Good Commercial Sense

I'm excited to welcome you to Good Commercial Sense, a newsletter focused on making topics of value creation and the management of investor relationships broadly accessible to entrepreneurs. I also share stories from other entrepreneurs, as well as resources that you can use to learn more about these topics.

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We have been working tirelessly with our companies all year to navigate fundraising. The current environment can seem intimidating or impossible to penetrate, and we spend considerable time reassuring our founders of the possibility and opportunity it presents.

We work tirelessly to add value to our portfolio companies, but in this market we have occasionally felt like parents of teenagers—observing helplessly from the sidelines as their children learn to navigate the harsh realities of the world first hand. Where our fund size and rules limit financial participation, we have stepped up in other useful ways. I wanted to share some advice that has resonated with our founders.

The Narrative

Fundraising is all about the story: The founders we work with are brilliant and have ambitious visions for the world. Yet sometimes they shy away from sharing their grand vision or choose to lead with quantitative metrics. Every good fundraising story has to start with a compelling vision. A compelling story about your vision for the world—and how you will open up new markets in the process of bringing it to life—will get someone to invest their time, and money, in the details. This fact is easily lost in our new world of higher opportunity cost, where investors are currently obsessed with benchmark metrics. As a result, founders risk getting caught up in the how. Remember the importance of the why.

Strategic metrics matter: One of my favorite professors in business school used to say that numbers can ruin a good story. The teams we work with are applying first principles to product development, capital stack design, and operations to deliver commercial innovation that fundamentally disrupts their industries. These strategic milestones are not as easy to measure, but form the foundation upon which benchmark metrics are built. Properly documenting and articulating them to investors is critical. Investors in your space, and with a deep understanding of and a philosophical alignment with your work will get it.

Venture is biology, not physics: I subscribe to this philosophy that Miles Grimshaw articulates well. Great companies are not copies of what has been—e.g., when entrepreneurs define their company as the “Uber of X”—but are original, ever-evolving organisms. Great teams are good at articulating distinctiveness of their project, the hypotheses they are testing, the experiments they are running, and the expected results. The quality of the experiment—setup and speed of execution, capital efficiency, outputs—is what investors are judging when assessing a funding round. The outputs might include revenue or other typical benchmark metrics, but not always.

The Deal

Qualify yourself candidly: In tough markets founders risk muddling optimism with realism. I encourage founders to have a realistic view of the opportunity set available to them. For example, entrepreneurs of color must realize that only ~1% of all venture funding is available to them and must zero in on actionable investors. Founders must also qualify the strength and quality of their business in a high opportunity cost market. It might be best, for now, to hunker down and survive to fight another day rather than burn cash fundraising. Qualifying yourself can also mean borrowing credibility through pursuing warm introductions that increase response rates. Finally, it might mean adjusting expectations for outcomes of round size, valuation, etc. to accommodate the right investors

Opportunity is costly: Most investors look at deals in relative terms. They are assessing a finite set of opportunities at any given time and choosing the best. Understanding potential investors’ opportunity cost framework—especially around new opportunities, follow-ons, and concentration—can help founders think realistically and creatively.

A beggar is a chooser: Many founders forget that they are using the currency of dilution to purchase value from investors. It’s important, especially when paying a high premium, to fully understand what you are receiving in return: the peace of mind afforded by a longer runway, a high quality investor with lots of friends with money, an option to survive and fight another day, etc. You must be at peace with the trade today for the sake of the long term health of the relationship.

I encourage founders to remember that despite the challenges we face, we can navigate a tough market not from a position of defeat but positivity. Our industry has the privilege of building outside of the noise of the markets. We also have the flexibility to adapt our businesses to different macroeconomic conditions while preserving the ability to generate value over the long term. The daunting prospect of fundraising can make us apprehensive, but this market is an incredible opportunity. It’s a chance for closer collaboration and a tightening of the belt to improve the capital efficiency and output of our asset class.

I hope you enjoyed reading Good Commercial Sense, a newsletter focused on making topics of value creation and the management of investor relationships broadly accessible to entrepreneurs. If you think this newsletter would offer something of value to someone in your network, consider sharing it with them.