It feels like I just joined Floodgate yesterday, but I’ve been a seed stage investor at the firm for more than year now! There are a number of non-obvious and underrated lessons that I’ve learned along the way that I hope make me a little less green on what it takes to help fund and build breakthrough startups. I wanted to pay it forward to the next generation of investors by documenting a few of my reflections here. There’s so much more to learn, but I hope these points are helpful!
1. Venture is an apprenticeship business. Optimize for the best sensei over titles and pay.
After spending a few years managing international expansion for Thunderlizard startups like Square, I knew that I wanted to pivot from being an operator to an early stage investor. I used to think that the best path forward was to get into a position where you can start writing checks as soon as possible. Candidly, I earnestly considered joining a newer fund that offered a better title, better compensation, and — most importantly — the autonomy to write my own checks globally. I thought that’s how I’d be able to fast track my track record in venture!
I am eternally grateful to Phin Barnes and Josh Kopelman, my Dorm Room Fund mentors from First Round, for knocking sense into me and nudging me towards Floodgate instead. The two helped me see a few simple truths — venture capital is a power law business, and to be successful you should aspire to be in the orbit of a small handful of investors who have repeatedly proven that they can find, pick, win, and scale the very best startups. Most venture funds don’t even return 1X the capital they raise, and only 5% of venture funds hit the magical 3X fund multiple that LPs look for. You need to learn from the best, and you need to work with mentors that want to see you succeed. It is now so clear to me why Mike Maples and Ann Miura-Ko — who founded Floodgate and helped invent the institutional seed round more than a decade ago — fit that bill.
Over the last 12 months, they have looped me into virtually every founder pitch, portfolio whiteboarding session, board meeting, etc. on their calendars. We very intentionally designed a rotation series in the first year where I spent dedicated time shadowing each of our partners. I learned so much more about venture than any title, pay, or day-one ability to make independent investing decisions could offer. In doing so, I was able to develop a keen understanding of each of my partner’s unique investment philosophy and use these learnings to support them on more than just deal sourcing and diligence — I worked on everything from helping Mike structure his new theory on startup ideation to helping Ann teach courses on entrepreneurship at Stanford. Bottom line: find great mentors.
2. Decision culture determines how you should approach deals. Figure out whether you should be an art curator or a preacher.
Different firms will have different decision cultures, and I feel fortunate that I’ve learned how to advocate for an investment in multiple different cultures. At Floodgate, deals are veto-proof. That means that individual partners can “pound the table” for an investment into a company even if all the other partners disagree. I had to learn how to become an art curator, where it was important for me to anticipate what different partners were looking for. Each partner will have distinctly different tastes in startups based on thesis, stage, price, etc. A startup that one partner would vigorously decline might be one that another partner is eager to pursue! This directly contrasts with the consensus majority-vote model advocated by First Round Capital (which Dorm Room Fund was modeled after). In this case, I had to learn how to become a preacher, where it was critical to know how to “move the room” through debate on each deal.
There are pros and cons to each model: the Floodgate model optimizes for speed and independent thinking while the First Round model optimizes for a collaborative search for the truth. In either case, you need to be an effective advocate for your company in order to get it across the finish line — whether you have to convince one specific person (art curator) or a collective (preacher).
With this being said, you shouldn’t lose sight of the fact that it’s your job to bring the most compelling companies to the table for debate. If there are companies that are totally outside the circles of competence or interest areas of your partners, it’s on you to build up your knowledge so that you can educate the team. I’m starting to learn that partnerships are more malleable than once thought, and that junior investors have a large role in shifting the opinions of senior investors.
3. Investor judgement is more important than sourcing volume. Get to a point where your partners trust the companies you refer.
As a junior investor, there is a lot of anxiety to source good deals. Last year, I independently sourced and met with 200 companies, which roughly worked out to meeting 4 companies per week. Of the deals I referred to our partnership, more than a third ended up in serious diligence. Several of them got funded!
But real talk, it’s easy to fall into a trap where you believe your value is directly tied to the number of companies you bring in that the firm actually invests in. This is why many partners I’ve spoken to are skeptical of hiring junior team members in the first place — there is a fear that junior investors are incentivized to care more about quantity than quality, especially since many of us don’t stick around long enough to own the outcomes.
Thankfully, our partner Arjun Chopra set me straight. He sat me down and told me, “Even if you don’t source one deal this year, that is perfectly fine. It’s more important that you get the deals right rather than get the deals done.” This sentiment echoed across our entire partnership and lifted a huge weight off my shoulders because it helped me focus on sharpening my sense of how to pick great companies. Fun fact: It turns out Ann didn’t invest in a single company in the first nine months following the founding of the firm! However, the first check that she did write turned out to be for a humble startup called TaskRabbit.
In my opinion, sourcing skill is a function of hustle and networks, but picking skill requires a prepared mind and insight. I think it’s important that you join a firm that prioritizes the latter for long-term success in venture.
4. Silicon Valley thrives on serendipity. Generate your own strategic luck by leaning into platform programs.
As the common saying goes, it’s better to be lucky than good! One of Mike’s blockbuster deals came together by chance. He had just met with the founders at Weebly (who he ultimately invested in) and was wrapping up his day. Justin Kan happened to be right next door, wires hooked into his backpack and actively streaming his life through his product Justin.tv. After the Weebly founders vouched for him, Mike and Justin got to talking, which ultimately led to an investment. This eventually paid off when their company pivoted into Twitch and sold to Amazon eight years later for about $1B! All of this because Justin happened to be next door and Mike decided to squeeze in one more meeting that day.
I used to believe that you couldn’t control how lucky you could get, but I’ve since learned that luck really is just where preparation meets opportunity. Silicon Valley thrives on serendipity, but you don’t want to leave it all to chance. Certainly, you need to be “awake” when great founders come in through the door, and you need to act in a way where founders are excited to vouch for you to the best founders they know. But I’ve also found that it’s important to maximize chance encounters with greatness by creating your own “strategic luck” through platform programs.
Over the last year, I’ve helped ramp up some of these programs for Floodgate to help us meet the right people at the right time. The most important stakeholders that will route you to the best actionable deals will be your portfolio founders, prolific angel investors, and rockstar operators. You need to set up mechanisms by which you can regularly engage these folks. Many of our most interesting programs remain under the radar, but one I’ve been super excited to lead has been our Anchor List, an initiative to annually recognize the most extraordinary startup operators currently building the world’s fastest growing companies (more here on this year’s inaugural winners here)! What started as a crazy idea in my head ended up getting a full endorsement from the Floodgate partnership. I’m now hard at work curating a community that includes awesome leaders from Doordash, Airbnb, Nextdoor, and more; many of whom have expressed an interest in advising startups and collaborating with us on angel investments. We hope this strategic luck will compound over time!
5. Your north star should be partner satisfaction. Become indispensable by focusing on long-term value creation.
For the longest time, I thought that my mentors in venture would give me structured goals and benchmarks to hit, just like you might find as an operator. Frankly, this isn’t the case. Venture funds are more like small startups where everyone has to wear the hats. No one gives you a playbook for how to succeed as a junior investor at a venture capital firm. Unlike being an operator, there is no “manager” who will define OKRs for you to hit. I’ve learned that you should set the goals yourself.
One helpful framework I like is to think about success as a function of partner satisfaction, where you imagine measuring NPS scores from each investor that works with you. Making this the ultimate OKR means learning what levers different partners respond to and working towards becoming indispensable to your partners and to the firm. This insight gave me a newfound respect for chiefs of staff — who essentially get a tremendous level of exposure with individual partners, but aren’t expected to have sourced blockbuster deals or build a personal brand by the end of their tenure. They’re given the space to understand each partner’s distinct likes and dislikes, which effectively serves as a great education in venture.
Ultimately, I think you add value to your partners by playing the long game. You don’t need to fixate over building a personal brand or social media following. Your reputation follows the legitimate value creation you’ve enabled. Don’t become famous for the sake of being famous. Work with your portfolio founders and help them traverse the zero to one. Build out fantastic thesis research and teach your partners something surprising. Introduce interesting people to each other without expectation of anything in return. Leave your mark in such a way that the broader startup community can’t imagine you not being tied to your firm. Prioritizing building trust with your partners means they will eventually be willing to vouch for you to founders and co-investors who one day might want to work with you.
Stay tuned for Part 2…
In the follow up to this essay, I’ll cover my thoughts on what’s been most important in finding and picking great startups to work with. Follow me on Twitter @shawnxu to get the latest or shoot me a note at email@example.com.
Special thanks to Team Floodgate, Julia Lipton, and Minn Kim for their feedback and help in editing this piece.