Absurdity
From Absurdity to Receptivity
When investing, I’ve done my fair share of stupid things.
And like everyone else, I always found a way to justify those absurdities, especially when it paid off, one out of a dozen times under the fact that Venture Capital is a power law where 95% of the returns are driven by 5% to 10% of the companies we invest in.
When you play a Monte Carlo law like Kima Ventures does, the terms don’t matter because Kima is a follower. The job is to maximize the odds of backing the best entrepreneurs out of the cohorts, and whether we like it or not, sometimes Kima gets in even though the terms look stupid, and end up making money because exceptions always emerge.
Exceptions exist, and it’s fine, but too often, we turn them into generalities. And because we only lose the money once but can make it a hundred times, we feel forced to accept a price that is arguably beyond reasonable.
Entrepreneurs will argue that it’s ridiculous to accept 20% dilution if you can get 10%, that it’s only a matter of supply and demand, that venture capital is a marketplace, and whether you want to compete or not is up to you. It’s fair. I agree with the fact that under the market conditions, we are solely responsible for the decisions we make.
But that doesn’t change the absurdity of the situation and the fact that most entrepreneurs actually don’t realize that they’re not doing themselves a favor most of the time. Some investors sometimes try to bring reason to the table, but who’s really listening !?
A smaller team is immensely more productive than a large one.
Yes, but we remain a small team, except that we have cash in the bank.
Maybe but all that cash brings comfort that keeps you off risky boundaries.
The marginal gain of productivity decreases as a team grows in size.
Yes, but we keep small teams in silos to ship more in parallel.
Bullshit, you are just edging and losing focus.
Cash is an elusive advantage in fighting against competitors.
Maybe, but they have raised a lot, so should we for credibility.
A fast car doesn’t turn you into a better driver, on the contrary.
We could go on and on… And surely we would never get to a conclusive convergence of opinions if entrepreneurs and investors had to debate, also because it takes a lot of time for the results to be delivered, and we tend to forget and bury what didn’t work while we turn positive output into great stories to reassure ourselves and build up credibility.
If you ask me what’s absurd, here is a short list…
For a rookie team to raise a pre-seed round at 20 to 25M post-money cap throughout Y Combinator. Most of the time, you simply annihilate the creative force driven by the urgency generated by the scarcity of resources.
For a founding team who has known each other for only a few months to go full throttle in fundraising mode and to start building like it was love at first sight or like their friendship was a good enough indicator of their ability to work together forever.
For venture firms to offer pre-emptive post-seed or series A rounds without questioning how fucked up that is in terms of expectations on every level, towards the team, what they will have to deliver, and their next round. Is this what we call long-term thinking…
For young investors to be able to invest small checks into founders for them to learn the job by leading their own deals without taking too much risk for the firm. That's beautiful for those early grinders in the job, but terrible as well for the founders who become optional guinea pigs.
For entrepreneurs to accept a $2M check at Seed stage from a Venture firm with a Billion dollars under management. It’s like accepting a $200k check from a firm with 100 Million under management, expecting you really matter while you’re optionality and absolutely nothing else. Stop fooling yourself…
For entrepreneurs to accept a $20M check at seed stage from a Venture firm with a Billion under management. Most of the time, it’s useless, except if the cost of building is exceptionally high due to the nature of the business or if the entrepreneurs are repeat founders in a field where you trust them to find their way through with all the experience they have from the past and without going nuts on spending and everything. But too often, we see that with former operators turned entrepreneurs, and it simply doesn’t make sense.
For entrepreneurs to run beauty contests among investors instead of trying to find a real match with a truly committed investor who will be irreversibly in your cap table for the next decade or so. Do proper reference checks, especially during tough situations. Don’t forget that people change firms and that you’re picking a partner and a firm as well.
At New Wave, we’re not investing under a Monte Carlo law. We invest in 20 to 25 deals with each fund ($80M-$90M-ish size); and meaningful checks into founders. We make mistakes and try to reflect thoroughly on every single one of them to see whether we should be more careful when investing in our next deals. We also came to the realization that we didn’t want to jump into beauty contests or money games.
We owe our investors and our entrepreneurs a lot more than precipitate decisions and dangerous terms. We’re not into dating, but rather into relationship building. Sometimes there isn’t a fit, and that’s okay. If we’re forced to rush, we should stay off, and that’s okay too.
The meaningful relationships we nurture with receptive entrepreneurs are why we do what we do. I insist on being RECEPTIVE. The ability of a founder to surround themselves with the right people and to be receptive in order to grow with, through, and alongside them, is the core pillar of their success.