Jess Lee, a partner at Sequoia Capital, has sat on both sides of the table. The Hong Kong native, Stanford graduate and former Googler ran and sold the venture-backed outfit Polyvore before being recruited into the world of venture capital, where she’s spent the last six years.
Because she herself pitched many investors (and, she has said, was rejected many times), she understands the mindset of CEOs in fundraising mode and the perspective of investors who are being pitched many companies every week. At a recent TechCrunch Early Stage event in San Francisco, she shared some of those insights to help founders in the audience achieve more success when they pitch investors. (She purposely avoided a lot of the content that’s already widely available to founders, including how to run an auction process and how to write a perfect pitch deck.)
For our larger audience, here are some of the things she suggested that founders keep in mind when it comes to the VCs they’re approaching:
- Some decisions are reversible. A startup investment? Not so much. “It’s almost impossible to kick someone off your cap table,” she noted, so while people liken partner-founder relationships to a marriage, it’s worth pointing out that divorce is often easier.
- Find an investor who “gets you” and knows your gaps so they can either fill those holes or help you find someone who will. If that investor also shares your values, can help you with your biggest unknowns (like, say, how to secure FDA clearance), and understands your space and your customers and your core thesis, all the better — though that’s a very tall order. “It’s actually really hard to find someone who has all five of these things,” said Lee. “I’m not recommending that. I would just say find at least one dimension of really good fit with investors.”
- Know your audience. On this front, she suggested, it’s critical to understand how VCs think. We found this part of her talk the most interesting because it’s very easy to assume that all VCs have a similar mindset — and also that their lives are relatively stress-free — when that’s far from the case.
She started first with a broad scenario, noting that a 28- to 50-year-old partner at a venture firm might make 15 to 25 investments over the next 10 years of their career. The VC, said Lee, knows that venture capital has a power law distribution, meaning a third of their investments will probably go to zero, a third will break even and the last third needs to make up for everything else if they want to stay in business.
“VCs are not in the business of downside minimization. We don’t want a portfolio of 10 sort-of-OK outcomes.” Jess Lee
“It’s not like stock picking, where most of the stocks don’t ever go to zero,” Lee noted.
Much can vary depending on where a VC is in their career, Lee noted. Veteran VCs have more experience and can be hugely helpful; they can also be very busy, have a lot of board seats, and, in some cases, “be very lazy because they’ve already made a bunch of money.”
Newer VCs may have more time, but they may also be thinking about their reputation and how they build their brand in a competitive market so that founders pick them. Newer VCs might also be facing uncertainty about whether they’re actually any good at their job.
“The weird thing about venture capital,” said Lee, “is you don’t know if you’re good at it for a pretty long time. The feedback loop is very long and very slow and things can change on a dime. Companies that seem to be working can suddenly fall apart. Companies that don’t work for a while can suddenly pivot and then click. Black swan events like COVID [can emerge] where many of the businesses that were doing great are [hit hard]; then you have companies like DoorDash or Instacart that instantly accelerate.”
The point, she suggested, is while there is an “existential uncertainty for founders, founders are fundamentally in charge. You can see your metrics moving every day, and you can figure out what to do about that.” It’s a different kind of uncertainty for VCs, for whom much is beyond their control.
Don’t take it personally when a VC says no to your company, and don’t let it dissuade you. Here, Lee used a picture of a mountain, calling it a “pretty good analogy for what it’s like to be a founder. You’re aiming to get to the top of the mountain, to dominate your market, to make it. But it’s treacherous. There are ravines everywhere. No one has ever forged this path before at any moment. You could fall off the ravine and your company could perish … and so you’re winding back and forth [as you focus on] how [to] climb this mountain.”
Lee then switched the picture on the screen behind her, pulling up an illustration of a mountain range and noting that while a founder is climbing one mountain, the VC is looking at the entire mountain range. “And they’re not just looking at a mountain range,” she added. “They’re looking across all the mountain ranges across the world and trying to answer the question of which are the few mountains that are worth the climb” over the course of their career.
Put another way, she explained, while you might convince a VC that you can trounce your competitor, a VC is comparing your company against every other company that they met that day or week, which might be upward of 50 startups. “So it’s not so much a personal reflection of your competence; it’s more likely a personal reflection of their view on your market.”
She noted that it’s important to sell the problem, not the solution. Indeed, she said, keeping in mind the other demands on the VC’s time and brain space, the best thing a founder can do is “not sell your solution and [talk about] why you’re going to beat your competitors, but to sell why this problem you’re solving is worthy in the first place.”
As she noted, VCs are asking themselves whether your company is one of the best companies they can partner with over the next 10 years, and part of that is thinking through whether the founder is someone they can potentially partner with over that span of time and how the market will evolve — but also whether solving this particular problem merits so much of their attention over time.
“As much as you as a founder are thinking about, ‘Here’s where I am today, here’s where I’m going to be in a year,’ when you’re fundraising, you have to sell the vision of what you could become in 10 years,” Lee said. “And you have to dream big and you have to show the potential for the VC to be involved in [one of those rare] category-defining companies” — a company that returns 30x the firm’s investment.
It’s hard, Lee acknowledged.
“Like, you’re just trying to survive. But a common mistake that I see, especially from underrepresented minority founders and from female founders, is a slide that says, ‘Even if we screw everything up, we could still be $100 million company.’ But $100 million doesn’t necessarily get you to that 30x return threshold. So don’t make that slide. VCs are not in the business of downside minimization. We don’t want a portfolio of 10 sort-of-OK outcomes.”