Part 4 - How I Underwrite Founders and Opportunities: Investment Mechanics and Art vs Science

This is the final part of a four-part series on how I approach underwriting founders and opportunities. In part 1, I covered why people always come first. In part 2, I covered market understanding and the $100m revenue question. In part 3, I covered team-building dynamics and founder traits. Now, let's dig into investment mechanics and why this is ultimately more art than science.

Entry Price and Outcome Math - Understanding Why and How Valuation Matters

This is one you are going to hear a lot (and I mean A LOT!). Which is the ever-famous line: 'Price matters.' And yes, it does, but it doesnt exist within a vacuum. It only matters relative to outcome opportunities. If I truly believe an outcome might be $500 billion, then passing on a seed round at $100M is foolish. And this is a hill I will die on.

PRICE ALONE WILL NEVER MAKE ME PASS ON A DEAL. I believe more than anything that my primary responsibility as a VC is getting in early to companies at a price where I can envision at least a 100x return. I'm looking for really big multiples on my entry point.

I hear all the time about how funds won’t ever invest unless they get 10% ownership upon entry - and I don't know where that comes from. It is totally misplaced. For many reasons, but the biggest is: the idea that they can use backward-looking valuations as legitimate benchmarks for what is possible in the future. It is mindboggling to me that this still persists.

In the future, everything is bigger. Our entire financial system is built on increasing productivity and value. So, when I think about entry point and ownership, it’s not a percentage target I’m looking for upon entry; it's the outcome upside based on the size I can get. I can understand why people think it sounds good to say, ‘we always get 10% and we only write checks between 1m-3m.’ And, in many cases, it does make sense. BUT, if you truly think a company can be generational, it’s horrible advice if it means you end up with an adverse selection bias. I see this ALL THE TIME. Many VCs are not solely interested in investing in the best companies. They’re only interested when they can get 10%. This approach is ludicrous to me, especially when I think of emerging managers. I’d much rather have 1% of a generational team than 10% of a goose egg.

In Layman's Terms: Outcome Upside

There is only one way for me to look at this: Am I buying enough of this company that if it works, it can 2x, 3x, 4x my entire fund? That is all that matters to me. I know this is different for everyone, and just like portfolio concentration arguments (I will write a long post on this one day as well), I also fully believe there are multiple ways for VCs to win. (So, if you’re a 10% target VC and reading this, I do believe you can win your way. BUT it is not my way.) Once again, I’ll return to an example of one of my favorite debates: the argument between saltwater and freshwater economists. Both sides argue their way is the best, when the reality is that static solutions will never fit dynamic situations. Startups and markets are not static, so I don’t approach them as such. Hence, my entry point approach, like my economic belief, depends on the situation. At the end of the day, the opportunity size outweighs everything.

As I mentioned earlier in this series, Rock Yard exists with the sole purpose of finding and investing in Signature Deals. Everything I do is in pursuit of that singular goal. This series, like the ones before it and after, are all with that in mind. My podcast, my research, my events, everything. And what that means is sometimes price or ownership or 'frameworks' are secondary.

A Few More Thoughts - For the Soul

Which leads me to the last thing I will cover in this series: all underwriting in early-stage venture is more art than science in the early days. I’m balancing the values of all of this, and in due time, I may bend on any of this if some portion of the puzzle weighs so heavily that I just have to be part of the company journey.

I know for a founder, that could be frustrating as hell, like hitting a moving target. In my own way, I deal with it as well when I’m meeting potential LPs. Shit, there are plenty fund of funds that won’t even take the time to meet me - I send an email, and the response is no thanks, not interested. Does that deter me or convince me that I won't be successful? Absolutely not. But does it totally hurt my feelings and make me feel shitty? Yes. It does.

We Are Not Single Points in Time

So with that being said, always remember that none of us are single points in time. Where we are today does not dictate where we will be tomorrow. Or even who we will be. I love the book Atomic Habits for this exact reason. We can change and improve ourselves.

Going back to the part about being coachable - we can coach ourselves. When I was younger, I wasn't as good at that. As I gain age and maturity, I like to think I’m getting better. BUT, the quality and type of people we take advice from matters. Not all advice is good advice, and not all advisors are suited to give advice on every topic.

I go out of my way to pick my mentors and advisors carefully, and when I read, which I do A LOT, I’m constantly applying a bit of a filter to only grab what works for me. Because what works for me may not work for everyone, and vice versa. We’re all unique.

I went to prison, and I’m covered in tattoos. Some LPs won't mess with me no matter what I do. Rather than try to change that, I now spend more time trying to qualify if someone is worth me getting to know. For example, the fund of funds that passed on talking to me, in truth, even though it hurts my feelings, did in fact save me the time I would have spent prepping for the call, taking the call, and following up from the call.

My biggest learning as it relates to this: When you find your champions, cherish them. I trust them to help guide me and educate me for improvement. This brings me to apprenticing - something we should never outgrow.

The Apprenticeship Business

I believe pretty much everything in life is an apprenticeship business. I especially believe it in venture investing and startup building. This is why so many companies can spring from other companies, such as the PayPal mafia or the Palantir mafia, or look at the early YouTube and Google crew - they are crushing it.

The same goes for VC, which is why I already know the way I underwrite will change over time, because I will get smarter over time. I hope to adjust accordingly. Just as I mentioned, Rich Wong taught me things earlier in this series, I've also learned a ton from Hunter Walk at Homebrew, Mamoon Hamid at Kleiner Perkins, Jon Bradford at Dynamo (my awesome old boss), and many, many more. Sometimes it’s a single sentence or conversation that unlocks a new piece of information, sometimes it is emails or Zoom. Learning (and mentoring) comes in all shapes and forms. Don’t let anyone tell you how to do it. Life and learning, like venture investing, are constantly evolving processes.

The Transparency Philosophy

Once more, I want to reiterate that this series on how I underwrite founders and opportunities is not meant to tell you or anyone else what to do. Its only goal is to offer you a bit of how I see things right now. More transparency is always a good thing, which is why those who know me are aware that I have 'read' receipts turned on on my phone. This is my attempt to do the same for founders, LPs, and other investors - increase transparency, and I’ll do my best to update this framework over time.

What This All Means

Although it's not perfect, and it evolves as I learn more, the goal is to create and define a repeatable lens, aka, a universal measuring stick. And, while I have frameworks and systems, there are still moments when the framework points in one direction, but my gut says something else. When a founder doesn't check all the traditional boxes but has something special that makes me believe they can build something generational - I will still say yes.

This is why it's more art than science. The frameworks help me make better decisions and communicate my thinking to LPs and founders. Over time, it allows me a metric to measure against, reflect on, and learn from. But it is harder than we care to admit. I'm making bets on people and their ability to build something that doesn't exist yet

I know I won’t be right all the time - but I must be right on the investments that matter. I must find those signature deals that can return entire funds and create generational value. That is my purpose and pursuit.

This series is part of that pursuit. The more thought and awareness I have about how I think, the more likely I am to improve it.

If you made it all the way through to here to the end, thank you. I hope you found something helpful.

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Thanks for following this four-part journey into how I underwrite founders and opportunities. The conversation continues. If you're building something in the build/move/make space and this resonates with you, I'd love to hear from you.