Venture Capital is Dead – Long Live Venture Capital! Part I

Late stage VC funds are earning dismal returns relative to the S&P 500 and take little risk. So why are LPs continuing to fund them? What the heck is happening in VC and can we fix it?

Welcome to the world of unlevered, illiquid, venture investing!

In this bizarro world, bigger is worse, and investors don’t seem to care.

What is going on?

Part One of a Three Part Series

Venture Capital Returns by Fund Size: Comparing Early-Stage vs. Later-Stage

Venture capital (VC) is a critical component of the financial landscape, fueling innovation and growth within the startup ecosystem. However, the returns on venture capital investments can vary significantly based on several factors, including the stage of investment and the size of the fund. Without trying to boil the ocean, I’m going to do a quick look at how venture capital returns diverge by fund size, with a specific focus on comparing early-stage and later-stage VC investments. Additionally, I want to cover how early-stage funds, particularly those smaller than $250 million, often outperform their larger counterparts, especially when compared against broader market benchmarks like the S&P 500.

Venture capital funds are typically classified into different stages based on the maturity and revenue of the companies they invest in: early-stage (Seed and Series A), mid-stage (Series B and C), and later-stage (pre-IPO financing). The size of these funds can also vary, ranging from small funds (less than $250 million) to large funds (more than $1 billion).

Later-Stage VC: Higher Risk with Lower Relative Returns Relative to Early Stage VC

Later-stage venture investments involve funding more established companies that are closer to a public offering or a major liquidity event. These investments are perceived as less risky compared to early-stage investments because the companies have proven business models and steady revenue streams. However, the return on later-stage investments can be less attractive compared to early-stage investments on a risk-adjusted basis. According to data from Cambridge Associates, later-stage VC funds have demonstrated lower returns compared to early-stage funds. The 10-year pooled return for later-stage funds as of 2020 was around 12%, significantly lower than the returns generated from early-stage funds which averaged around 20% (1). I’m looking for more recent data, because I’d bet my bacon that late stage fund returns went down, a lot, on average. At least, that’s what institutional LPs tell me, a lot. So much so, I wonder why they keep investing (that is part II of this essay).

Moreover, when comparing these returns to the S&P 500, which delivered a historical average annual return of approximately 8% to 10% with considerable liquidity, the attractiveness of later-stage VC diminishes further. The lack of liquidity and higher relative risk associated with late-stage venture investments, combined with returns that do not commensurately reward this increased risk profile, makes them less appealing compared to other investment opportunities. And yet, late stage VC keeps on raising money, lots and lots of money.

Early-stage venture capital involves investing in startups at their nascent stages, typically while their revenues are $3mm a year or less. These investments are inherently riskier due to the unproven nature of the businesses and their higher likelihood of failure. However, the potential for high returns is significant, especially for top-performing funds. A pivotal study by Cambridge Associates shows that top decile early-stage venture capital funds, particularly those with under $250 million in assets, have significantly outperformed their larger counterparts and broader market indices. The top decile of early-stage funds reported returns as high as 35%, showcasing exceptional performance that should attract sophisticated investors (2).

This performance variance can be attributed to several factors. Smaller early-stage funds are often more agile, able to make quick decisions, and invest in innovative startups that larger funds might overlook. Additionally, these smaller funds can provide more hands-on support to their portfolio companies, contributing to their chances of success.

That’s where early-stage VCs can generate massive alpha, and late stage simply can not because the companies are already significantly de-risked. Risk equals reward, and those who manage risk better, can earn returns in excess of their risk adjusted expectation. Later stage VCs require less risk-management ability, and their relatively poor returns reflect this.

Comparative Analysis with the S&P 500

When compared to the S&P 500, top-performing early-stage venture capital funds offer much higher returns, albeit with greater volatility and liquidity risk. For investors, this trade-off is often acceptable due to the substantial premiums involved. According to the National Venture Capital Association, early-stage funds not only surpass the S&P 500 in terms of returns but also contribute significantly to job creation and technological advancements, thereby offering both financial and societal benefits (3).

Part II Teaser

In summary, while venture capital as an asset class can offer high returns, the variability of these returns based on the stage of investment and the size of the fund is significant. Later-stage venture capital, despite its lower risk profile relative to early-stage investments, often fails to provide returns that justify the risks and illiquidity involved. Conversely, smaller early-stage funds, particularly those making Seed and Series A investments, consistently outperform not only their later-stage counterparts but also the broader market indices like the S&P 500 when considering top decile performers. These findings underscore the importance of strategic fund selection based on detailed performance data and fund characteristics in the venture capital industry.

So how did we get here? Why are LPs piling into bigger and bigger funds that offer returns lower, and lower each year? This makes even less sense when we consider that the S&P has been recently beating late stage VC returns, WITH LIQUIDITY!!!

【1】Cambridge Associates, US Venture Capital Index and Selected Benchmark Statistics
【2】Cambridge Associates, US Venture Capital Index
【3】National Venture Capital Association, 2020 Yearbook

Ignorance Is Learned – How to Unlearn it

We have to humbly face the truth that as a founder, you are probably making something you love. Make something other people love if you want to succeed.

Make Products People Love – Part One

This is the first part of a three part series on how founders can make products people love. To begin, we have to humbly face the truth that as a founder, you are probably making something you love. Make something other people love if you want to succeed.

Unlearning is a transformative process that involves the deliberate effort to change or discard previously acquired knowledge, beliefs, or behaviors that are found to be incorrect, outdated, or harmful. When you want to make something other people will love, the ability to unlearn things you may love becomes crucial in avoiding customer ignorance and fostering a culture of continuous learning and growth in your startup. This post explores the significance of unlearning when making something people love, outlines strategies to facilitate unlearning for yourself and your company, and examines the challenges and benefits of this process to finding product-market fit.

Understanding Ignorance and the Need for Unlearning

Ignorance, in this context, refers to a lack of knowledge, understanding, or awareness about a customer or the broader complexities of your customer’s needs and values. It can stem from outdated information, misconceptions, biases, or the inability to access or interpret new information accurately. Ignorance most often is not the absence of knowledge but holding onto incorrect or incomplete information as truth.

Unlearning addresses this aspect of ignorance by challenging our current knowledge base and making room for new, more accurate information. It is a deliberate process that requires recognizing that some of what we know may be wrong or incomplete and being open to changing those understandings. Unlearning is essential in a world where technological advances, societal shifts, and new scientific discoveries constantly reshape our understanding of reality, and our customer’s needs and preferences constantly change with it.

Strategies for Unlearning

  1. Reflective Practice: Engage in regular reflection on your beliefs, knowledge, and behaviors in regard to who your customer is, what they value, and how they use the product. Question the origins of your assumptions and the evidence supporting them. Reflective practice encourages a critical examination of one’s understanding and opens the door to recognizing areas in need of unlearning.
  2. Seek Out Diverse Perspectives: Exposing oneself to different customer viewpoints and experiences is vital in challenging customer ignorance and fostering new learning. This exposure can highlight gaps in knowledge or biases, providing opportunities for unlearning and relearning. We STRONGLY encourage our founders to conduct hundreds of customer interviews using methodology outlined in the Mom Test to accomplish this.
  3. Embrace Vulnerability and Curiosity: Admitting that one’s knowledge may be flawed or incomplete requires vulnerability. Approaching learning with curiosity rather than defensiveness allows for a more open and effective unlearning process. Take joy when you realize you’re wrong about something.
  4. Critical Thinking and Media Literacy: Develop skills in critical thinking and media literacy to better evaluate the accuracy and bias of the information being consumed. This skill set is crucial in distinguishing between credible information and misinformation or outdated knowledge.
  5. Continuous Learning: Commit to lifelong learning as a mindset. Recognize that knowledge is ever-evolving and that staying informed requires ongoing effort to learn, unlearn, and relearn. Nelson Mandela once said, “I never lose. I either win or learn.” When you’re always learning, you’re always winning!

Challenges in Unlearning

Unlearning is not without its challenges. Cognitive biases, such as confirmation bias, can hinder our ability to see beyond our current beliefs and accept new information. Emotional attachments to certain beliefs or the discomfort of cognitive dissonance can also make unlearning difficult. Additionally, team, social and cultural pressures can reinforce outdated or incorrect beliefs, making the process of unlearning even more challenging for product development. Pivoting or abandoning beloved features when they don’t offer value can be painful if we’re emotionally and socially committed to them.

You and your team are preprogrammed to like things that reinforce your feelings and ideas, just one of many biases you should be familiar with. The Decision Lab has an amazing list of cognitive biases that is worth your time to study. The more bias you recognize, the better you can figure out your Dunning-Kruger reality, so to speak (click the bias link if you’re curious about Dunning-Kruger, no worries if you already know it all, wink, wink).

The Benefits of Unlearning

Despite these challenges, the benefits of unlearning are profound. First, it fosters a more accurate understanding of your customer, enhancing your ability to make informed product decisions based upon their needs and willingness to pay. Second, it promotes flexibility and adaptability, qualities essential for a start-up to find product-market fit. Third, unlearning can lead to personal growth and improved relationships, as it encourages empathy and understanding by challenging our biases and assumptions about others. This means that the team that unlearns the best, is the team that also works together most efficiently. Win-Win!

Final Thoughts

In a world saturated with information and where knowledge is continuously evolving, the ability to unlearn is as crucial as the ability to learn when doing customer research. Unlearning allows us to shed outdated, incorrect, or harmful beliefs and behaviors about our customers and ourselves, making room for new information and perspectives that foster trust and understanding. You will, in turn, build something people love because you know them. This process is essential in avoiding ignorance and fostering a culture of continuous growth and improvement.

While unlearning presents challenges, particularly in overcoming cognitive biases and emotional attachments, the benefits it offers are substantial. By adopting strategies such as reflective practice, seeking diverse perspectives, embracing vulnerability, and committing to continuous learning, start-ups can navigate the complexities of unlearning, identify the true customer need, and make something people want. Ultimately, unlearning is not just about discarding old knowledge but about making space for new understandings that lead to product success.

To Do ESG Investing Right – VCs Must Flip the Decision Around

Over the past year, many ESG (Environmental and Social Good) focused funds have reported dismal returns and are either shutting down, or dramatically lowering expectations for performance with their LPs and hoping for mercy. And yet, with our fund I, performing remarkably well, we have INSANE ESG impact without looking for it per se.

However, upon closer inspection I realized that our massive consumer surplus definition of a good investment embeds within it an Easter egg that can not be uncoupled from consumer surplus: environmental and social good.

Consumer surplus is a economic foundation that most VCs ignore, but I cover exhaustively. It is the difference between what you’re willing to pay, and actually pay. Great stuff that can be adopted faster will always dramatically improve consumer surplus. Embedded within this economic truth is an ESG reality: services and technology that massively improve consumer surplus not only improve economic outcomes, they improve social and environmental ones by default.

If consumer surplus goes up, ESG impact must by definition increase. Consider these two examples from our portfolio.

1: Fila Manila is now the #1 Filipino food leader in the US. When we invested in the company, the space was pretty empty. If you wanted Filipino food in the US, you had to either go out to eat at one of the hard-to-find restaurants that served it, or spend hours in the kitchen preparing it. When you buy it in the store, you save time, gasoline, effort, etc. There is an environmental and economic benefit. Socially, we benefit from an expanded culinary palette with greater awareness of the rich culture and beauty of the Philippines.

2: Nitex is quickly becoming the largest supply chain management system for the global fashion economy. By implementing this software, fashion companies save millions of dollars by dramatically reducing travel to manufacturing sites, often in hard-to-reach developing economies around the world. They also can respond faster to changes in demand, dramatically reducing overproduction in an industry responsible for most industrial water use and contamination. In short, Nitex is not only a good choice economically, massively driving down supply chain costs, but cuts out an insane amount of carbon from air travel and dramatically reduces the need to over consume precious water resources.

As we look across our portfolio, we see that when selecting companies based upon strict consumer surplus benefit criteria, our process bakes in an automatic ESG component because improved economics ALWAYS improves ESG if you measure value by this metric. By flipping ESG selection around, looking for incredible consumer surplus impact first, we’re hard-coding our fund to only invest in ESG positive companies because they secretly go hand-in-hand.

Perhaps ESG funds should consider doing the same? Focus on game-changing, consumer-surplus generating ideas, and reap the ESG benefits that naturally occur when you invest for impact with strict economic benefits in mind.

To do ESG right, let consumer surplus be your guide. Economics align with environment and social good when we invest wisely.

A final note: new, exploitive technologies do not generate consumer surplus, they profit from monopolies or exogenous factors such as chemical addiction and resource exploitation for short-term financial gains and massive negative externalities born by someone else. Again, consumer surplus leads the way in accounting for and avoiding such schemes.

I Asked Chat GPT How It Sucked, Its Response Is Worth Paying Attention

While I’ve been trained on a diverse range of sources, I might struggle with very nuanced or specific contexts…

“How do you suck?”

Understanding Context: While I’ve been trained on a diverse range of sources, I might struggle with very nuanced or specific contexts, especially if the conversation requires understanding of very recent events or highly specialized knowledge that wasn’t widely available before my last training data update.

Your question is a bit broad and can be interpreted in various ways depending on the context. If you’re asking about limitations or areas for improvement in AI like me, ChatGPT, I can provide some insights:

Real-time Information: I don’t have the ability to access or provide real-time information or updates because my knowledge is static and cut off as of my last update in April 2023.

Emotion and Tone: Interpreting and responding with the appropriate emotional tone can be challenging. I aim to be neutral, informative, and respectful, but may not always capture the subtleties of human emotion or social cues perfectly.

Creative and Subjective Responses: While I can generate creative content, my responses are based on patterns in data I was trained on. This means my outputs might not be as original or nuanced as those from a human, especially in areas requiring personal taste, judgment, or current cultural nuances.

Specific Personal Experiences: I can’t draw from personal experiences or opinions because I don’t have personal consciousness or life experiences. My responses are generated based on the information I was trained on.

Precision in Complex Tasks: For complex or specialized tasks (e.g., advanced technical problems, medical advice, or legal interpretation), my responses might not be as accurate or reliable as a professional’s guidance in that field.

If your question was intended in a different direction or if you have a specific query in mind, feel free to provide more details!

Message ChatGPT…

ChatGPT can make mistakes. Consider checking important information.

Author’s Note: The image used for this post was ChatGPT’s response to the query, “Create a visual representation of yourself”.

For Crypto to Live, It First Must Die

Governments hate stuff they can’t control.

The beauty and promise of cryptocurrency is that Bitcoin and Etherium truly became the worlds first fiat monies divorced from any government backing. Yes, use of fiat is blasphemy to crypto die-hards, but for crypto currency to succeed as a global currency, we need to have an honest conversation about what fiat really means, and how crypto must kill off it’s government independence if it wants to truly reach its full potential.

Fiat currency is a medium of exchange that has no intrinsic value, unlike gold and other precious metals, that have industrial and artistic use with value apart from its circulation as money. Fiat currency has value because we believe it has value, and thus becomes a store of value and medium of exchange. Fiat currency to an economist is money that only has value because we have faith in it, and it has no use otherwise.

In this way, crypto currencies are true Fiat monetary systems in a pure way. Divorced from any government backing, and with an alternative use case of zippo, they truly are a medium of exchange that is divorced from everything. And therein lies the rub.

Governments hate stuff they can’t control. And Bitcoin/Etherium are far from their reach. The Satoshi’s and Buterin’s of crypto built their systems in such a way that governments can never, ever control them. And that is beautiful when it comes to creating the perfect fiat currency. No more printing money when you need it (looking at you Zimbabwe), and all the other money mischief devised by central banks that protect governments and hurt everyday people (for a good read on the various ways governments have done this, Milton Friedman has a great read by the same title if you click the link).

Governments have thus far reacted to crypto with what John Gottman recognized as one of the ultimate forms of rejection and contempt: stonewalling. This is when you just go quiet. Say nothing. Sit still. Ignore. The epic lack of regulatory interest in crypto is accomplishing its purpose: killing crypto silently.

Crypto currency’s promise, to have a stable system of exchanging stuff divorced from government mayhem, will never be realized until governments learn to accept that the future of currency is out of their control, but within their regulation. And this is where crypto lovers weep: regulation must happen for crypto to reach its full potential. In this way, crypto dies so that it can live.

In a world where we buy stuff and pay our taxes in Bitcoin and Ethereum, governments need to have rules around how money can be used. These rules include how to get paid back if you’re ripped off, how to track money to protect us from dark forces, and how to make sure people aren’t manipulating crypto markets and hurting consumers by restricting supply and demand. The public benefits of crypto currency are many, but only if the beast is trained to avoid destroying our freedom with its own.

And here lies the root cause of our current dilemma. A US Congress so old it might as well be a nursing home, led the way with the oldest White House leader ever, means that US leaders are too far removed in history to address modern problems they do not understand. Joe Biden remembers world war two as a kid. Ponder that and honestly ask yourself if he’s ready to suggest ways government can adopt the future of money. Yeah, I didn’t think he was doing anything either.

What the world needs right now is visionary leadership from a new generation of forward-thinking monetary leaders. Sadly, I’m not sure we have them right now, at least not outside of the developer community. Ouch.

How to Help Your Customer Reach Happily Ever After: A Princess Bride Quest

We’ll venture through four stages: Awareness, Consideration, Decision, and Loyalty / Advocacy and examine how to save customers from fire swamps that slow them down along the way. 

Whether you’re just starting to sell or you’re deep in the weeds of growth marketing, understanding your customer’s journey from awareness to rabid fandom is essential. Founders, let’s map your customer’s epic quest inspired by the timeless classic, The Princess Bride. We’ll venture through four stages: Awareness, Consideration, Decision, and Loyalty / Advocacy and examine how to save customers from fire swamps that slow them down along the way. 

Scaling the Cliffs of Awareness

To get to happily ever after, customers must first scale the Cliffs of Awareness. So, how do you make your potential customers aware of your offering?

Riddle me this: 

I am what you seek to spread the word,
A means to make your product heard.
To solve the puzzle, it’s plain to see,
Experimentation is the key.

Hint hint: there are 19 different channels that can be employed to build awareness, but only 1-2 will help your customers find you. The only way to find these channels is to test. Examples of these channels include: 

Once you identify your top performing channel, monitor its performance (e.g., how many clicks did your ad campaign get?) and test different messaging. Guide your customers, like Fezzik carrying his companions up the rocky cliffs, safely to your offering. 

Wading Through the Fire Swamp of Consideration

After your customers ascend the Cliffs of Awareness, they face a deluge of choices, like Westley and Buttercup navigating the perilous Fire Swamp.

As they research and evaluate their options, aid them in their quest by following these steps:

  1. Understand their priorities. (e.g., choosing between Apple iPhone and the Samsung Galaxy, the customer might consider price, features, design, and/or brand reputation)
  2. Create buyer-centric content: Develop content that addresses your audience’s specific needs at each stage of the buyer’s journey. (e.g., Zillow’s comprehensive home buying guides.)
  3. Leverage lead nurturing: Use email marketing, retargeting ads, and personalized content to keep leads engaged and guide them towards a decision. (e.g., Everlane’s targeted promotions.)

Empathize with your customer’s pain points and fears, and create content and testimonials that showcase your brand’s unique qualities. (e.g., Airbnb’s user-generated reviews and experiences.)

Are customers getting past the Cliffs of Awareness but struggling to make it past the Fire Swamp of  Consideration?  The only way to know is to measure and test messaging! (e.g., how many people clicked on your retargeting ads)

The Pit of Purchase Decisions 

In the decision stage, customers have chosen a solution and are ready to buy. If your purchasing  process is as torturous as the Pit of Despair, your customers will go no further and peril. 

If your customers are emerging victorious from the Fire Swamp of Consideration but dropping off in the Pit of Purchase Decisions (e.g., abandoned cart), attempt to save them just as Miracle Max saved Westley when he was “mostly dead”. Here are some tricks to try: 

  • Count the clicks: Know how many actions it takes for the customer to buy and make it as easy as humanly possible (e.g., Amazon’s one-click purchase; guest checkout; credit card autofill and Apple Pay)
  • Email your customers to bring them back to their abandoned purchase. You can even deploy product promotions (e.g., “Sign up now and save 30%”) to sweeten the deal. 
  • Re-examine your demo or sales script. Have an experienced sales person sit in on a closing call or review emails sent in the closing process, implement the feedback and test the new messaging.  

Happily Ever After: Loyalty and Advocacy

Congratulations, you’ve won the battle, but the journey is far from over. You don’t want a fake, short relationship (Boo!) like that of the King and Princess. Create a true and everlasting love between your customers and company like that of Westley and Princess Buttercup. 

Here are some strategies to foster loyalty:

  1. Exceed customer expectations: Go above and beyond to deliver a memorable experience that surpasses their expectations. (e.g., Chewy delivers flowers when a pet passes away and has an exceptional return policy)
  2. Personalize customer interactions: Use data insights to tailor your marketing efforts, offers, and communications, creating a bespoke experience for each customer. (e.g., Spotify Wrapped)
  3. Implement a loyalty program: Reward loyal customers with incentives such as discounts, exclusive offers, or early access to new products. (e.g., Starbucks Rewards program.)
  4. Regularly request feedback: Actively seek customer feedback and demonstrate your commitment to improving their experience by implementing frequently mentioned suggestions. 

When you show your customers love, advocacy becomes more natural. 

However,  if customers need a nudge to shout their love from rooftops, here’s a trick: 

Implement a referral program that rewards customers for sharing their positive experiences with friends and family. (e.g., Scott’s Cheap Flights gives users a month of free Premium service when their friends sign up or Dropbox’s famously good referral program that took them from 100,000 to 4,000,000 users in 15 months.)

Sharing the Storybook

As we close the storybook on our Princess Bride-inspired customer journey, remember the lessons learned from Westley, Buttercup, and their friends. From the rocky Cliffs of Awareness to the triumphant Happily Ever After, this quest is yours to write. And when you help your customers every step of the way, they will live another day to pass along the story of the great quest. After all, the best person to help a new customer up the Cliffs of Awareness is a friend who has emerged triumphant. 

Why Invest in a Sharia Compliant VC Fund

Shariah compliant VC funds provide proven economic benefits to LPs, GPs and portfolio companies including higher rates of return, diversity, less volatility in portfolio returns, and better alignment with environmental and social good.

Last fall, Oksana and I met with hundreds of prospective Limited Partners for our new fund. Among those who we realized had the best fit, were a significant number of Muslim investors, and they had some great ideas about how we could improve our fund performance by becoming a Shariah compliant fund.

Investing in Shariah compliant funds has gained popularity in recent years, as investors seek to align their investments with their values and beliefs. Shariah compliant funds follow Islamic principles (but are not limited to Islamic investors) and avoid investments in sectors such as alcohol, tobacco, gambling, and pornography.

Given our unadulterated devotion to ethically improving returns for LPs, we did our research and discovered that Shariah compliance is a fast growing investment market and provides many proven economic benefits to LPs, GPs and portfolio companies, including: higher rates of return, diversity, less volatility in portfolio returns, and better alignment with environmental and social good.

According to a report by the State of the Global Islamic Economy (SGIE) in 2020, the assets under management (AUM) of Shariah compliant funds had grown from $58 billion in 2009 to $121 billion in 2019, representing a compound annual growth rate (CAGR) of 6.7%. The report also projected that the global AUM of Shariah compliant funds would reach $174 billion by 2023. This is pretty impressive when you consider that CAGR is almost double traditional fund inflows.

On the economic benefits, the first advantage of investing in Shariah compliant VC funds is that they offer the potential for higher returns than traditional VC funds. A study by the Islamic Development Bank in 2015 found that the average annual return of Shariah compliant VC funds was 16%, compared to 13% for non-Shariah compliant VC funds. The study also found that Shariah compliant VC funds had a higher success rate in exiting their investments, with 78% of their investments successfully exiting, compared to 62% for non-Shariah compliant VC funds.

Secondly, Shariah compliant VC funds offer investors a way to diversify their portfolios. These funds typically invest in startups that are aligned with Islamic principles, which means they are likely to invest in a range of sectors such as healthcare, technology, and renewable energy. A study by the University of Maryland in 2015 found that Shariah compliant funds were more diversified than non-Shariah compliant funds, which reduced the overall risk of the portfolio. This means that investors can benefit from the potential for high returns from investing in startups, while also reducing the risk of their overall portfolio by diversifying.

Diversity leads to less volatility, our third area of economic benefits. In a study by Khediri and Charfeddine (2016) found that Shariah compliant funds exhibit lower volatility due to the diversification of their portfolios. The study analyzed the performance of Shariah compliant and conventional mutual funds in the Gulf Cooperation Council (GCC) countries and found that Shariah compliant funds had lower levels of volatility. The authors attributed this to the diversified nature of Shariah compliant funds.

Shariah fund reduced volatility is not only from their diversity, but is hard-wired into their selection process. According to a study by El-Gamal et al. (2017) found that the screening process used by Shariah compliant funds tends to exclude companies that are highly leveraged, which can reduce the risk of investment losses in volatile market conditions. The authors also noted that Shariah compliant funds tend to focus on long-term investments, which can lead to a more stable investment portfolio. Holy alpha!

Fourth, investing in Shariah compliant VC funds can provide investors with a way to make socially responsible investments. Shariah compliant funds avoid investing in sectors that are deemed harmful to society or the environment, such as alcohol and tobacco. This means that investors can align their investments with their values and beliefs, while also potentially generating higher returns. A study by the Harvard Business Review in 2017 found that companies that focus on social and environmental issues tend to outperform those that do not, which suggests that investing in socially responsible startups can lead to higher returns.

And as a secret bonus, Shariah compliant VC funds offer investors access to investment opportunities that are not available through traditional VC funds. These funds tend to invest in startups that are based in emerging markets, such as Asia and the Middle East, which have high growth potential but may be overlooked by traditional VC funds. A study by the University of Cambridge in 2017 found that Islamic finance institutions were more likely to invest in small and medium-sized enterprises (SMEs) than conventional finance institutions, which suggests that Shariah compliant VC funds may be more likely to invest in startups that are in the early stages of development and have higher growth potential to late-stage VC funds.

So yeah, we went all-in for Sharia compliance with zero regrets! Yeah, we want to generate higher returns with greater diversification, less volatility, invest in a sustainable and socially responsible manner, provide access to unique investment opportunities, and crush benchmarks for top decile funds. While there is no guarantee of returns with any investment, the academic research and published studies suggest that investing in Shariah compliant VC funds can be a viable option to make all our GP dreams come true.

If you’d like to learn more about Shariah compliance and VC investing, here’s links to the articles we mentioned above, and a few more we found interesting. Enjoy!

  1. Report by the State of the Global Islamic Economy (SGIE) in 2020: https://halalfocus.net/report-on-state-of-global-islamic-economy-2020-2021/
  2. Study by El-Gamal et al. (2017) on corporate governance in Islamic finance: https://www.oxfordislamicstudies.com/article/book/islam-9780195177831/islam-9780195177831-chapter-45
  3. Study by Khediri and Charfeddine (2016) on Shariah compliant funds in GCC countries: https://www.sciencedirect.com/science/article/pii/S0927538X16300237
  4. Study by Chaieb and Khediri (2018) on performance and volatility of Islamic and conventional mutual funds in Tunisia: https://www.emerald.com/insight/content/doi/10.1108/JFRA-05-2017-0051/full/html
  5. Article by Islamic Finance News on the performance of Shariah compliant funds: https://www.islamicfinancenews.com/shariah-compliant-funds-less-volatile
  6. Report by PwC on the growth of Islamic finance: https://www.pwc.com/m1/en/islamic-finance/assets/if-growth-m1-eng.pdf
  7. Report by EY on the outlook for Islamic finance: https://www.ey.com/en_gl/financial-services/the-outlook-for-islamic-finance-in-2019

Everyone Tells Me My Product Is Awesome, So Why Don’t They Buy It?

Polite people don’t want to tell you, “your baby is ugly.”

Many early stage entrepreneurs are truly baffled by the fact they get wonderful feedback from prospective clients, and may even have some unpaid pilots, but when asked to buy, customer silence is soul-crushing. Said one founder, “literally, everyone I show this to tells me what I’m building is awesome and they love it, but then I ask them to buy it and they go dark.”

If this is you, I’m about to reveal a shocking truth: they’re lying to you.

Polite people don’t want to tell you, “your baby is ugly.” So, humans tell white lies and say, “that is amazing.” Amazing, awesome, great, and beautiful are perfect words. They, and their many friends, convey a sense of wonder and accomplishment that doesn’t convey the fact that the person has zero need for what you’ve built.

If you want to get past platitudes, stop showing people your product and start asking them smart questions:

  1. How do you currently solve this problem?
  2. Why do you do it this way?
  3. Would you change anything about this?
  4. How would changing that help you?
  5. Will you walk me through how that happened last time?
  6. Who pays for this and why?
  7. Is there anything else I should be asking to understand this better?
  8. May I observe how you work to understand what you do better?
  9. Who else should I be talking to to learn about this?

If you have a cunning grasp for the obvious, you’ll notice that none of these questions are about your product/service or introducing it in any way. That is precisely the point. If you want to sell something, stop selling and start listening.

Studies show that if you allow your customer to talk around 60% of the time on a call, you have the highest probability of success. I generally recommend an 80-20 ratio, since I find most people don’t realize how much they are talking (myself included), and by targeting 20%, they end up closer to 40%.

When you ask questions about how a customer solves a problem and why they do it, you’ll gain insight on their interest and develop a better solution. Don’t worry, they’ll get to your solution soon enough. Focus on them first, and the sales will follow.

Diversity Wins

Every VC fund needs a token, white, male, general partner.

Sputnik ATX does mark-to-market portfolio updates quarterly and the results thus far have been fantastic (89%IRR, not that I’m bragging). Our goal is to help people reach their full potential, and we believe that IRR is a key outcome to measure if we’re doing our jobs well. Diversity is another measure of that success. How are we doing?

Two metrics we’re just as proud to cite: over 40% of our portfolio companies have a female founder, and over 20% have a black founder. How do we do it? We joke among our team that our secret to success is maintaining a token, white, male, general partner.

Yes, I’m the only white dude.

The fact that we have only one white male on our team gives us an unfair advantage. I highly suggest more VCs try this approach. If you’re a general partner (GP) reading this article, please consider ways to get your own token, white, male GP and do so NOW.

What we’ve learned at Sputnik ATX is that when diverse people (education, culture, work experience, ethnicity, gender, etc) all have a say in decisions, we make FAR better decisions. There is copious research to support me on this (check out this HBR article.).

We’re well past the time to continue to allocate capital to homogeneous white dudes and yet, the flow of capital to these funds is shockingly disproportionate and persists. It’s time for lip service to end, and action to begin.

At the risk of alienating allocators looking at our next raise, I just have to say to every fund of fund manager and pension fund manager, please stop giving money to funds where the GPs all look like me. It’s hurting your returns, its skewing investment away from quality founders, its exacerbating US economic apartheid, and preventing everyone from reaching their full potential.

Note: I highly suggest reading the links in this article, and the book on US economic apartheid is especially interesting. Also, after writing this article, Sputnik ATX shockingly found another white guy who joined our team as a temp this summer. Congrats Matt, you beat the odds at our fund. Let’s not get too comfortable. Our investor returns depend on it.

De-Risk Your Startup

Let’s take a side eye to the five general categories of risk that can doom your start-up and how you can best avoid them…

There are literally a million things that can kill your startup. Worrying about all of them will likely drive you nuts, and distract you from the “holes” right in front of you. So with an eye on the hole right in front of you, let’s take a side eye to the five general categories of risk that can doom your start-up and how you can best avoid them: product risk, market risk, financial risk, team risk, and execution risk.

Product risk is what most early stage founders and investors most commonly fail to measure. It is best framed in the economic measure of consumer surplus (the gospel of which I am an avid disciple). Are you producing something people want because the cost of acquiring it is far less than the value it provides to the user? To answer this question, you’ll need to listen (yes, stop talking) to a LOT of customers. Ask them how they do things, observe how they solve their needs. Question the root cause of those needs. Seek first to understand them before you begin showing off your so-called solution. When you can make something they actually want really badly for a cost far below what they are willing to pay, you have product fit.

Market risks that can doom your startup are most often found in distribution problems, market size, and competition/substitutes. Even if you have a product with massive consumer surplus for a party of one, you’ll never have a massive business if the total size of the market is minuscule, you can’t find a channel to get it to market, or if there is a competing solution that is half your cost. Most companies die because they fail to solve market risk by building effective sales channels. Too often VCs cite a company with a lack of product-market fit when in reality, the company has a great product and zero marketing. To solve this, focus on how you can make purchase decisions easy: convenient location of sale, ease of technology, elegant UI, one-click buy, marketing channel exploration, CAC/LTV ratios, etc. This is why we advocate for maker-founders to seek out help from proven marketing and sales guru investors who put in money and time into your company rather than advisors who both those things out of your startup.

Financial risk becomes a problem when the fundamental costs of doing business generate insufficient returns to sustain your business. Some are short term, like making payroll next week if your runway is going away. Some are longer term, like high upfront capital costs from inventory or equipment required to make or distribute your product/service. The key here is to keep a tight lid on costs and try to get profitable as fast as you can. Avoid splurging on that fancy office when a shabby one will do just fine (and use the savings to add the additional sales person who will help resolve this problem). If your company has significant upfront costs, you’ll need to carefully manage inventory levels and development expenses so that you don’t run out of runway before you’re ready to take off. Too often I hear founders complain that their company failed because they couldn’t get funding, when really, they couldn’t find a way to develop the product and market fit with the resources they had, when it was entirely possible to do so. They just failed to have a financial plan to match their access to resources. Yes, it does take longer to build a company without funding from VCs, and yes, we often don’t understand what we’re doing. So if you’re the smart founder who does “get it”, live within your means to do so.

Team risk is why most seed stage companies with $50k-$100k MRR fail to raise their series A. No one is going to drop $3-5mm on a company that, if the founder is hit by a bus tomorrow, blows into dust with them. Nor will a VC put real money into a team that has only product skills. If you want money to scale, you need to show that you can build a team that is better than the founder and has complete skills (product, marketing, sales, customer support, and finance). This means you not only need a team, but a team that says, “we’ve got this”. Hire folks who’ve done it before or have such impeccable academic qualifications that their abilities are not in doubt. Hire away a key person from a HOT growth company who has experience with the growth challenges you face right in front of you (note: Google is not a hot growth company, it is a stale corporate machine).

Execution risk will be the subject of a post later this month, but to summarize it best, it is when you get to $3mm in annual revenue and think you’ve “made it” when really, you haven’t even started the real race yet. The ability of a company to grow quickly under pressure, hire the right people, put in place proper culture, incentives, and relationships so that the company can prosper and run full speed is far, far harder than anyone thinks. Execution risk is the killer of would-be unicorns and turns them into someone’e distressed asset purchase or family business. Your ability to create a culture of performance aligned with your customers needs and economic value model will be the key to getting things done as you scale. If this is your start-up, DM me, and we’ll talk further. A paragraph here just doesn’t do that sentence justice.

So, overall, start thinking about how you can de-risk your startup by looking at these risks and how your daily activities, weekly and monthly goals help eliminate them as best possible. You’ll never get rid of them, but you can sure sleep better at night if you do.