture capital firms prefer to hire people with a finance background. Those with investment banking and private equity work experience are thought to be great candidates. In my chats with emerging and established managers, several mentioned they’re seeking junior hires and emphasized a desire for candidates from finance.

I’ve never worked in finance, but I have friends who have. It’s notorious for long hours and hard work. Anyone who’s done time in this world is thought to have a great work ethic, which is likely true. One learns a host of skills in that environment that many think highly of (financial modeling, research, etc.).

A banking background provides a strong skill set and will set people up to succeed in some stages of venture capital, but I don’t think that applies to the early stage. Evaluating companies at the idea stage or before product–market fit requires skills that a finance background likely doesn’t equip you with.

Early-stage investing tilts strongly toward evaluating people and markets to find the nonobvious. Identifying founders’ strengths and weaknesses and what’s possible if they’re surrounded by the right resources and support is key. It’s difficult—more art than science. Many people have a hard time ignoring the unpolished exterior of a founder they can’t relate to and seeing their potential. Evaluating nascent markets can be equally difficult. Recognizing the severity of a pain before others understand it and the market size if the founders can create an ideal solution can require one to suspend disbelief and ignore current reality.

Skills acquired working in finance are great, but I don’t think they make you an ideal early-stage investor.

I’ve spent time with lots of emerging venture capital fund managers recently. These managers are like the founders they invest in. Many of the same qualities required for a start-up’s success are needed for a fund to succeed. Today I met a fund’s founding team that had an interesting dynamic. They reminded of me of the hipster–hacker–hustler concept for creating an ideal team:

• Hipster – The hipster focuses on the product being desirable to customers. They think about things like user experience and product design. They tend to be in tune with what’s trendy and cool. They have a unique customer-driven perspective.
• Hacker – The hacker is a builder. Building new stuff excites them, and they can focus intensely on it. They’re driven by data and logic. They see the world as black and white and may not have much charisma.
• Hustler – The hustler makes sure things get done. They relate well with people and are persuasive. They can hold people accountable to results, sell to customers, and rally people behind their vision.

The team I met today had all three: a hipster, a hacker, and a hustler. The complementary nature of this team shows. They’ve built a fund with a unique perspective and way of doing things in a relatively short time. I think this team will do well in the long term, and I’m excited to follow their journey and the journeys of the founders they support.

The last few weeks, I’ve been focused on solving a complex problem. It’s been iterative and hasn’t always moved as quickly as I’d like. I normally work on it on weekends too. But this weekend, I didn’t. Instead, I attended an event with extended family and friends. I gave myself permission to not think about the problem for a few days, and I’m glad I did.

It was great to be fully present to celebrate with people I care about. It was also nice to reset mentally. Today, when I began to work on the problem a bit more, I had renewed energy and some fresh ideas.

This weekend was a reminder that sometimes it’s best to put something away for a few days and then come back to it with a fresh mind and renewed energy.

During the last few years, we’ve seen a significant increase in the number of venture capital funds started. I’m happy that more people are deploying capital to founders. I think this is great for founders. But I’m concerned about how efficiently the capital is being matched to high-potential founders—especially those outside venture capital networks.

I’ve investigated and found that many (not all) funds have similar strategies. Sourcing, evaluating, and supporting founders look similar, with small tweaks. A lot of these funds were raised in 2020 and 2021. Those were great years because the start-up market was booming. These new funds benefited from the rising tide. They didn’t find and evaluate nonobvious founders with high potential. Many used VC network consensus to find and evaluate the companies they invested in. More capital was available, and lots of their investments enjoyed markups because of the abundance of capital—not because of traction earned by solving a problem well.

If the current market downturn continues, companies that aren’t focused on solving a problem well enough to reach product–market fit will struggle to raise additional capital. Their runway will shorten. Early-stage funds with unoriginal strategies that invested in these types of consensus start-ups will face hurdles too. If their portfolios aren’t performing well, they’ll have a harder time convincing others to give them more money to deploy in more consensus deals.

I’m curious to see how this pans out. I believe the non-consensus early-stage investors with original strategies will excel.

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A good friend shared his story with me today. His first few years as a founder were tough. He was figuring it out and progressing steadily, but he didn’t know what he didn’t know. That changed once he got the right introduction into the right network. A few conversations with the right people opened his eyes to what he could be doing and helped him understand how to do it.

My friend is doing well and is a success by any measure, but it’s too bad that it took him years to get in the right network. I can’t help but wonder what would have happened if he’d been connected sooner. How much further along would he be now?

Matching is important for early-stage entrepreneurship. The best start-up ecosystems are efficient at matching early founders with the right people and resources. As my friend experienced, that can be a catalyst. Not getting into the right network won’t, by itself, cause you to fail, but it could lead to valuable time passing that you can’t get back.

Today’s conversation has me thinking about ways to improve the matching mechanism for early-stage entrepreneurs—especially given the distributed nature of the world post-pandemic.

I caught up with a founder who described his traction. As he shared his update deck, two things jumped out at me. He’s raised around $100k, and he’s had a team of five or so working for over a year. They’ve made significant progress and have built a product that has early paying customers.

For a team that size, $100k is a small amount of money, so I asked how he’s sustaining things. He said his team agreed to deferred salary. Their salaries are set, but they receive only a portion of them until the product is launched. They’re about to raise a proper round from venture investors. When they do, the deferred salary will be fully paid.

This is an interesting approach to building a company absent sufficient investor capital. It definitely isn’t an option for all founders or their employees, but it’s one to be aware of. This founder has done a lot with a little. I’m confident he’ll be able to raise capital to fulfill his promise to his team and keep building.

Venture capital is an interesting structure. On one side, you have capital contributed to venture capital funds by limited partners. I’ll call that the supply side. On the other side, you have founders building companies. Founders usually need capital and resources. Let’s call them the demand side. In the middle, you have venture capital making the connections between founders and resources (mainly capital). I guess that makes venture capital a marketplace, albeit one that requires lots of manual intervention.

Many people would argue that this marketplace is inefficient in its current state. I tend to agree, but I think more about its future state. What will happen if the supply of capital increases materially? As public markets continue to swing and inflation lingers, I suspect more capital will come to early-stage venture capital.

What happens if the demand side grows? More people are wanting to control their destiny and seeing entrepreneurship as a way to do it. And if recession-related layoffs increase materially, more people will look for their next thing. The result: many more founders.

All these changes are great, but I’m not sure venture capital could handle them. Would it be able to efficiently increase throughput and efficiently deploy capital? I suspect it could deploy it—but not efficiently. Those close to venture networks would receive more capital, likely creating a bubble.

I believe there’s an opportunity to rethink critical pieces of this marketplace to both improve throughput and reach founders outside traditional venture capital networks.

I spent time today talking with a friend and fellow investor. We talked about similarities in various venture capital firms. Many firms are fishing in the same pond, we agreed—they recruit people from the same network and use similar strategies to source and evaluate founders. He said something that resonated with me:

“If everybody follows the same playbook, the returns will reflect this.”

My buddy makes a great point. If a venture firm is making investments similar to those of other firms and generally doing what other firms do, that’s consensus investing. They’re likely investing in consensus founders solving obvious problems. That’s a recipe not for outsize returns but for average or below-average returns.

This truth was masked by the rising market over the last few years since a rising tide lifts all boats. The tide seems to be going out now, and I’m curious to see what changes early-stage firms make to their playbooks.

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I listened to Michael Moritz share his thoughts on venture capital investing. Michael is a former journalist turned venture capitalist at Sequoia Capital (he joined in 1986). He isn’t just an investment partner—he’s been part of the firm’s leadership team for decades. He played an integral role in the firm’s international expansion and expansion into investing beyond venture capital stages. Given his unusual path to venture capital and the firm’s success, I was curious to hear what he had to say.

One of Michael’s insights that jumped out to me was his perspective on classifying founders and ideas:

To me, the best investments are the ones that don’t fit into a convenient bucket.

He cited Airbnb, Yahoo, Uber, and others as examples. The concepts behind those businesses were different than the norm at the time. It’s obvious now that they’ve worked out, but back then, the founders and their niche ideas weren’t obvious winners. Michael and others had to intentionally look past that.

I like Michael’s perspective. Sequoia’s investments in non-consensus ideas and people led to outsize results. Even though those founders and ideas didn’t fit into logical buckets at the time, investors still made the leap of faith to partner with them. This wasn’t just one or two lucky investments. Sequoia has a history of doing this, which implies that it’s core to their strategy and contributes to their success.

It makes sense that nonobvious people, ideas, and problems won’t fit into buckets. If they did, they’d be obvious.

I think other VC investors can learn a lot from Sequoia. The best people and problems can seem odd. But if you look past the surface, ignore the consensus feedback, and take the leap of faith, you could find yourself with a series of outsize returns and lifelong partnerships with founders who change the world.

I had a spirited debate with a founder friend this week. He raised $20+ million in venture capital for his company and sold it for nine figures. Based on his experience, he believes social proof is a critical driver in the fundraising process for founders. If you have a bigger, better network inside VC (investors and founders who have raised from investors), it gives you social proof. The more social proof you have, the more likely you are to get a meeting and get funded.

My friend is right. That is currently how VC works. I don’t think this is good. Venture capital is about finding new problems to solve and taking risks. Risks with ideas. Risks with people. Social proof is often justified as a proxy for what you can expect from a founder. The thinking goes, if you can’t figure out how to get a meeting with a VC investor, how will you get a meeting with a potential customer? Said differently, will this founder hustle to make things happen?

Founders need to have grit and hustle. Those qualities are critical to surviving the inevitable ups and downs. But social proof has evolved into something beyond evaluating hustle. It’s been used to derisk the entrepreneur; that is, it’s a way to evaluate whether this entrepreneur is a quality person worth betting on. If other people in the VC investor’s network know the founder, the investor can derisk the entrepreneur by asking others about them. Unfortunately, the feedback, instead of being about the founder’s abilities, is often based on shared personal characteristics and relatability.

In venture capital, you want to back founders who see the world differently and identify overlooked problems. Said differently, you want nonobvious problems and markets, which are usually identified by people with unique perspectives. These people and the problems they see may not be part of the “in” crowd. They may have different personal characteristics. People may not be able to relate to them or find commonalities, but that doesn’t mean they can’t be amazing founders.

Using social proof to evaluate founders isn’t a great practice. Instead, founders should be judged on their abilities, the severity of the problem they’ve identified, and the potential of the solution they envision. The number of connections they share with a VC investor shouldn’t factor into funding decisions. In fact, social proof as a founder evaluation tool can lead to false negatives on under networked high-potential founders solving nonobvious problems.