How well you listen is a key factor of your success as a founder

Listening is one of my favorite topics. It's something that has historically been challenging for me.

Often I know quite a lot about a topic. And I make assumptions going into a situation. And then my mind runs very quickly towards analysis. 

But here's the thing: assumptions mean you listen selectively. You hear only what confirms your biases. 

And rushing towards analysis means you've moved to processing when what you should be doing is gathering information. Your mind drowns out what is the most important part of a conversation: what the other person is saying. 

Revisit your assumptions by turning them into hypotheses. Assume you don't know what's true. You're seeking to falsify. It's a process of discovery, not confirmation.  

And then leave behind your mind by making the other person your sole focus. 

This might sound like a metaphor (you're still thinking, aren't you?). But I'm not sure it is a metaphor. I mean get in the zone, the flow, of truly, deeply, actively listening. Be nothing but a sponge to that. Including watching for all those cues that nature has prepped you for: the twitch, the squirm, the grimace, the gesture. 

When you feel like you're not understanding, try to slow down the conversation. Smile. Ask open questions. Don't let yourself be led towards reacting. The point is to take it all in, and then create the space to respond.

Walk around a day like that and see whether this makes a difference in your life. 

Or, you know, don't - humans don't seem to learn through prescription. Figure out for yourself whether what I've said is true. 

Quant VC funds are coming: here's my playbook

You can read the whole thread here. Worth it as always with Ryan's tweetstorms.

Faced with the growing volume of companies in the market and the constraints of a $130 million early-stage fund at Sunstone, we did significant work on this problem in the 2015/2016 time period. 

I had previously been part of the teams at Atlas Venture (2007-2010) and Accel Partners (2012-2013) that tried to leverage structured public data about companies. This was also the thesis of my angel investment in Mattermark. We would aggregate data from all public sources - Crunchbase, SEC, press, social media - to build Markov chains that look at likelihood and quality of both next raise and eventual outcome.

There were always several issues: on the one hand, data quality/availability is poor. The sample (N) isn't the total population - many great companies are fairly secretive. On the other, the information advantage (IA) was non-existent: what came out of these models was akin to the Correlation Ventures results. I.e., if Sequioa does a Series A in consumer, you should try and get into the Series B. If Matrix does an enterprise software deal, that's probably a good company. Well, no kidding, but good luck getting into that deal if it's doing well. 

So at Sunstone where we are focused on Seed and Series A, we tried something very different: we ignored the company data and instead focused wholly on the founder. We aggregated CV-level data of founding teams across ~5,000 companies and ran a vanilla LSTM neural network on it to make predictions about whether a company would get financed and what the quality of its investor base would turn out to be.

The early results were promising: while data quality was still a problem, we didn't mind as much. As a small fund, it's OK to run the model and end up with a small set of companies that you can then manually screen. False positives were less of a problem than in other use cases. Remember, at that point we hadn't even looked at what the company does. Out of 1,000 screened companies, the model would recommend we invest in ten companies. All of which looked promising. 

Getting this right would solve the dealflow issue for a small fund entirely. We were super excited. If this worked, we could focus all our attention on being amazing for these ten companies - both before and after investment. 

Not only could we be very aggressive in reaching out to them - we knew we were likely to want to make the investment. So we could buy them flights to come see us. Have them picked up at the airport by a driver. Spend two days with them, really getting to know them. Give them the Zappos treatment. Freeing up all the time spent sourcing and evaluating investments also meant we would be free to spend most of our time helping our existing companies. This was a game-changer.  Dealflow would be handled by a machine!

We took our prototype and pitch to Y Combinator. Partially because it was fun to go through the process, partially because this felt like it might be a separate Sunstone fund. We got through to in-person interviews and had a great chat with Sam Altman & company. In the end, YC felt like it would be competitive but offered to introduce us to their LPs.

Alas, as we tried to scale the approach we found that data quality became a harder and harder constraint. Of all founding teams in the market, too few declare themselves as founder of a company before their seed round on LinkedIn. Many companies that met our criteria  had already raised. In the midst of the frustration, our very talented developer Michael Hirn left for the beckoning world of crypto. 

Two years on, I'm starting to feel the itch of another attempt. Given the constraints around N, what's critical is generating own data. I still believe in the IA hypothesis that the founding team is the best predictor of a good venture outcome - at least at Series Seed and A. 

To that end, I'd like to develop a founder self-assessment tool that takes into account founder experience, disposition, personality traits, skills, etc. Think a Hogan type assessment. That data would be correlated with self-reported prior success criteria, publicly available data about the company, and compared to a model of currently successful founders. 

We previously assembled this type of data manually for around 100 companies in Europe that were $100M+ outcomes and got to super-interesting results: e.g. you should have at least one immigrant on your team, social cohesion is key (you should have worked or founded something together), having a failed or moderately successful startup is a plus, etc. But we also felt like there were key things we were skipping, questions like: does this person have a good social support system? Are they self-aware? Are they good managers? 

A founder assessment like this would need scale - it should be taken by as many founders as possible. Possibly with some sort of "coaching" slant like "we'll let you know what to work on to become a world-class founder." As a minimum I'd like to have 25,000 responses.

Once you felt good about your data, your model and its predictions, you could turn it into a fellowship-type seed programme: "have you and your team take this assessment. It will take 30 minutes and if you get through, we'll give you $100-250K to get started." Again: game-changer.

The firm on the back of this would again have solved the dealflow issue, but it would also have a natural value-add: to take the assessment and coach founders to greatness based on their results. What should they be working on? What weaknesses should they be aware of? What strengths should they play to?

When Marc Andreessen said he thought venture was one of the few industries that couldn't be automated by AI, I thought "this sounds like what I would say if I were an accountant." It can undoubtedly be done. It will be done. The question is: will it be done by us?

If you're qualified and feel like helping me build something like this (read: data scientist, HR/psychology background), let me know. Could be a very worthwhile endeavor and Sunstone would provide an awesome platform to do this together. 

The Amazon "kill zone" in DTC

I listened to Harry Stebbing's second interview with Rebecca Kaden at USV a few days ago. It's a great conversation. If you're anywhere close to direct-to-consumer investing, it's a must-listen.

A lot of it echoes our DTC investment thesis. But she had great clarity on what she calls "the Amazon 'kill zone'" and it's something that we've been thinking about a lot.

As European investors you're often disadvantaged by geographical and network distance from the internal strategic and tactical conversation at the FAANGs. So we listen closely when someone like Rebecca Kaden, or Jeremy Levine, or Kirsten Green, talk about their evaluation of what's a priority for Amazon. 

As a commerce investor I am in awe of what Amazon has done and is doing. The speed with which they're starting and scaling businesses. Their courage in shutting down things that aren't working. Their maniacal focus and execution prowess.

A common trope is that Amazon has won by scale. Like Rebecca we think Amazon also, and perhaps more so, has won by executing many different things incredibly well. It's not just logistics, it's selection (merchandising/assortment), convenience, price, trust. More than 50% of product searches are now on Amazon in the US. When you know what you want, you don't search Google. That's a massive, massive change in the consumer economy. 

In the functional, utilitarian way of shopping, no startup has an advantage over Amazon. If this is what your product maximizes - utilitarian price/value - forget going direct. Go on Amazon and seek to build a moat elsewhere. If your segment is or becomes big enough for it to matter to them, you have a problem you should address now. 

So what's Amazon not good at? Where do startups have an edge? Because Amazon certainly has structural advantages in scale, capital, data, and probably people. 

Right now, it looks like the advantage lies in "the other ways in which people want to shop." Whether it's through their friends, by following an influencer, by falling in love with the narrative of the brand, by joining a community of like-minded, passionate individuals for whom the brand is their joint expression of belonging. 

That emotion is not "Amazon" at its core. 

Extending this "authentic emotional connection" micro-thesis a bit, it suggests a playbook that looks fairly different from many of the DTC brands that we're seeing in the market. Most important, perhaps, is the experimentation at the early stage that looks at what helps people fall in love with your product. What gets them to not just want to join, but want to build your community? As Rebecca notes, what causes them to set up Facebook groups, ask for swag, refer their friends, come back to buy again and again?

Beyond Amazon, this throws into doubt the whole idea of building mainly on paid acquisition. Forgetting the point for a moment that companies that need to continually acquire customers at low to medium AOVs don't make for good-margin, capital-efficient businesses, paid acquisition may actually muddy the early data that would help you do more of what consumers love about your brand. 

That's a powerful point by Rebecca and one we're planning to emphasize more in our DTC thesis. 

October 3, Day of German Unity

October 3 is the Day of German Unity, the federal national holiday in my country of birth. It marks the day Germany was formally unified after being divided by the occupying forces (US, UK, FR, USSR) after WWII. 

The alternate and more emotionally charged date would have been November 9. It is a day heavy with German history, a Schicksalstag: from the execution of Robert Blum on November 9 1848 to the proclamation of the first German Republic in 1918 following the abdication of Kaiser Wilhelm II. From Hitler's first coup on Nov 9 1923 to the Reichskristallnacht pogroms against the Jewish population (fellow citizens) in 1938. And finally the fall of the Berlin Wall in 1989. 

November 9 would have been the right day. Not least because it is drenched in both the lightest light and the darkest dark in German history. Unsurprisingly, it is a country that does not wear its patriotism lightly. A contemplative national day would have been the right choice.

Like many Germans, I have a love-hate relationship with my country of origin. When we moved to Canada in 1989, shortly before the fall of the Wall, the first book I had to read in school - English-German dictionary in hand - was Night, by Elie Wiesel, about the experiences in Auschwitz and Buchenwald with his father, at the height of the holocaust. 

Never shall I forget that night, the first night in camp, which has turned my life into one long night, seven times cursed and seven times sealed. Never shall I forget that smoke. Never shall I forget the little faces of the children, whose bodies I saw turned into wreaths of smoke beneath a silent blue sky.

As a German, this is how I learned English at 12 years of age. 

When I look around Germany today, I am gripped by nostalgia. Its traditions do not hold me in their sway but they fill me with a longing for the simpler days of childhood. Its national character - thorough, dutiful, punctual, rule-bound, korrekt - still echoes through the halls of its dusty bureaucracies and large corporates. But its culture is increasingly homogenized into the globalized sameness. Germany is not special, in that way, or in many others.

For now, it is a country managing the barely perceptible but inevitably creeping erosion of its industrial base and its highly perilous demographics. Most of its political bodies do little but administer this decline. The number on welfare and in meaningless jobs is staggering. And yet (or perhaps exactly because of this) the national spirit has been resurgent as of late, both in its lightest light and darkest dark. 

What the country is not, at this point, is united. Like everywhere, deep lines divide the nation - of geography, ethnicity, class, worldview - fueled by a turn towards identity politics that is the scourge of our time. 

Take this with a grain of salt. From Marx onwards, Germans have been especially good at imagining both the end of the world and in particular believing that our own epoch is its final stage. William F. Buckley (according to George Gilder) called it immanentized eschaton, this tendency to hasten the end. According to Catholic catechism, it is an embodiment of the Anti-christ.

Germany's role remains pivotal, at least in Europe. What matters is how we hand it over to the next generation. But I, for one, no longer identify as one of its sons. Too broad is the world; and too many the places that I have called home.

It is unlikely that I will choose to die on its blood-drenched soil in its name. I can only wish the country may rediscover more of its lightest light. 

Why does ad targeting still suck?

We've been in the US for a week now. Every year, we spend three months with my in-laws in Texas. It allows me to travel the country, spending time on both coasts and some beautiful places in-between (Austin, Boulder, and maybe a wild card this time... Raleigh?). 

The spare car that we had been using in Texas had flooded during Hurricane Harvey. So I did a few minutes of research on the startups that would allow me to avoid the American dealership "experience" and (sorry, Elon) decided on Carvana.  

It was a good, nay, a great choice - within 24 hours of arriving, the car had been delivered to the house, paperwork signed, and we were adulting Texas style in a seven-seater Chrysler Pacifica. Yes, it's a minivan. It was that or a Ford Raptor and my wife x-nayed that idea. 

So imagine my surprise as I was reading Amazon Pravda Essentials (about Robert Kagan's new book, which is the talk of the town in DC, except of course for that other pesky issue of whether you-know-who likes beer and how much of it), when this popped up:

That's a retargeting ad for Carvana. The place where I just bought a car and took delivery. Do they think I might want another car? Maybe because I had used the prior one up? Monthly subscription? Get the next one half price!

Criteo was founded in 2005. Given all the data that Facebook and Google have on me, given all the ways you can close the loop on this transaction, what is going on?

Amazon does this, too. Amazon, where I do like 200 transactions a year (seriously, this is a problem), cannot tell that I have just bought a garden hose and am highly unlikely to require another one for the next five years. 

In a way, that's fine. It's giving me some peace on the big data (do we still say that?) issue that we're so god-awful at using it. Now we just need some legislation on what that data can't be used for (health insurance, credit scoring, immigration) and we're solid. 

In the meantime, let's hit some open road. 

A recent brief, clarifying conversation with a founder

VC= me; F = founder.

The setting: phone call. The crisis: significant, potentially company-ending, involving multiple parties, complex, chaotic, needed to be urgently addressed. The founder had been losing sleep and I had been losing my sense of dispassionate engagement. 

I have anonymized the conversation, shortened it, and edited for clarity (I hope). 


VC: Tell me about the thoughts that go through your head when you think about [the crisis you're currently facing]?

F: Seriously? This is what you want to do right now?

VC: Humor me, just for a minute.

F: If we don't solve this, we'll miss all our targets. I think the fundraise will fall through. People will start leaving. The whole house of cards is going to collapse. 

VC (swallowing acerbic comment about the "house of cards" thing): Identify the emotions that come up. 

F: I just want to make this go away. I don't know if I can. 

VC: If you really wanted to make it go away, you would. Let me ask you again, what do you _feel_, literally, inside your body?

F: I hate these conversations with you... *laughs*. I feel a big knot in my stomach. There's so much tension everywhere. I guess you can call it fear. We've worked so hard for this and so many people depend on this going right. If I come up empty, it will be a huge and very visible failure.

VC: Based on the possibility of the whole company going under, it's perfectly natural you're feeling that fear of failure. No wonder you've been avoiding addressing the issue, losing sleep over it, trying to contain it. But you're not doing the best that I know you can do.

F: What would you have me do differently?

VC: Let me answer that with another question. Your belief is that this crisis could make the whole company fail. What would a different, more powerful belief be?

F: Perhaps it's showing me that I avoid things when I get fearful. 

VC: What else?

F: Once we get through this it will make us much stronger. As a team and as a company. It's an opportunity to grow.

VC: Take that belief and imagine it's true. I know you don't fully buy it right now. What would that feel like?

F: Liberating. It feels like it's a necessary rite of passage for this company. 

VC: Do you believe that?

F: Yes.

VC: So based on that thought, that this is a real opportunity for growth, and the liberating feeling you have about that, what actions are you going to take?

F: I've been trying to tackle this head-on, very aggressively. Perhaps the better way is to build consensus more slowly with all parties. Let me go and try that.

VC: How can I help you?

F: You already did. Let me call you back tomorrow and I'll tell you where I got to. 


In the conversation above, the main block to taking decisive and correct action was fear of (personal) failure and the ensuing self-doubt. While we didn't go as deeply as I think would have been beneficial, enough was achieved to move forward. 

The conversation was, for me, a reminder of how all blocks to action are a result of the filters and consciousness developed from previous experience. Not every setting is right to address those historical blocks and I am not a therapist. But to be aware of such things as an investor can be hugely beneficial to the founder-VC relationship. 

If you'd like to experience a different kind of venture capital, the doors at Sunstone are always open. 

Image result for phone call unsplash

Spacetime and the order of things

I’m reading Carlo Rovelli’s The Order of Time. 

I’m struck by an analogy of the Einsteinian synthesis of Aristotelian relative and Newtonian absolute time into the field of spacetime: it is an apt metaphor for so many of the discussions I follow. Both of the relativist and the absolutist kind, and the apparent irreconcilability of opposing absolutes. 

Things can be both relative and absolute in relation to each other. The differences we see are matters of perspective, the speed of personal growth, directionality, our ability to observe. Increasing entropy is nothing but a lack of observational capacity. 

There is _always_ an integral view. Always the shift you can make to understand even if you don’t agree. 

Look at the world like the living God you are. Assume the limitations of your views are just this - limiting beliefs you have acquired, just as easily let go if they no longer serve you. 

It is time to shed them. 

Talking, talking, talking: wisdom with Charlotte

This Saturday we returned from an extended holiday/parental leave. One of the episodes that really stuck with me was the following exchange with our eldest.

Alina: “Charlie, listen to papa. What did papa say?”
Charlotte (2): “Talking, talking, talking.”

Which, from her perspective, is totally valid. I’m way too verbose for a two year old. Probably way too verbose for most people in my life. I’m going to tune down the -v flag a bit and listen more.

Incidentally, I also broke a toe on the return trip. Which I’ve decided to be really grateful for, because I was about to get back into my habit of running hard towards [whatever]. It’s slowed me down quite a bit a lot. And by being forced to be slow, I find myself looking and feeling more.

These are good things.

Talk less. Listen more.
Run less. Look more.
Feel.

Thrilled to be back at work and looking forward to making this a regular blog thing again.

Much love,
Max

P.S. Also rewatched all three seasons of Rick and Morty. What what. The third season isn’t as terrible as I thought.

Everyone wants to be rich and famous in the wrong way

I used to think part of what was wrong with the world was that everyone wanted to get rich “in the wrong way.” That is without paying their dues, without hard work, instantly. On The Voice or via social media or whatever. 

That’s an unkind way of thinking because the folks who do well on those platforms have usually worked hard on them for years. 

But I still believe there’s a truth there somewhere: everyone wants to be famous. It’s perfectly understandable. To be famous is great. You feel important. You will be rich (at the very least, people will pay for your presence/time and endorsement). 

To be rich and famous is to be validated in the world. It’s a way of dealing with death. It makes you a little bit immortal. It shuts up that inner poverty that says “you are nothing.” At least for a little bit. 

Let’s think about that. What does it mean to not depend on that? What does it mean to be “inwardly rich”? It is the only thing that permits you to stand alone and not depend on other’s opinion for your salvation.