Qualities of a Top VC Pt. 1: Sourcing
Part One in the Five-Part Series on Qualities of a Top VC
Intro:
Welcome to this new five-part series of what makes a good venture capitalist based on insights from current and former partners at Sequoia, Benchmark, Kleiner Perkins, and a16z.
I will publish blog posts and podcast episodes once or twice a week, split into four parts, with one unique bonus essay I’ll reveal later. We will look at the following qualities of a good VC:
Sourcing
Picking
Winning the deal / being a good partner / adding value
Optimal Fund Size / Liquidity Strategies (when to sell)
This will be a must-read for anyone interested in
The different aspects of running a venture capital fund
What traits make a good venture capitalist
Why LPs fund certain venture capitalists
Why founders pick certain venture capitalists
How you as a founder should screen a venture capitalist
So, let’s get into part one: Sourcing.
Pt. 1 Sourcing:
Sourcing is the oxygen that gives life to a venture capital fund. Without it, the fund cannot exist.
For those who don’t know, sourcing is the act of finding entrepreneurs to meet with to consider investing in. It can come via inbound, as in the entrepreneur reaching out to the venture capitalist due to his or her reputation, network, or content he or she published, or it can come via outbound, as in the venture capitalists reaching out to entrepreneurs to meet.
Effective sourcing is possible if the VC is curious, has the hustle to build a network, and puts out content as a beacon for great entrepreneurs to come to them. In the following essay, we’ll discuss why these three concepts are vital for a venture capitalist, backed by quotes from greats such as John Doerr, Bill Gurley, and Jeff Jordan, among others.
1. Curiosity
Curiosity is perhaps the most important trait of a successful venture capitalist. You get that jolt of inspiration, that accelerating heartbeat when you hear about a new technology, new business model, or a counter-positioned company disrupting incumbents. If you’re a curious person, you know the feeling.
That jolt then takes the investor down a winding road of reading anything or talking to anyone he or she possibly can to accumulate proficient or expert knowledge in that domain. It’s a constant cycle of inspiration and exploration that can only happen if that person is inherently curious.
Sequoia partner Alfred Lin has an excellent quote about the importance of constantly exploring. He said,
“This business is about inspiration just as much as about perspiration. We need to both hustle, but at the same time, we need to be able to think and be inspired about the world. Some of it comes from reading, and some of it comes from just talking to founders.” Always reading, writing or talking to founders. Great VCs are incredibly curious, and by exploring ideas they know where to position themselves.”
There’s a joke that it’s easy to be a VC, which it is if you want to have a below-average fund and not be qualified to raise another one. But if you want to be a top decile fund that’s everlasting, it requires a lot of hustle and a strong desire to learn more.
Being curious is also vital for outreach. I assume most people imagine firms like Accel receive more requests for meetings from founders than they send out to founders. This is very likely to be true, but being curious and wanting to engage founders led Accel partner Daniel Levine to reach out to the Scale AI founders, who were 19 and 21 years old at the time, to set up a meeting. That only happened because he was curious to learn more about what they were building.
A less curious investor would’ve had the mindset that “Oh, I’m a partner at Accel; every founder will email me if they want to meet. My inbound is too good to worry about outbound.” Daniel Levine, however, knew that great founders are everywhere, and sometimes you have to find them yourself. His curiosity to meet exceptional founders and interesting companies led to Accel leading Scale AI’s seed round, eventually accumulating roughly $1.5 billion of value in Scale AI shares for a minuscule price compared to their $7.3 billion valuation today.
This is vital if you’re an early-stage investor because it’s all about getting to founders before someone else does, and that curiosity and hustle will serve you well.
To test a venture capitalist’s hustle and curiosity, a good question for an LP to ask a VC is how many meetings they took the past year. As you might expect, it’s a good signal if a VC is open to taking as many meetings as possible.
There are two reasons this is such a good signal.
First, it shows the VC is inherently curious and loves what they do. The best VCs say that meeting with founders gives them the most energy because they love to learn, and the founders they’re meeting with are likely domain experts, so they’re great people to ask questions and learn from. (Also, if you meet with the right ones, they’re great people to generate 100x returns for you).
Second, it shows they have hustle. They know that missing a meeting means missing out on a potential 100x outcome, and a pitch deck with a cold email isn’t enough to say yes or no to an investment at the early stage. You have to meet the founder and understand who this person is. After all, as readers know, Mitch Lasky, a former partner at Benchmark, had no intention of investing in Riot Games and took the meeting to do his friend a favor. Fifteen minutes into the meeting, he committed to leading Riot’s Series A round. Had he been lazy and not taken that meeting, he would’ve missed out on a 25x investment with an 184% IRR.
Benchmark partner Peter Fenton sums it up well:
"I start with an emphatic, yes, let's meet. When I don't have enough time to take that next marginal meeting, I shouldn't be practicing.”
The best VCs take as many meetings as they can. It’s a sourcing flywheel. If you meet with 300 founders in a year, then you’ll grow your founder network exponentially. Chances are, if you had a good meeting with that founder, whether you invested or not, those founders know other potential founders and will refer your firm to them. Those 300 founders could refer 2-3 of their friends to your firm; now you have 600-900 referrals. Frankly, it’s one of the best ways to source future deals.
So, it’s vital to be curious, learn, and explore as often as you possibly can to source the best deals. Whether you go to them by trying to find experts in an industry you’re interested in, or they come to you, and you’re fully engaged in learning everything you can about this founder and company. Regardless, being curious is the key.
2. Constantly Networking
Referrals are vital for venture capital firms. Some venture capitalists, like Marc Andreessen, consider the warm referral the first test for an entrepreneur and won’t take a meeting without one. Others have a less strict policy, but I understand it as a good screening tactic to see whether an entrepreneur has hustle or is connected to other exceptional builders they could potentially hire for their company.
Marc Andreessen can get away with this lackadaisical inbound strategy because he’s Marc Andreessen, but most VCs don’t have that luxury and are constantly networking to meet interesting people.
This is important for a few reasons:
You can move quickly on funding an exceptional entrepreneur if you’ve already built that relationship:
Everyone remembers 2021, when many entrepreneurs received funding days after pitching to VCs. That was an anomaly, but this is still the case for the best companies. We mentioned in the Benchmark essay, regarding why they invested in Uber, how Travis Kalanick pitched the Benchmark team and then less than 15 minutes later had a term sheet from them. That’s how fast you have to be to fund exceptional companies like Uber, and it only happened because Bill Gurley had already built a relationship with Travis before they even raised their seed round.
Therefore, when it was time to raise the Series A round, Gurley already knew he wanted to fund Kalanick; they just had to agree on the terms. Similarly, and we’ll talk about this more in the winning/adding value essay, Kalanick was already leaning towards working with Benchmark before pitching them because he already had a strong relationship with Gurley. It’s a two-way street of relationship building that is critical for a VC to move quickly on the best deals.
You have an extensive rolodex of exceptional builders and VPs to introduce to founders you’ve backed to help them build a super team:
We’ve talked about this in previous essays, and we will discuss it more in pt.3 of this series regarding being value additive as a VC, but we know how companies can de-risk themselves of failure if they’re able to hire exceptional teams. Exceptional teams help founders move quickly to find product market fit or, if this product is not succeeding, facilitate a successful pivot. Regardless of the situation, exceptional teams move fast.
Therefore, a VC can be value-additive by introducing entrepreneurs to top engineers and sales executives. Selfishly, it also de-risks his or her investment since it gives the founders an all-star supporting cast to work with.
What does this have to do with sourcing? Well, a savvy founder will recognize how valuable these rolodexes are and will want to work with the most connected partners to help them in their pursuit. This is why there are increasing returns in venture capital: the winners work with exceptional people, leading them to win more and attract more exceptional people to want to work with them.
So, the best VCs are always looking to meet the experts in the field, whether they plan to work with them in the future or not. Perhaps the greatest venture capitalist of all time, John Doerr, attributes much of his success to his willingness to network. He’s emphasized it over and over again in several talks he’s given. He once said,
“I just try to hang around the smartest people I can. I've built a network of advisors, whether it's Bill Joy, Larry Page, or Dylan Field. I love Innovation. I worship at the altar of innovators. I hang around universities every Wednesday night and have about eight students, mostly from Stanford, over to our home for dinner.
When I'm trying to learn about a new field, I go to entrepreneurs and ask what I should read. What should I watch? Then I'll invite the innovators in a field, just call them up on the phone, and I ask them if they're going to be in the Bay Area and then go have breakfast or lunch with them.”
Sure, it’s easier for John Doerr to meet with the likes of Bill Joy, Larry Page, and Dylan Field, but one can start anywhere. One can cultivate entrepreneurship in current students at their alma mater or a local university by hosting events or asking for intros to exceptional people through their professors.
A good VC will constantly flex their rolodex to entrepreneurs, and LPs will be attracted to that network as well.
You build a scouting network of exceptional entrepreneurs who can refer their network to you:
The last and most accretive benefit of constantly networking is becoming a favorable name in the founder network. The founder network is the most valuable network for a venture capitalist to infiltrate. It’s where the most and the best referrals come from, and it’s an evergreen crop producing more and more talent as it grows.
As John Doerr talked about, a good VC can infiltrate this network by just cold calling the most innovative thinkers, whether they’re starting a company or not, because they likely have friends who are.
Another way many venture capitalists find their way into the next great companies is by meeting with entrepreneurs they previously backed who are now successfully scaling a company. There are many stories about the twelfth employee at Google or the fifteenth employee at Stripe starting a successful company. It’s an invaluable experience for a young person to work at a company from seed to scale, and it’s a reason why so many investors love to back these people.
Bill Gurley shared an example of this phenomenon for a familiar company to All Things VC readers. He once said,
“Bruce (Dunlevie) (a former partner at Benchmark) had been involved with a company that I think was in a software tool space. He developed a lot of friendships by going down the organizational chart at the company. One day, one of the engineers from that company came to him and said, “I’m working on this marketplace thing called eBay.”
Benchmark’s intro to eBay happened because Bruce took the time to meet all the interesting people within the company he invested in. It’s the easiest way to tap into a network you’re already viewed favorably in, and if you invested in the right company, chances are there will be several future businesses sprung out of that initial one.
This also goes back to our first point about networking: being good at sourcing and networking helps you get into deals before other VCs get the opportunity because that relationship has already been built. Remarkably, Benchmark was the only firm to give eBay a term sheet. Still, it’s likely the Benchmark team never would’ve heard of Pierre Omidyar and eBay had they not connected themselves with employees within the company they invested in.
Success leads to more success in venture, as we know well. Still, you increase your likelihood of future success if you hustle and take advantage of past successes. It’s a bountiful flywheel if there’s a VC there continuing to spin it.
3. Producing Content as a Beacon
The final piece of our deep dive into how the best VCs source deals is the notion of producing content as a beacon for entrepreneurs to pitch you on something that aligns with your theses. Producing content has become increasingly prevalent in forming the new wave of angel investors such as Packy McCormick and Mario Gabrielle, but it’s an age-old tactic that exceptional venture capitalists like Chris Dixon, Bill Gurley, and Paul Graham have been doing for years.
If you don’t write, you should start because it’s a great way to fine-tune and cement ideas in your head. Writing is a constant process of generating an idea and going deeper and deeper through extensive research on that idea until it’s a concise piece of content any interested reader can understand. Therefore, the curious, prepared-minded investor must write consistently to understand potential investments before they’re prevalent.
The other reason why there’s a boom right now in venture capitalists publishing content is because it acts as a beacon to find entrepreneurs building in that domain. Benchmark partner Sarah Tavel describes this double-edged sword:
"I always talk about having an air game and a ground game. For me, writing helps me learn. You write about things, like areas that you're interested in, and it tends to be kind of a virtuous loop for you and for founders who are thinking about building a marketplace or a social network.”
So, by writing and publishing content, a good VC is learning about whatever field they’re looking to invest in and can, therefore, act fast on investing in companies that appear within that person’s thesis. It’s basically practice; however, it’s practice with scouts attending, and in this metaphor, the scouts are current and future entrepreneurs.
By publishing content, the venture capitalist tells the world:
I know a lot about this industry, having researched it extensively
I will likely fund your company if you align with what I’m writing
It’s a very powerful sourcing mechanism that generates relevant inbound from entrepreneurs. Sure, it’s great to network and hustle to find entrepreneurs, and great VCs should also do that, a.k.a. what Sarah Tavel calls “the ground game,” but that’s a time-constraint strategy.
What’s time-unconstrained is publishing content online for anyone anywhere around the world to read at whatever hour of the day, a.k.a. what Sarah Tavel calls “the air game.” It’s an incredibly effective inbound tactic that can directly contribute to billions of dollars in returns for an essay that can take 100 hours to write or even just a few hours. Don’t believe me, well maybe you’ll believe a16z partner Jeff Jordan:
“The reason we publish content is we're trying to send out bat signals saying this is what I'm interested in, this is what I'm looking for, I have a thesis. Then, founders ideally come to you with companies that try to address what your bat signal is for.
I remember the shortest blog I ever wrote was early in the on-demand economy about, “hey, you can have convenience, you can have economics, the ones we're looking for have both.” Apoorva at Instacart read it and came and talked to me during his fundraise. I asked why'd you reach out, and he said I saw your blog, and I’m like okay the bat signal works.”
The content Jeff published, ironically the shortest blog post he ever wrote, generated hundreds of millions of dollars in returns for a16z via Instacart.
It’s such a key tool for venture capitalists to utilize constantly. It’s a make-money while-you-sleep tactic that can pay outsized dividends relative to how long you work on it. To me, any VC that doesn’t publish content seems lazy. It’s practicing in front of scouts. Why wouldn’t you put in that extra work for the potential for outsized returns?
Also, writing is a tried-and-true method where the person who publishes great content consistently over time almost always gains a following. If you research the topic and take adequate time to fine-tune your thinking, it will be a strong bat signal for entrepreneurs to find you, and the better the content, the better the entrepreneur.
Conclusion:
I’m no venture capitalist, but I imagine VCs have a love-hate relationship with sourcing. It’s probably exhilarating to meet with exceptional founders and learn from them, but you will never meet with every exceptional founder no matter how hard you work. You could take meetings 24 hours a day and you’ll still miss the next Coinbase or Airbnb.
Regardless, these traits of curiosity, networking, and producing content will position a venture capitalist as well as possible to meet with exceptional entrepreneurs. Previous success either in starting a company or investing in startups is a major lever in how much entrepreneurs want to work with you and how connected you are in the industry, but I imagine the hardest workers in these three categories do get rewarded by seeing many top companies at their infancy. I do think hard work in these areas does eventually pay off.
The hardest part about investing in great companies, however, comes after you meet the founders. The real challenge is our topic for the next post: Picking…