Venture Capital Needs New Filters

When we were in San Francisco last year going through Jason Calacanis' LAUNCH accelerator, we were trying to meet an investor that you all know and respect. I reached out to him 4-5 times to ask him if he’d be open to talking about PubLoft, including two emails addressing an ask he had in a tweet. I never got a response. When I asked Jason for an intro and he made it, this investor responded immediately with a quick note starting with “Thanks for getting the intro, Mat".

What gives?

I didn’t change as a person while cold emailing him. Our company was on the same growth trajectory with or without the intro. Objectively, you’d think he would respond and ask for a deck either way. But it was only after the access was passed from Jason did this investor mentally allow himself to respond and engage. This is one component  that makes the Bay Area as strong as it is — it’s an area of the world dominated by access, credentials, and filters.

It’s a world where who you know, and what they think of you, matter more than your skills, hustle, or even the growth of your business. If you went to Stanford, it sends a different signal than if you went to Arizona State...where the difference between getting into YC and getting into Angelpad really matters. And there’s no better way to get this access than to get a warm intro.

We all know that a warm intro is the ultimate passing of access. The Bay Area operates on warm intros. Even so, venture fund returns average below 3x across the spectrum. If 80% of investors only take warm intros, I feel like only 20% of the good deals are getting seen. This could be a reason for the sub-optimal returns. Even with this being true, investors do use other indicators to evaluate quality of a founder that isn’t directly coming from an intro. They do it through evaluating credentials. Which in simple terms, I am defining as filters.

The power of filters in investing

Filters allow investors to evaluate the strength of a founder before they meet eachother. Credentials pass as filters, and the more filters that a investor can put a founder through, the more likely it is that an investor have conviction whether to meet this founder or not. Listed below are some of the more common filters that investors use, in the form of questions.

Did they attend a strong university?

Anyone coming through Harvard passes a signal that this founder is at a certain level of competence, which de-risks spending time talking to them. If a founder can get into Harvard, they have achieved a certain level of intelligence that can be passed on as a signal to investors that this is a founder worth knowing.

Have they worked at a quickly growing tech company?

If you worked at a high growth tech company for 5 years and a great reputation with respected leaders there, this is very effective. Even more effective than getting into Harvard. This means you were able to get into “Stripe” in the first place, and well respected people enjoyed working with you and your work ethic. This is why many eventual founders work for a startup, and then start a startup after 2-7 years. It’s because the credential and access you get from working at that company is so strong.

Did they go go through Y Combinator?

YC is responsible for over $150B worth of market cap with the companies they’ve funded. Tens of thousands apply for their program yearly, but they only pick 300-500 startups a year to participate. Due to this, you know YC is going to pick the best founders they can pick out of their giant pool. And because YC has trust with the startup ecosystem to keep finding amazing founders, investors will generally be more keen to meet with a YC founder than not.

Did other great investors invest in them?

If an investor knows Chris Sacca invested in a weird company called Uber, they trust Chris to make the best decision he can make. An investment is the ultimate form of conviction, so even without talking to Chris, this investor knows something special is going on with this founder/team, because someone else you trusted ended up jumping in.

One issue I’ve seen with the industry is that most investors use the same filters to evaluate a founder or company. And it’s generally the ones I listed above + warm intros. These are the filters most investors use to evaluate deals and founders. I actually think this has a strong correlation to the fact that overall, venture funds don’t return the 3x they strive to hit for their LPs.

If every investor is using the same four or five filters to evaluate a founder, how will great founders that don’t have those credentials be found? I don’t know. And since the venture industry overall is not delivering expected returns, I think the answer is simple. Find new filters.

How am I finding deals before you?

I started a podcast 1.5 years ago where I set out to interview Pre-series A companies, But not ANY pre-series A company.; Ones that I thought were going to be big. Really big. So in many ways, I treat my podcast as an investment vehicle. Since I’m based in Phoenix AZ, I was forced to use different filters to find these great early stage founders. And I think I found some good ones.

Here are five companies I’ve interviewed on my podcast before they raised their most recent round. Note, I didn’t find them from filters listed above. These were new filters:

1. AirGarage (Interviewed in March of 2019, has raised $2,000,000 since)

2. Beanstalk (Interviewed November of 2019, has raised $4,500,000 since)

3. Trainual (Interviewed in November 2019, has raised $6,800,000 since)

4. Fast (Interviewed in November 2019, has raised $20,000,000 since coming onto the podcast)

5. DoNotPay (Interviewed in November of 2019, has raised $12,000,000 more since)

In addition, there are companies in the current YC batch that I have interviewed well before they got into YC. The fact is, I live in Phoenix Arizona. I have had very little access given to me by people of power. Yet, not only am finding these deals before you, but I am doing it through filters that I discovered from first principles thinking. Note, I didn’t mention Wren, Deel, Openphone, Papa, and others, simply because I found these through the same regular filters.

I strongly believe the internet has enabled investors to look at new filters to evaluate founders, and the VC current market hasn’t caught up yet. Venture capital is an industry rooted in tradition, and not much changes. But the world around it has, and I am proposing that seed stage investors challenge themselves to look at different filters to find great founders.

New Filters To Evaluate

Twitter social graph

Twitter built a very powerful product for simple filtering. When you are browsing people on Twitter, you can see who follows them, among people you also follow. So the key here is to follow people that you think have a knack for finding interesting companies. Once you follow them, you will then be able to see who they follow when you browse. Do you see a founder in Ohio working on a side project, yet 12 people you respect follow them? That’s a filter.

Product Hunt Launches

Startups are a game of momentum. If a product launches on Product Hunt, and gets 1,000 upvotes, this is a decent filter that these founders built something interesting and they know how to get it in front of people. Every day, amazing products launch on Product Hunt. Many of these end up becoming VC backed companies. That’s a filter.

Note, I do a Product Hunt Roundup every week, so if you don’t have time to review every product that launches, I do. So subscribe to my newsletter to get the goods.

Suggested Friends on Facebook

If you have smart friends on Facebook, Facebook will suggest friends of people who are similar. Friends with a a lot of founders? Facebook will serve up founders to you on a silver platter just by looking through suggested friends. The smarter your friends, the better founders Facebook shows you. That’s a filter.

Twitter Triangulation

One of the most effective ways I find founders to interview that is I follow the people who I think discover cool products first, and I just patiently wait. If I see a product mentioned 5 times by different people at different times, I reach out to that founder of the product/company. If I keep seeing someone I don’t follow in my newsfeed, AND people I follow, follow them? I know something is up and I want to get to know them. That’s a filter.

I’m still figuring out more filters to use to find interesting companies before the market does. I do know that I’m very talented at this. I know that I use a data driven approach vs. trust/referral driven approach like most VCs. You might disagree with this approach, and that’s okay. The question isn’t what works vs. what doesn’t? The question is what will get the most impactful return for our LPs? And if every VC is using the same filters, maybe it’s time to get some new ones.

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