Author: John Tough
getting into venture

getting into venture

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Fall 2010

August– Met with Professor Ellen Rudnick about different initiatives at Chicago Booth to promote venture and entrepreneurship. She introduced me to the Chicago Innovation team leaders. Met with the senior leaders there and quickly realized the program was significant more scientific than business model & scaling, where I wanted to focus.

August- Found a way to reach out to nearly every second year student that had some VC exposure and even some recent graduates

September- Met with (now former!) Professor Linda Darragh, who was launching the Impact Investing Summit in Chicago. She was looking to find companies that had both economic and social returns to present to a group of social impact investors. Met and reviewed 20+ companies over 2-3 months and then prepared them for “demo day”. My first real venture and early stage advisory experience. What a THRILL!

November- Applied to Hyde Park Angels and got very lucky to get in in the final spot. During that time it was still run by Ira Weiss (now leading Hyde Park Venture Partners!) and Sam Guren (epic venture investor!). Within months was the head associate for the business services vertical and we were reviewing businesses, meeting with entrepreneurs and analyzing multiple deals every week. Truly an amazing experience that shows an early VC the importance the requirements of vision, analytics, compassion and interpersonal requirements within the VC space.

Silicon Valley Exposure

December- Selected to participate in the Chicago Booth west coast VC trek. This opened my eyes. It was only 3-4 days but it was a magical trip. We met with a dozen venture and start-up firms over 3 days and got an abbreviated insight into the world of VC across multiple different industries and stages of focus. I was beyond hooked… I almost instantly confirmed all my intentions, and knew it was where I wanted to dedicate my career. The combinations of audacious ideas, big bets, the criticality of leadership and teamwork… I loved it.

Day 1: We met with three venture firms and two start-ups….. AirBnB (a month after they closed their Series A) and Optimizely (still pre-seed investment). We were all too focused on the Battery Ventures meeting later in the day to pay attention to the two leaders of these companies trying to tell us to drop out of b-school and join them. Whoops

Day 2: We met with 3-4 more venture firms. One that stood out was Charles Tai from Charles River Associates. He mentioned this report called the “PWC Moneytree Report” and said it listed all the venture firms. I took a mental note. My unstructured and competitive senses simultaneously told me that list was my gameplan.

Day 3: More VC firm meetings. The general theme was “give before you get” and find way to be proactively providing value to the entrepreneurial ecosystem and good things will happen. In a separate meeting another VC told us about how one of his “spray and prey” investments made visual word clouds. Terrible business? Likely. Great way to summarize the data gathering of the trip? Absolutely.

And so, I took my 10+ pages of notes and brought the keywords into the software…and boom… suddenly I had a soft, visually-engaging content way to introduce myself to everyone on the PWC Moneytree Report. Just an icebreaker. And here it is.

January 2011: Reach out to about 80 firms on the PWC 100 list. Found 1-2 partners at each firm where I could make some interpersonal connection. Here are some stats, as I tracked everything in a funnel, like a sales process! (I will be expanding on each stage with some incremental posts but this is the skeleton structure)

Outbounds or Introductions: 110+

Each inbound was light and easy and tried to have a basic connection with the VC based on either their investments overlap in my sector interest or some overlap in their personal interests that were listed on their site or public profiles (Twitter, blogs). I would state my case that I wanted to enter VC and recognized the need to get involved and provide value over the next 24 months of school. I essentially was shopping free help.

It has been well-documented how VCs like to have a set of longitudinal data on an individual for consideration to join the investment team. Mark Suster talks about this with his hires. He needs to see multiple years of data points and experiences to understand the candidate’s performance over time and their general responsiveness to all types of life issues. I couldn’t agree more with the importance of following an “individual’s trend”. Consider these outbounds as merely day 1 of a multi-year process to a formal job in VC. Having an online presence helps share some of your earlier data points, so continue to contribute your interests and general thought processes and action items, when applicable.

Reply engagements & communications: 70

There is conventional wisdom that most VC firms do not hire associates or interns. Many of my initial feedback emails from VCs were quick notes saying as such. But, maintaining a cheery attitude and willingness despite there being no job at the end of the experience is still a great way to keep the conversation flowing. In fact, both places that I ultimately received a job offer from had never had an associate before.

In these meetings I would indicate my area of focus and how I believed my sector interests, perspectives, and growing network (and huste!!) would be a complementary value to the VC firm. And with that background I would offer to be helpful in ANY way. I would always prepare (an hour + for each call) about the person and their investments. I would come with an idea to provide value to them and a specific portfolio company or two. And would always offer to do more for a potential next call.

One of the biggest surprises here was who responded. Very big name VCs would engage or pass me along to a partner in the fund after a few sentences appreciating the word cloud. Amidst all of the “we are not hiring” emails or non-responses seeing how very senior and reputable VCs treated me well when they didn’t know me yet was a nice touch of class and inspiration.

If I was paying it forward they were paying it backward.

Follow-up meetings (in-person or with more materials): 25

These were some pretty in-depth meetings where I would do whatever I had previously offered and then a boatload more. I was of the mindset that I was a free agent and with every meeting I was leveraging prior meeting intelligence gathered around industry terms and market trends. And with that positive feedback loop my conversations became increasing substantive and resulted in a number of referrals.

For any of these meetings I would say “happy to chat over the phone, or I will be in the SF area next Thursday” and if the VC agreed to meet in person, I would buy a flight that day and try to convince a few others to meet in person at the same time.

Take a meeting with everyone. Your goal is to get smarter with every meeting and to ultimately create a mini echo chamber so that in the off chance two VCs you have spoken with know each other (it is a small world in VC)  you can reference your communal relationship and begin to establish more credibility. And, if you are really providing value to these individuals, that positive contribution will be recognized and communicated as a method of thanks. Again, do this work even if there is not a job at the end of the tunnel with a specific firm. At worst, your learn and gain experience and gain a bigger network!

It was exhausting but a real thrill.

On-site broad partner “discussions” (interviews): 4 

They are never really called interviews but more exposure to other partners in the Fund to see compatibility. In general my approach here was ALWAYS to provide value and assume that they were busy and could look to me to be a mainly independent asset to supplement their work and go target and find industries that they were not fully into yet.

For my interview with the KPCB team I proactively analyzed two to three big industry trends and used an investing framework I was learning in school and from my ongoing meetings. I used those frameworks to assess the industry trends, identify where the best companies would be positioned and went and found a few of them. The goal was to show I already knew what the job was… even though I was (in retrospect) really oblivious.

Job offers: 2!

Both came in March of 2011 so it was a full speed initiative for those four months. And then the real work began!

lessons from business school

lessons from business school

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Lessons from business school

I am doing this with a few years separation so I am sure I am missing some of the intricacies but that should also help keep this more directional. A few background notes:

– I lived in Chicago prior to school, and therefore didn’t live in the “dorms” where many students end up living
– I didn’t go after a traditional on-campus recruiting job
– I prefer to have 1:1 or 1:few in-person meetings versus mass get-togethers and do my best thinking after listening for a while and going off on my own to process and formalize my thought process. I generally hate big room gatherings and the idea of clusters of people

With that, here are my lessons

1) Know your strengths and weaknesses and put yourself in a position to succeed on the job search front. This will mean saying no to many, many things and being patient as many others around you converge towards the latest on-campus event. There will always be something to do and somewhere to be and if you expend your energy in distracting areas, you will naturally reduce your ability to focus on the path of your main target.

2) Expand your reach socially. It is unlikely you will ever be in a place where you will have such an expansive set of stories and experiences from people who have absolutely no similarities to you. Get curious and, if possible, form working groups outside of your comfort zone. Look for social events that are new to you and go on a few trips to different parts of the world with people from the area. Learn from a local – it will make the experience more rewarding. These relationships will help develop your breadth of thought as well as your empathy and fascination towards initially foreign cultures. You will learn new questions to ask and new ways to approach problems and develop solutions.

3) Make friends with the faculty and engage them to uncover their experiences and motivations. Many students forget that our professors are more than just teachers. They have their own careers, their own stories and their own aspirations. This isn’t undergrad – you are more of an adult now and if you can connect with a professor as a professional and not just a teacher, the experience will expand your learning experience dramatically. But don’t do this for the grades – do this if you have genuine curiosity in their story. Professors see hundreds of students a year – they have great BS meters. Any fake intentions will be discovered immediately.

4) Take the best classes you can as early as possible in your 2 year stint. This way you will get access to the best professors early on (see part 3) and you will take those learnings and bring them to other classes within the curriculum and your job search outside of the curriculum. And do well in those classes. In general, this is one of the great parts of Chicago Booth- a supremely flexible curriculum that you can develop to your own aspirations.

5) Forget the hierarchy of first and second year. Everyone is there as a student looking to better themselves. Treat everyone the same: with respect, and continue to give forward any advice you have obtained. The higher your network (friends, school) reaches, the higher you will reach. Give even when there isn’t a certainty of reciprocation. And, this holds true beyond the walls of your b-school: engage with the community and if you are lucky, with other business school students at other schools. Your career is young and paths tend to cross un the unlikeliest of ways.

6) Use your spare time to improve yourself outside of the classroom as well! You wont have two years this “free” for a while… so tackle a new sport, get a pet, try an instrument, learn a new language or cooking technique. Whatever it is, just surprise yourself and go with it.

why business school

why business school

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To most aspiring MBAs, the tradition two year program offers a “reset button” to lateral into an industry outside of the applicants existing career track. And, depending on the target school’s strengths, the majority of applicants are usually aiming for a role within the services, advisory or direct investments field. When looking at the largest employers for the top 10 schools, similar names emerge: large investment banks, large consulting firms, select consumer goods firms and the occasional technology firm.

Most candidates have heard of the prominence and pay upgrades that these careers offer and give up two years of income and shell out around $125,000 for the right to prepare and pivot into one of these industries. Pause for a moment. That is $125,000 in after tax dollars of cost on top of (likely) a few hundred thousand dollars in lost income. So, around a $300,000 investment. Woah.

Everyone has their own unique reason to go to school. Some are even forced to by their firms.

For me, there were three main reasons:
1) The 2007-2009 crash showed me how isolating being strictly a finance professional can be during times of economic underperformance. And those finance professionals that were not balanced with a hint of operations experience and strong networks were the hardest hit. I saw the MBA as a way to expand upon my strong finance base, while simultaneously expanding my network to people in many verticals with many different areas of interest. I recognized that my network within finance was pretty homogenous and I wanted to expand.

2) I had developed the start-ups and growth bug and loved the fact that superior operating advice and financing structure can yield outsized outcomes when paired with the right teams. I knew I was not founder material – as I had way more interest in the strategic levers of growth and the ways to finance different business models to optimize growth & trajectory while limiting the downside. I realized pretty quickly that the start-up market is woefully inefficient as companies balance growth aspirations and capital requirements and my ability to provide insights into growth efficiency from Seed to a growth round was going to be a sustainable differentiator if I could develop those skills.

3) I dedicate 100% of my time to my current efforts. So while many people can spend half-ass a job while they are transitioning, I just don’t have that in my blood. I knew that two dedicated years to developing my skills and network was going to be way more efficient than doing so part-time or outside of my work hours at meet-ups, etc. Quite simply, I forced myself to create time in my calendar and hit a reset button of sorts. May have been an expensive way to do so, but I recognized my weakness.

And so, I took the GMAT (twice) and applied to a couple of schools. I got into Chicago, off the waitlist (woohoo! – found out on the tennis court in Florida, that was nice 🙂 )and from that moment on I started officially expanding upon my career plan that I had detailed in my application essay: to get into the venture industry.

biology to finance

biology to finance

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When I graduated from Duke University I proclaimed to myself that I had taken my last exam. No more studying, ever. And with a degree in Biology and Chemistry, I was making the very logical next step to enter investment banking. It was 2007, finance was still (momentarily) the rage, and ethanol was still slightly the rage and between some midwest connections and the tiniest of Venn diagram overlap between ethanol and my life sciences degrees, UBS Investment Bank deemed I was one of the right candidates for their largest analyst class, ever. In retrospect, that should have been a pretty good indicator to the top of the market / finance bubble. There were not even enough training desks for all of the analysts!

Thankfully by the time I actually got to the Chicago office most of the ethanol deals had gone the way of history and I focused on a mix of M&A and midwest coverage- getting the full spectrum of balance sheet and M&A strategy exposure. At first though, I totally fell on my face. My non-finance background proved a difficult transition into making M&A models, as my other classmates with more of a finance background raced ahead. I likely finished near the back end of my class my first year as an analyst and that was a difficult pill to swallow. But, over the course of that first year I had recognized my deficiencies and sought out some senior associates and directors to provide more direction: I admitted I needed to learn, and hunkered down.

And so, by my 14th month, my skill-level was growing at a near-vertical pace and I was the lead analytical resource in the midst of a 4 month M&A transaction working alongside one of those mentors. The deal had me in the office literally everyday for about 15-18 hours a day – with my curiosity, drive and fellow cubemates all helping me to get better. The hours were tough but it was a forming experience that ultimately earned me respect and a few more deals to learn from before my two years were up. The entire experience of growing professionally whilst outlasting every round of layoffs was a lesson I will never forget and I have some great mentors, friends (and a few grey hairs) to keep those lessons forefront.

And so, when I was looking at what to do next after my two years at UBS, two of the leading Managing Directors in the office went to bat for me and directed me to the XMS Capital team.

With XMS’ much more personal approach to advisory and (at times, co-investing) I was able to experience much greater alignment with the companies – and see to an even greater extent how the combination of relationships and hard word really do drive outsized returns for all parties. I was hooked. I was able to work across many industries: energy, technology, healthcare, retail (i even worked on starting up a music colliseum and surrounding mall). It was a great group of senior leadership at XMS that allowed their junior team to expand their scope – and I credit a lot of my fundamental business model learnings to them allowing junior staff to do much more analysis and engagement with the companies. Combining that enhanced engagement with access to those same leaders (at XMS and at the companies) to answer my myriad of questions and I really was getting a lesson in finance, strategy and growth execution.

And so, with only a year under my belt at XMS I thought I may stay forever but I had a nagging hunch that I needed to solve. More on that and why I chose to go to b-school next.

my ongoing journey

my ongoing journey

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On occasion I get asked how I ended up where I am in my career and how certain transitions of my career transpired. Given I have likely written 20+ iterations of the same email to many inquiring students & mentees, I figure it finally makes sense to put some of those thoughts and tips out here.

Overall, the biggest takeaway to me is how seemingly random events and acquaintances become pivotal. To most people, random means lucky; but I view random as the outcome to a function that somehow multiplies hard work, intelligence & curiosity, giving forward and staying hungry.

Anyways, here we go.

using surprise as a means to ask better questions

using surprise as a means to ask better questions

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If you have worked with me for more than a few days, you know my two favorite questions to ask when I am trying to better understand a situation are:

“What surprised you about [x]?”
and
“What will surprise me about [y]?”

I love these questions because if they are answered well, the conversation is engaging, insightful, and educational. If approached well, the questions allow the answering individual to display a combination of empathy and EQ, as well as capability to handle what can be a non-linear progression.

And, while these questions are great to ask others, sometimes they are even more effective when performing your own self-review. If something notable happens and it catches you by surprise (or does not catch you off guard) there is a reason why… and you should reflect to see what drove your handling of the situation. It will help you in spades as you continue to progress personally and professionally.

treat yourself to a zero dollar marketing budget

treat yourself to a zero dollar marketing budget

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There are many lessons you learn early in a VC career. You learn how to identify product-market fit, size a market, evaluate a team, review the business model and determine scalability within the market position. The list could go on for days.

And yet, one of the items that I only slightly recognized in my ongoing venture experience – but ABSOLUTELY recognize in my operations experience is the importance of establishing a very lean (or non-existent) marketing budget for the early stages of a company. There are two main reasons why:

1) Organic / “free” customers that are naturally drawn to your product for the service you offer are VERY different customers than customers acquired through paid channels. The cohort analysis on an organic customer will (almost) always show significantly improved economics versus a paid customer. Solving for your core user base and improving the product-market fit by not being distracted by more secondary, paid channel customers is key. Quite simply, paid customers could hide the real solution you want to solve for with your early adopters. Optimize for those early customers before expanding.

2) Venture capital firms expect a 30-50% annual return on their capital. It is pretty dam hard to get a 30-50% return on marketing dollars. There are many high flying adtech firms out there promising returns of +1-2% more than usual channels – and those companies are still questionable in their success. And even more scary is that if there is an easy way to get a 50% return on marketing dollars, the returns will quickly be competed away by competitors. Just look at the food delivery market. Competition will drive down returns to marginal cost. Combine that with sunk cost bias and you can see why VCs and high flying unicorns are raising hundreds of millions of dollars for what can quickly become a commodity product.

Jim Goetz at Sequoia Capital made a great comment in a recent HBR article that I believe demonstrates the danger of excess capital, usually spent in marketing.

“In our portfolio there is a correlation between cash required and long-term market cap—but it’s negative. The more you raise, the less value you create. Google, Cisco, and Oracle were incredibly efficient with their cash, as were ServiceNow and Palo Alto Networks. Those companies all had market caps north of $10 billion within a couple of years of going public. One curse of raising lots of cash is you lose that discipline. We discourage our teams from raising too much capital.”

Yes, you are reading that right. More cash = less success.

In summary, when you raise money as a young company, focus on nothing but customer-driven product development. Focus on listening to your early customers to create an amazing product that will serve them so well that the customer not only WON’T go anywhere else, but actually CAN’T go anywhere else to meet their needs. Save that money to hire better engineers and do more customer inquiries. In fact, I challenge you: give yourself a $0 marketing budget for the first 12 months and see how scrappy you can become. You will thank yourself later – because when you are ready to let yourself enter the paid customer acquisition channels, your barrier to entry and competitive advantage will be significant.

deliberate diversity

deliberate diversity

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When I lived in London growing up I was immersed between locals, a host of ex-pats, and many African and Asian students that flocked to UK schooling to advance their education. The diversity of backgrounds was significant and it was arguably one of the most transformative and curious four years of my life. In any given week I would learn an Ethiopian tradition, how the local British kids has different curriculum expectations and then how many ex-pats from all over the US viewed different ongoing social events.

I loved the difference every day brought and yet I took it all for granted. You do not realize when you are growing up just how easy it is to fall into a comfortable cultural norm, to shut yourself off from new perspectives and only surround yourself with individuals of similar belief to your own. For many individuals, the most diverse years of their life occur during college, when they are forced together with thousands of other students. How disappointing us that?! How disappointing is it to know that for most people they are not going to learn (and therefore respect) more about other cultures or lifestyles beyond the age of 20.

Much has been written about the lack of diversity in Silicon Valley — mainly on gender and race. Companies that take deliberate action early on to remove the anchor, or expected “normal” will win. Engagement will be higher. Empathy to the customer and the ecosystem will be more noticeable. Long term value will be a mere output. Companies like Slack are the pillar of this movement. I am so confident that their diversity approach will make them a generational winner both as a communication tool and as a social demonstration for the outsized returns generated from the curiosity and empathy of inclusion.

People and companies have to take deliberate actions to expose themselves to new perspectives. There are many reasons why my experience in the UK was so transformative, but the single most important is this fact:

There was no single ethnicity at the school that was “normal” and there was no single background that was consistent.

Imagine that. When there isn’t a default opinion or set of biases that we know to fall back upon, everyone is more open. Everyone is more curious. And the result? The cumulative environment is greater than the sum of its parts. Forget valuations being a sole benchmark for a unicorn, let’s talk billion dollar social & capital return and that is where the true, rare unicorns exist. And I bet we are going to find out that social influence married to a great business model is going to equate to an outsized hundred billion dollar + company with world-impacting change. If this is not the most motivating idea to you, the idea that Silicon Valley may be able to intertwine social acceptance into business models, then you are in the wrong century. When companies like Slack and others prove successful, other companies around the world will slowly adopt the social-influence mantra, and then, Silicon Valley may have just disrupted the workplace.