Edith Yeung’s 2017 China internet report

Our very own 500 China partner Edith Yeung just released her China internet report. This 67-page report includes everything you need to know about China internet landscape including China vs. US internet by the numbers, China internet market size, top China startup cities, venture capital, smartphone landscape, major Chinese internet trends including messaging, mobile payment, Cryptocurrency, shopping, bike sharing, live streaming. gaming, eSport, artificial intelligence, and education.

Here are some of our takeaways:

  1. China internet future is really bright…
  2. China is the leader of messaging, mobile payment, bike-sharing, gaming, eSport, live streaming and online education industries.
  3. China’s domestic market for mobile payment, bike-sharing, gaming, eSport, live streaming and online education is big enough that many players are not looking outside of China.
  4. Government support is instrumental China wants to dominate artificial intelligence and the government is pushing hard to make this happen.
  5. To experience China, you need to spend time in Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou
  6. China is the world’s largest education market with 144 Million online users.
  7. China is the world’s largest cryptocurrency market and is developing its own digital currency.
  8. WeChat is Facebook, WhatsApp, Tinder, Paypal and Slack combined.

 


Edith Yeung is the head of 500 Startups Greater China and partner of 500 Mobile Collective Fund. Edith invested in over 40 mobile, VR, AR, AI and machine learning startups, including Hooked,, DayDayCook, Fleksy (acquired by Pinterest), Human (acquired by Mapbox), AISense, and many more. Before 500, Edith worked with companies like Dolphin Browser, Siebel, AMS, AT&T Wireless and Autodesk. For more from Edith, you can follow her on Twitter and Linkedin and newsletter

Part 2: 27 Interview Questions to Find the GREAT Growth Hackers (& Weed Out the Big Talkers)

In my last article, I gave the 7 Focus Areas Every GREAT Growth Marketing Hire Should Know, but there’s still some tools you need to have in your toolkit to find a GREAT growth hacker. Why? Because big talking growth hackers will blow smoke that may blind founders who are not trained in interviewing GREAT growth hackers.

For example, you may ask one of my focus area questions, like:

“Do you have experience with Mixpanel?”
A Big Talking Growth Hacker will answer: Absolutely I used it all the time in my past role.
But what they really mean: The engineer sitting next to me was always talking about the difference between events and properties, but I don’t understand it.

Or you might ask:

“How about Google Analytics?”
A Big Talking Growth Hacker will answer: It’s my favorite app. I know it inside out.
But what they really mean:  I’m used to going in, finding a graph that looks up and to the right, and then sticking it into a presentation to show it to my boss.

It’s one thing to know the term, it’s a totally different thing to have done used it at the scale and proficiency your startup needs.

Below are 27 Interview Questions to Find the GREAT Growth Hackers (& Weed Out the Big Talkers):

1. They know how to get traffic

  • Question 1: Without using Dropbox, Facebook, and Hotmail, what are your favorite viral loops in the market? How would you design a viral loop for our business? Are there any tools you’d use that don’t require coding? Desired Answer: if they don’t have one, that means they aren’t looking for one. If you’re a curious growth hacker, you probably encountered one in the last couple of days.
  • Question 2: If we were to hire you, what would you do the first week to improve our SEO rankings? What tools would you use? What websites, access, and passwords will you need? Desired Answer: Do they ask for Webmaster Tools? Google Analytics? Do they know some SEO Tools?
  • Question 3: In previous jobs, what was your paid advertising budget and goals?
  • Question 4: In Adwords, do you prefer single keyword ad groups or grouping? Up to how many keywords in each one? Desired Answer: It doesn’t matter their answer. There are good reasons for both. That being said, be aware if they seem to think, “I can’t believe this guy goes into that much detail…” If so, they probably are not proficient.
  • Question 5: Ask them about a particular pay-per-click metric (cost per install, per signup, per free trial). Ask them about CTRs from past ads to see if they remember them.
  • Question 6: We run Adwords Campaigns for Countries/Cities/Regions to Achieve {X} business objective… What campaigns would you run, and how would you structure them? Further Prompts: What will be the break up of the campaigns or ad groups? What are the settings they’d pick?
  • Question 7: We run Facebook Ads on Multiple Countries/Cities/Regions to Achieve {X} business objective. What campaigns would you run, and how would you structure them? Further Prompts: What will be the break up of the campaigns or AdSet? What will be their settings on Facebook? What will be the audiences they’d target? What will be the conversion pixel they’d optimize for?Also, look for them to tell you how they’d do a remarketing campaign for retention.

2. They are a tracking pro

  • Question 7: What were your Urchin Tracking Module (UTM) tagging practices on your last job? Further Prompts: How did you tag people coming from Facebook Ads vs. people coming from Facebook Social? How did you do email marketing vs. search?
  • Question 8: Given what you know about our business, what are the main events and properties you’ll send to our tracking software? What would be the code that you’d send to engineers? (Give them a computer to Google it). Desired Answer: When Googling, they should go right to the developer’s documentation of Mixpanel, Amplitude, or Kissmetrics and grab the javascript.
  • Question 9: What Split Testing Software do you recommend we use? Why? How is it different from the others?
  • Question 10: If we were to do a Split Test of our landing page/checkout/{insert section you want}, what would be the level of confidence you’d want? How would you know if the test is statistically valid?

3. They write persuasive copy

  • Question 11: Create a Facebook Ad for our business based on X landing page.
  • Question 12: How would you improve X landing page headline? What would be an alternative headline you’d test? Desired Answer: You’re looking for how quickly the candidate come up with persuasive wording, and if you like the wording. After all, the ads the candidate writes represent your company!
  • Question 13: If we were to do a content marketing effort (like write an article, webinar, ebook, or white paper), which one would you choose? What would be its title and the table of contents?

4. They convert using UI/UX design

  • Question 14: Aside from Slack, what’s your favorite onboarding funnel? Why?
  • Question 15: How would you improve our onboarding? (Show them your current onboarding)
  • Question 16: Tell them they can ask questions about what you do in other channels, cases. Desired Answer: See if they think multichannel.
  • Question 17: What are some of your favorite landing pages from real companies? Desired Answer: Will tell us if they are paying attention to landing pages.
  • Question 18: How do you get inspired? How do you save things you like? Desired Answer: They should have a folder or tool they use to store cool things.

5. They know how to handle data

  • Question 19: What dashboard would you build for our business? What are 5-10 key metrics you would monitor? In what timespan?
  • Question 20: Write SQL (Structured Query Language) to query the number of {“x” events} per week for this year.

6. They’re a great communicator

  • Question 21: How would you write an email to one of our engineers to implement the changes you suggested to our landing page/onboarding? What extra info you would add? Desired Answer: You want somebody that is clear and will support things with pictures, video, and links to API documentation/libraries.

7. They a stubborn learner

  • Question 22: Can you remember something that took several experiments to crack?
  • Question 23: Give an example of a time in your life when you persisted. Desired Answer: This can be a personal experience. Do they have a black belt in Brazilian jiu-jitsu? Have they finished an Ironman?
  • Question 24: What blogs do you read regularly?
  • Question 25: What book are you currently reading?
  • Question 26: What podcasts do you subscribe to?
  • Question 27: What are some conferences you want to attend? Courses your want to do? Desired Answer: You want to see that they are learning continuously. You also want to know how they keep themselves updated.

Depending on the candidate’s knowledge the interview can last more than an hour. Give them a heads up, and let them know you ask very detailed real world questions. You can also send some of your questions in advance via email (but send only some to ensure they don’t have a someone helping them answer).

These questions are VERY specific. If you’re not a trained growth hacker, you might not know the answers yourself. But these 27 questions will trigger good conversations, and you’ll see how much your candidate actually knows by how they explain it to you.

I honestly believe interviewing this way will save you A LOT of time, money, and headaches. You’ll avoid the Big Talkers or at least you’ll know if you decided to hire one or a half-baked Growth Hacker)! And most importantly, I guarantee, these questions will help you find a GREAT growth hacker.

FAQs

Do you have a Hiring Book/Interviewing Book to Recommend?

Who by Geoff Smart. It is a more digestible, less corporate version the book “Topgrading,” written by the author’s dad, Brad Smart (the guy who helped Jack Welch at GE). If you want a thick book to knock someone out, I do think Topgrading is a better choice. It’s boring and dry, but who says hiring should be fun!

Does he/she need to know how to code?

No. But it helps! A LOT. A least the minimum to be able to communicate effectively with engineers (depending on the engineer… this is not an easy task!)

Do they need to be proficient in all these areas?

This is about hiring a GREAT Growth Hacker, right? If you want GREAT, yeah they do.

But I understand sometimes you get what you can pay for. At least these areas / questions will help you understand their weaknesses, so they can improve or you can hire help or outsourcers to support weaker areas.

IMPORTANT: I’m talking about hiring A SINGLE person. Once you are showered with money in your Series A, B, C… Z, you’re probably better off creating a “Growth Team” where areas are covered by more than one person.

My Ask for You?

Was this article helpful? Yes?

Then PLEASE PLEASE PLEASE Share it Everywhere. Yes, EVERYWHERE.

Twitter, Facebook, GrowthHackers.com, email it to friends & CEOs.

It will help A LOT of founders conduct better interviews and avoid VERY COSTLY mistakes.

And of course… let me know on Twitter (@juanmartitegui) what you think!

If I get enough love… I’ll write next about How to Create & Train a Growth Hacker (with training resources included)… This is great if you can’t hire a growth hire with enough experience or expertise.

 


Made in Argentina, Juan Martitegui is the Founder of VirtualiaNet, The Biggest Teleworking School in the Hispanic Market. With more than 11,000 students (and growing rapidly), he and his team teach people how to find and perform in jobs they love without commuting or going into a traditional office. When Juan is not working on his businesses, he is probably finding great startups to invest on as a 500 Startups Venture Partner in the 500 startups fund, reading some strange book on evolutionary psychology and persuasion, trying to improve his Rubik’s cube solving times, or spending time as a father of Pedro and Felipe and husband to Marina. For more from Juan, follow him on Linkedin or Twitter.

Part 1:  7 Focus Areas Every GREAT Growth Marketing Hire Should Know Inside & Out

Since I started working at 500 Startups the question I get asked most often (aside from, “What’s Dave’s email address?”) is, “Do you know a great Growth Hacker?”

And my always answer is, “No I don’t. If I did I’d hire him myself”

Why? Because since the term “Growth Hacker” (definition here, here and here) was coined, thousands of people have popped up claiming to be a GREAT growth hacker… But few people actually are a GREAT growth hacker.

To make sure you’re hiring someone who’s actually a GREAT, it’s important to make sure they’ve “been there, done that”. Do your due diligence by deep diving into these 7 Focus Areas Every GREAT Growth Marketing Hire Should Know:

  1. They know how to get traffic
    • What’s your experience with Facebook Ads?
    • What’s your experience with Adwords?
    • What’s your SEO experience?
    • What’s your experience designing and implementing viral loops?
  1. They are a tracking pro
    • What’s your experience with Google Analytics?
    • What’s your experience using Mixpanel, Amplitude, Kissmetrics, or another tracking tool?
    • What your experience with Google Tag Manager?
    • What’s your experience with Javascript?
    • What’s your experience split testing? Do you have a software preference for split testing?  
  1. They write persuasive copy
    • What’s your experience writing ads?
    • What’s your experience writing lifecycle emails?
    • What’s your experience writing landing page headlines?
    • What’s your experience launching and maintaining content marketing initiatives?
  1. They convert using UI/UX design
    • What’s your experience designing landing pages?
    • Have they ever designed a funnel?
    • What’s their favorite landing page software?
  1. They know how to handle data
    • How good are you with numbers?
    • Do you know how to use excel?
  1. They’re a great communicator
    • How clear of a communicator are you?
  1. They a stubborn learner
    • Do you love to learn?
    • Are you persistent?

Your candidate isn’t a great growth marketer if they don’t know these 7 focus areas inside and out. Make sure you deep dive into each of these buckets, so that you don’t make the painful and COSTLY mistake of hiring the wrong person.

Stay tuned for Part 2 next week when I help you weed out the “big talkers” who can BS the above focus area questions.

 


Made in Argentina, Juan Martitegui is the Founder of VirtualiaNet, The Biggest Teleworking School in the Hispanic Market. With more than 11,000 students (and growing rapidly), he and his team teach people how to find and perform in jobs they love without commuting or going into a traditional office. When Juan is not working on his businesses, he is probably finding great startups to invest on as a 500 Startups Venture Partner in the 500 startups fund, reading some strange book on evolutionary psychology and persuasion, trying to improve his Rubik’s cube solving times, or spending time as a father of Pedro and Felipe and husband to Marina. For more from Juan, follow him on Linkedin or Twitter.

7 Marketing Secrets from 500 Startups Demo Days

Have Fun, Get Deals Done – The Future of Marketing is the Brand Experience

Pitching to top Silicon Valley investors like Tim Draper is nerve-racking. It helps when he’s dressed in a superhero costume.

From Valentine’s Day-Themed (Batch 19) to Summer of Love-Themed (Batch 20), 500 Startups Demo Day is more than a pitch day, it’s a festival where everyone has fun and gets deals done.

Here’s a look back at lessons we’ve learned from the last 7 Demo Days, and how 500 Startups stumbled upon creating the unique pitch day in Silicon Valley.

1. Listen to Your Audience

Back in the day, 500 Startups Demo Day was pretty basic (see Batch 8):


500 Startups Founding Partner, Dave McClure, speaking at 500 Batch 8 Demo Day (back when the most colorful thing at Demo Day was Dave’s language).

During Batch 13 Demo Day, things got a little bit more interesting.

It all started when I bought Dave a unicorn hoodie for his birthday, which happened to coincide with the Batch 13 Preview Day (an invite-only sneak peek to Demo Day). To our surprise, many investors and founders in the audience loved Dave’s unexpected fashion statement, talking and tweeting about it.

Dave noted the audience engagement and decided to wear the unicorn costume again on Demo Day. He also encouraged Founding Partner Christine Tsai, a former ballerina, to wear a rainbow tutu. Again, the response was extremely positive at Demo Day. Silicon Valley Business Journal even dedicated an article to Unicorn theme.

The lightbulb turned on, and we saw the potential marketing value in bringing creativity to our Demo Days. But it wasn’t a mere fluke — we listened to the audience feedback, saw the marketing value, and applied it.

 

2. Turn Challenges into Creative Advantage

When planning for Batch 14 Demo Day, we found out the only day the venue was available was the day before Halloween. We were not happy. Typically we tried to plan our events around major holidays, like Halloween, assuming people would be busy attending their own company parties. We were worried about not having enough investors attend our event, but we couldn’t change the date. So we decided to exploit the timing instead. Thus, Demo-Ween was born.

In our past Demo Days, we always focused on the pitches, not wanting to take away from the big day of our batch companies. However, the thematic timing forced us to look at the Demo Days from a different angle. We decided to make Demo Days more entertaining. We added the Halloween theme to our Demo Day, aka “Demo-ween” — presenting the content in a new form. The new form of Demo Day allowed startups and investors to dress up, have fun, and get deals done together.

As a result, the Demo-ween not only helped us maintain the previous demo day attendance, it also attracted more international investors than ever before (50% increase). By presenting the content in a more engaging format, we turned a challenge into our competitive advantage.

The first Demo-ween was so successful, we decided to make it an annual theme. 




3. Use Product-Launches to Rejuvenate Your Brand

In 2016, we started adding speciality tracks to our seed program, starting with a Fintech track in the Batch 16 program.

In order to highlight our new Fintech focus, we made the Batch 16 Demo Day poker themed. In order to create an authentic experience, the 500 events team hired a top poker player to give attendees poker lessons and play blackjack. Founding Partners Dave McClure and Christine Tsai also dressed up for the poker theme.

Partly in thanks to a successful Fintech-Themed Demo Day, we saw a 23% increase in Fintech applications to the following batch.

4. Embrace Company Culture

During the Batch 17 program in June 2016, the 500 team and batch companies attended the San Francisco Pride Parade. Pride inspired us to redefine the meaning of “unicorn” at 500. In tech, a unicorn company means a billion dollar company valuation. We decided that being a unicorn also brings about a sense of love and unity. We are not only about making profits and increasing portfolio company valuations but also about celebrating people and culture.

The momentum of the Pride Month continued into our Demo Day planning process. We wanted to use the upcoming Demo Day as a platform to promote 500’s company value of embracing diversity and inclusion. We chose the theme “Beauty & the Geek” based on our B17 tracks Fashion & B2B and decided to break down gender stereotypes by having Dave dress up as the “Beauty” and Christine the “Geek”.

After Demo Day, Microsoft offered to sponsor our efforts to advocate diversity in tech by supporting our Unity and Inclusion Summits. Our open and embracing culture has attracted a very diverse group of companies. In our latest batch, Batch 20, 36% of our batch companies were international (from 10 different countries), 20.5% of companies had at least one female founder, and 25% of companies had a black / Latinx founder.

 

5. Make It About Your People

At the end of the Batch 17 Demo Day, a flash mob of the 500 team appeared from the audience and started dancing on stage with Dave. The big screen started playing videos of venture capital investors and founders of successful 500 portfolio companies around the world wishing Dave a happy birthday. The B17 Demo Day happened to be Dave’s 50th birthday and our 500 family planned a surprise for Dave.

The Demo Day birthday surprise is just one example of the many things that we would do simply because we care about people. We build the 500 brand by connecting with people on a personal level.

6. Create Positive Emotion

From the previous Demo Days, we began to see that themes created a supportive environment for founders and investors to develop relationships. For Batch 19, we chose a Valentine’s Day theme because we wanted to bring more emotion into the experience.

We dressed up our founders as Cupid (Christine) and the Queen of Hearts (Dave) and decorated the stage with all shades of pink and hearts. Investors could give batch companies Valentine cards that said, “I have my eyes on you!”.



 

7. Leverage Culture & History

Our Batch 20 program was based in San Francisco around the same time as the city’s 50th anniversary of the “Summer of Love” – the 1967 summer event that drew nearly 100,000 young people to the city’s Haight-Ashbury neighborhood. Starting from early spring 2017, streets in San Francisco were decorated with the “Summer of Love” theme. We decided to do the same theme for our Demo Day to pay tribute to the city’s history.

With flowers, rainbow-colored lighting and our emcee in a Grateful Dead bear costume, this Demo Day brought a sense of nostalgia to the city many 500 Startups team members call home.



Conclusion

Our Demo Days are instrumental in building the 500 brand. We strive to create an organic ecosystem of investors, founders, and corporate partners by providing meaningful and engaging content to our audience.

If your goal is to stand out from the crowd and flaunt your unique brand to the world, don’t forget to incorporate these 7 Marketing Lessons from 500 Startups Demo Days:

  1. Listen to the Audience: Gather feedback from your audience, catch the opportunity, and act on it
  2. Reframe the Challenge: Look at the problem from another perspective and turn challenges into advantages
  3. Inspire with your products: Rejuvenate your brand with new products
  4. Embrace Company Culture: Integrate the company values and culture to create a powerful marketing message
  5. Focus on People: Build a people-centric ecosystem to organically grow your business
  6. Engage your audience with Emotions: Create Positive emotions to Drive Connection and Awareness
  7. Integrate Art into Business: Leverage the power of culture and history in your marketing

500 Batch 22 begins July 24th, 2017 in San Francisco.

Click Here to apply for our the Batch 22 Seed Program.

More from Yiying Lu: 


yiyinglu-profile-square

Yiying Lu is award-winning bilingual (English & Chinese) artist and designer. Born in Shanghai China, Educated in Sydney Australia & London UK, now based in San Francisco, Silicon Valley, she currently is a Design Lecturer at the NYU Shanghai Program on Creativity & Innovation. She is also an individual creative consultant who provides talks & workshops for global startups and corporate innovation teams on design thinking, entrepreneurship & creativity. Her projects have been featured in many publications, including The New York Times, Forbes, NBC News, TIME, CNN, BBC, San Francisco Chronicle, TechCrunch, Mashable, and The Huffington Post. She was named a “Top 10 Emerging Leader in Innovation” in the Microsoft Next 100 series. For more from Yiying, you can follow her on TwitterLinkedin and Medium.

 

A Tale of Two Squirrels: The Not So Simple Math on Venture Portfolio Size

By now most VCs are familiar with Dave McClure’s theory of venture portfolio size. In short, he believes that at seed stage, it doesn’t make sense to have a fund with fewer than 50-100 companies, because venture returns depend on outliers and you need a big enough portfolio to consistently capture them.

In the post, he outlines a range of typical outcomes for a large portfolio of seed-stage investments. You can see some variation of this trend in most published venture returns data such as Crunchbase or PitchBook.

Range of Potential Venture Outcomes from Dave McClure’s “99 Problems” blog post (May 2015)
Fig. 1: Range of Potential Venture Outcomes from Dave McClure’s “99 Problems” blog post (May 2015)

These are large ranges (because there’s a lot of randomness in startups), and depending on where you end up in these ranges, you could make or lose a lot of money. Most investors prefer a bit more certainty.

Thankfully, statisticians have invented something called a Monte Carlo analysis, popularized by Nate Silver of 538 fame, to simulate the impact of this randomness by simulating a large range of possible outcomes. And my friend Yannick Roux (@yanroux, blog), a London-based VC, kindly built a Monte Carlo simulation in Excel to help me model the range of possible outcomes for venture portfolios.

The “Blind Squirrel” Portfolio

We have an expression “Even a blind squirrel finds a nut every once in a while.” In other words, any VC with decent deal flow and a reasonable selection process, if they write enough checks, should eventually pick a winner. I’m not saying that’s a good way to invest, but let’s do the math.

“Eew, this one tastes like Ad-Tech.”

Working with Yannick’s model, I plugged in some assumptions from the middle of the ranges above. This represents the “average” venture investor, hence with outcomes that fall in the middle of these ranges.

Then the Monte Carlo engine quickly ran through 10,000 simulated portfolios and listed the outcomes. I repeated this five times, changing only the portfolio size each time, and leaving all other variables constant (such as fund size average investment per company per outcome). These are the results:

Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.
Fig. 2: Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.

As you can see, the results for the three largest portfolios are almost identical, but the results for the 20- and 50-company portfolio are worse. That’s because, in this model, we’re only expecting big (e.g. >50X returns) winners to occur 1% of the time. And in a portfolio of 20 companies, 1% of 20 is, more often than not, zero. But in a portfolio of 200+ companies, you could pretty reliably see a couple 50X outcomes in each iteration of the portfolio.

Here’s a frequency distribution showing the breakdown of return multiples 10,000 simulated portfolios of 20 companies vs. 200 companies. It’s a bit easier to visualise this way.

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.
Fig. 3: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.

But We’re Not Average! Enter the Super Squirrel.

The “blind squirrel” portfolio was designed to match the outcomes of the venture universe in-general. These are the middle of our ranges – and a median return of 3.18X before fees and after a 10-year lock-up isn’t terrible.

But we should hope that a well-known venture fund with a recognized brand and a large team of experienced partners would attract better than average quality companies, and be better than average at picking and supporting winners. So I re-ran the model with input assumptions towards the higher end of our ranges, a different picture emerged: 20 companies is still not a great portfolio. But in this model, 200 companies can get you better than 4X before fees.

Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.
Fig. 4: Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.

Now these are much better returns. And in this model, the impact of portfolio size becomes much more pronounced. That’s because payoffs in venture are asymmetrical, meaning the impact of the losers (e.g. you lose 1X your investment) remains the same regardless of how amazing you are, but the impact of the winners is exaggerated for Super Squirrel VCs, because there are more bigger winners in Super Squirrel’s portfolio.

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.
Fig. 5: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.

What about the 50 company portfolio?

As you saw above, the 50 company portfolio doesn’t do badly. The top quartile returns more than 6.34X, which is better than the 100 company portfolio. But it carries a lot more risk, and you can see that in the shape of the curves:

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios with 50 or 200 companies
Fig. 6: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios with 50 or 200 companies.

Notice that second gray hump on the right? That squirrel looks more like a camel! (a bi-modal, or Bactrian camel at that) That’s because your chance of hitting a “big winner” (50X – 100X) is about 1%. And in a 50 company portfolio, that will happen about half of the time. So the fund outcomes in the hump on the right have that one big winner in them, and the ones on the left don’t.

But in those great outcomes, it’s really down to that one big winner. If I re-run the Super Squirrel model and remove the top performing company in each scenario, then that whole second hump goes away. Notice below, the top quartile return for the 50 company fund drops by 49%, but the top quartile return for the 200 company fund only loses 20%.

Top Quartile returns for Super Squirrel funds with and without their single best performing company.
Fig. 7: Top Quartile returns for Super Squirrel funds with and without their single best performing company.

Now imagine you’re the manager of the 50 company fund. You’re six years in and you have that one company – late stage, growing fast, looking good. What if they “only” sell for $200M and you get crushed under a stack of liquidation preferences? What if Amazon goes after them? What if a similar company tries to IPO and it’s a disaster? What if the Wunderkind founder gets hit by a bus? Or suppose that company does well and you decide to raise another fund. Then you’ve got to convince your LPs that lightning will strike twice, and you’ll find another big winner again in your next fund. You explain that even though nearly half your returns from your last fund came from a single company, you’re sure you can pull that rabbit out of that hat again. These questions will haunt your dreams.

But We’re Not Squirrels!

It’s true, most VCs will tell you their investments are not random. They will claim they are able to access and carefully select the best companies in which to invest. So, as an LP in a 20 company fund, all you need to do is pick a fund manager who is consistently able to attract and consistently select the top 5% of seed stage startups.

But remember, if you have someone who can consistently select the top 5% of publicly-traded equities year after year, you have Charlie Munger of Berkshire Hathaway. That’s not a simple task!

And it’s theoretically easier to identify good companies in public markets, where you have decades of historical data, competitive data and armies of analysts poring over every available scrap of information. So the person who can consistently pick the top 5% of seed-stage startups is much smarter than Charlie Munger. (When you meet that person, please please please send her my way!)

But what about Sequoia Capital? Kleiner Perkins? Andreessen Horowitz?

Concentrated portfolios have been the venture game for the last few decades: Most institutional investors allocating into venture capital (representing at best a single digit percent of their asset allocation) have been fighting for allocations into a very small number of top-decile fund managers, typically based on Sand Hill Road.

How do we explain all those famous funds with concentrated portfolios that have done so well? It’s true, a few fund managers have done a great job of landing their outsized share of big winners fund after fund. So this must be possible.

We believe, the main difference is that these people are investing in later stages (Series A onwards). At later stages, a more concentrated portfolio might make more sense, as a higher proportion of your investments should be “winners” and fewer will go to zero. And in that case, your ability as a fund manager depends less on your ability to “select” winners and more on your ability to get into the best deals. That said, although companies in later stages may be 10X further along in traction and the likelihood of success may have improved somewhat vs. the prior stage, their pre-money valuations may have increased much more. (Our typical entry point on valuation for seed-stage is about $2.5M pre-money, whereas a Series A might start at $15-$20M pre-money and a Series B might be at $40M-$50M pre-money). Finally, entering at higher valuations means you need to exit at higher valuations to see a comparable multiple. For example, to get an Amazing (50X) outcome on an investment at $50M pre-money requires getting more than $2.5B exit valuation, whereas to get such an outcome on an investment at $2.5M pre-money requires getting only a $125M exit valuation (before dilution to simplify the math). The net of all of this is that, in our opinion, later-stage investing may have a worse risk-adjusted return profile than seed-stage investments, especially for fund managers who do not have the same kind of branding and deal access as the Legends of Sand Hill Road.

How Big Should My Portfolio Be?

We believe, if you’re 1) investing at seed stage, and 2) you are an average investor (in terms of deal flow & selection experience), and 3)  your main goal is maximizing financial returns, you’d want a minimum of 100 companies to get a decent shot at a 3X gross return. If you’re a really good investor, 50 companies might be enough. But if your one big winner doesn’t deliver hugely… that’s the risk. So, in our opinion, if you want consistent outperformance and unicorn failure insurance you should aim for 200 – 500 companies.

This is Not Revolutionary

I’m not the first person in the history of finance to suggest that diversification might be a good thing. And 500 Startups isn’t the first early-stage fund to favor a large portfolio. (That was Y Combinator, or Ron Conway before them). But we keep having this debate for some reason. So I wanted to unpack the math a bit.

Notes: I originally published this post on my Medium blogIf you’re seriously interested in learning more about early stage venture investing check out our investor education programs at education.500.co.


Acknowledgements

None of this math would have been possible without the portfolio Monte Carlo simulation engine developed by Yannick Roux, who also reviewed and improved drafts of the post. Plus great inspiration from @twentyminutevc in his great discussion with Josh Breinlinger and the ensuing tweetstorm. And many thanks to Dave McClure, Aman Verjee and Eddie Thai for all the feedback on drafts & constantly prodding the math. (And Yiying Liu for photoshopping the Patagonia vests on to the venture squirrels – priceless!) If you learned anything new from this post, it was truly from the shoulders of giants on which I stand.


About Matt Lerner

Matt Lerner, 500 Startups PartnerMatt Lerner (@matthlernerMedium blog) heads 500 Startups in the U.K. He has led over 30 early-stage  investments across Europe and the Middle East, and runs their “Series A” growth program for seed-stage startups. Prior to joining 500 Startups, Lerner worked as a Marketing Director and later Head of UK SME at PayPal. He built and managed growth teams that helped grow PayPal from an $800M business to an $8B business in 10 years. Lerner occasionally lectures on “growth hacking” at Stanford Business School and Imperial college.

 


LEGAL NOTICES

THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR.  UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE BY 500 STARTUPS. THIS POST IS NOT INTENDED TO PROVIDE THE BASIS FOR ANY EVALUATION OF AN INVESTMENT IN A VENTURE CAPITAL FUND BY 500 STARTUPS OR ANY OF ITS REPRESENTATIVES OR AFFILIATES. THIS POST DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF INTEREST TO PURCHASE ANY SECURITIES BY 500 STARTUPS, OR ANY OF ITS REPRESENTATIVES OR AFFILIATES.

POTENTIAL RETURNS AND MODELS IN THIS POST ARE THEORETICAL AND PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY.  THE PROJECTED RETURNS PRESENTED ARE NOT BASED ON PAST PERFORMANCE AND MAKE CERTAIN MATERIAL ASSUMPTIONS AND PROJECTIONS WHICH MAY OR MAY NOT PROVE ACCURATE. THE PROJECTED RETURNS HEREIN DO NOT PURPORT TO GUARANTEE FUTURE RETURNS, AND RETURNS FOR INVESTORS IN ANY 500 STARTUPS OR OTHER VENTURE FUND MAY BE LESS OR MORE THAN THE RETURNS REFLECTED IN THIS POST AND MAY DIFFER MATERIALLY FROM ANY PROJECTED RETURNS, PERFORMANCE EXPRESSED OR IMPLIED IN THIS POST.

THE VIEWS AND PROJECTED RETURN INFORMATION CONTAINED HEREIN HAVE NOT BEEN AUDITED OR VERIFIED BY ANY INDEPENDENT PARTY AND SHOULD NOT BE RELIED UPON IN MAKING ANY INVESTMENT DECISIONS.  NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY 500 STARTUPS AS TO THE REASONABLENESS OR ACCURACY OF THE PROJECTIONS OR ESTIMATES CONTAINED HEREIN, AS A RESULT, SUCH PROJECTIONS AND ESTIMATES SHOULD BE VIEWED SOLELY AS AN ORDERLY REPRESENTATION OF ESTIMATED RESULTS IF UNDERLYING ASSUMPTIONS ARE REALIZED.

VENTURE CAPITAL INVESTMENTS ARE CHARACTERIZED BY A HIGH DEGREE OF RISK, VOLATILITY AND ILLIQUIDITY. THE PROJECTED PERFORMANCE HEREIN IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THERE CAN BE NO ASSURANCE THAT ANY 500 STARTUPS FUND WILL ACHIEVE COMPARABLE RESULTS, ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY

 

#500FAMILY

Recently, a 500 colleague posted this on social media:

“Diversity and equality is NOT about women who succeed because they sacrifice everything else so they “have nothing else to do but work”. It’s about EVERYONE stepping up to the plate and pitching in. So we as a society don’t ever have to choose life OR work, but rather being able to do both well.”

This colleague isn’t a parent, nor is he planning to have kids anytime soon. Yet he still felt adamantly about the importance of gender parity and acknowledging that it’s everyone’s responsibility.

Breaking down barriers is tough. Many companies make the mistake of dismissing diversity early on, only to realize later how foundational it is to their success or failure. Unfortunately, there is no silver bullet that makes a company diverse. In order to have a meaningful impact, companies should value diversity and inclusion from Day One. This applies to how they design their parental leave policy.

At 500, our policy is 12 weeks of fully paid leave for all parents in the U.S. Parents can choose to take this leave consecutively, or spread it out through the first 12 months after birth. Despite the fact that only 21% of the 500 team are parents, we know that may change. In fact, in 2017 alone, there will be 8 babies born on the 500 team. We feel strongly about supporting our team and making sure they have time to recover, bond with their families, and find their bearings as they get used to a new normal. Given how crazy this period can be, we also feel that making that time fully paid is important. The last thing new parents need to worry about is whether money is coming in the door. The sad reality is that in the U.S., only 13% of workers have access to paid parental leave, and the U.S. trails 41 other nations in not mandating paid leave.

Admittedly, we’re aware that our parental leave policy may pale in comparison to other companies or even national leave policies worldwide. As 500 grows, we aim to keep improving upon our parental leave policy as well as all of our company offerings. Also, given that we’re a global team spanning 23 countries, we’re working hard to be mindful of different standards in each market and balancing that with 500’s core values.

We also feel that it’s important to acknowledge the fact that many men and women share in childcare responsibilities. Especially in this day and age, where nearly 50% of women are the breadwinners​, and there exist many different kinds of parents and parental relationships — two moms, two dads, single parents, co-parents, and so on. At the end of the day, regardless of one’s orientation or identification or relationship status, parents are parents. And that was the motivation for making it 12 weeks across the board, rather than separating maternity vs. paternity.

There’s a good amount of research out there that shows generous parental leave policies have a significant positive impact on employee retention and morale. While some companies (particularly startups) worry that the added costs are detrimental, the reality is that such costs pale in comparison to losing talent outright. Moreover, it’s an excellent way to attract great talent. People want to join teams where they’ll feel supported. For parents, that means not having to “hide” the fact that they are parents or worry about being judged for doing what they need to do for their kids.

The boys enjoying La Jolla Beach

Truth? When I was pregnant (both times), I experienced a lot of anxiety about how it would impact me professionally. I worried about being hit with the Motherhood Penalty, how my colleagues would perceive me, how others in VC would perceive me, how I’d juggle running 500 with raising kids. I remember cringing when people would ask me whether I’d be returning to 500 after I gave birth. The first few months postpartum were incredibly challenging, and it took awhile before I felt like myself again. While everyone’s experience is different, my own experience certainly was instrumental in shaping 500’s parental leave policy. I didn’t want others to feel as anxious as I did, nor did I ever want them to worry that they’d be treated differently at 500. That isn’t the kind of culture we want to build.

Restroom signage at the 500 offices in SF and Mountain View

It was important to us to create a parental leave policy that echoed our core values. Diversity and inclusion is not just an attractive tagline for marketing purposes. It is evident in everything we do — our team, our portfolio investments, our parental leave policy, our office restroom signage (see above photo). We work hard and attempt to do the impossible, yet we respect the fact that we’re all human and are constantly juggling our professional and personal lives. We’re committed to creating an inclusive environment where talented people are empowered to do amazing things, yet don’t feel torn about having to choose between work and life.

Like one of our EIRs delivering a fireside chat while feeding his 5 week-old son.

500 EIR Chris Neumann’s baby bottle of choice is Lifefactory

Thanks to my 500 colleagues for their feedback on this post, particularly Elizabeth Yin, Dave McClure, Clayton Bryan, Kelsey Cullen, Monica Matison, & Chris Neumann. Special nod to Tim Chae for being that “500 colleague” I quoted.

7 UX / UI Design Tips to Improve Your Startup Growth

Below is a collection of my tips and feedback from a creative branding workshop I led during the most recent 500 Startups’ seed accelerator program, Batch 19. The goal was to teach startups to apply design thinking methods to improve their UX/UI , and thus increase user acquisition and market growth.

Did you know the human attention span is shorter than a goldfish’s?
[Fun Fact about Attention Span] Goldfish: 9 seconds > Human: 8 seconds. 😱

Yep, your website has a lot of work to do in a short amount of time to get your key message to your audience.

How do you do it? Here are 7 Design Thinking Tips to Improve Your Growth Rate 🔑:

1. Integrate

Combine a strong marketing message (content) with effective visuals (form).

My Feedback for Bstow: Bstow rounds up your spare change to charity.

Below is the original design for the top half of Bstow’s  home page. It has a simple marketing message, “Donate spare change to charity”. However, at first glance, the website looks like it’s featuring an analytics product.

Neither of the key visuals, the app interface on the phone nor the blue background, reflect the marketing message – “donation” and “charity”. How does the graph on the phone have anything to do with charity? Why the blue background?  They are disconnected. There is no integration of the form & the content.

bstow-old-top

I asked the founders to look at their analytics and see which part of the website gets the most engagement. They told me the most engagement comes from the “causes” section, which on the website you have to scroll all the way down to find:

bstow-attention

Yep, that’s a lot of scrolling… By the time you scroll down to the causes, those Goldfish have already lost their attention – let alone humans!

I suggested the Bstow team integrate their charity causes into the homepage visuals by using the iPhone screen as a frame, showcasing charity partners’ content one by one.

Homepage After Feedback: Team Bstow came back with the new home page designs below: Boom! 💥

bstow

2. Manifest:

Present your company with a short, punchy tagline & visual, make it clear and obvious to the mind. This helps people remember who you are and what you do.

My Feedback for Scopio: Scopio is a search engine to find and license images on social media.

Homepage before Feedback:
scopio-homepage-before

Get a short and effective tagline (6-8 words) that conveys both HOW your company works and WHY you do what you do (your purpose, cause & belief).

Combine the original two lines on your website homepage,“Search engine and licensing platform for trending photos & videos on social media” and “Discover Moments and Tell Stories”, into a simple and effective one-liner.

Homepage After Feedback (version 1):

“Real Images Engage Audiences” is a much more effective tagline. Now how can we show (even better) that these photos are taken by real people?

scopio-1
When using very light weight text over the video, it’s VERY hard to read the tagline and explanation. I suggested changing the text, “A cutting-edge platform…,” into a one-liner.

The more clear and obvious you can make this, the better.

Homepage After Feedback (version 2 – current): Team Scopio came back with the new home page designs below. You can view the full site here.
scopio

3. Portray:

Depict your product/service vividly, let it come to life through visual storytelling.

My Feedback for ShearShare: ShearShare connects salon owners to stylists to fill empty salon chairs.

Below is ShearShare’s original Homepage:

shear-share-before

On the home page, a static image of a phone with the app search bar text, “Where do you want to work?,” is not the best use of the precious space.

Let’s make it more vivid and engaging, by actually showing the audience how this app works. Embed the Demo video on your demo page as an animated .gif or video on the phone.

You can see my above feedback into the mockup below.
shearshare-after

After the Feedback: Team ShearShare came back with a much improved homepage animation seen below. You can view the full site here. 👊
final_home

4. Reuse

Whether you are a new or established company, branding consistency always matters, because your brand is reflected in your logo and messaging. One of easiest ways to improve your branding consistency is by examining the visual consistency of your site/app. Reuse and reapply your branding colors and elements throughout the site and app, to create a unified look and feel.

My Feedback for ChangeJar: ChangeJar is a mobile cash platform optimized for small retail payments.

This is ChangeJar’s current logo:
changejar-logo

But if you look at their icon page, the main branding has not been maintained. It’s completely different with white on a purple background.
changejar-icos_before

To remain consistent across your whole site (and aid in brand recognition), add the green color from your brand/logo and/or the “jar” icon to the design of these icons below:

I made the mock up below to highlight the dollar signs in the green color from your brand logo. Now these icons look more consistent with your brand:
changejar-icos_after

Also, the current Favicon is hard to read when it’s white on green gradient. Its design/color scheme is not consistent with the current logo.

Current Logo:
changejar-logo

Current Favicon:
changejar-favicon-before

I suggest making it the same design & color scheme as the current logo. See the mockup below:
changejar-favicon-after

Similarly, here is Scopio’s current logo and it’s current set of icons (more on Scopio below):
scopio-icon-before
I suggest you reuse the Symbol from the logo/brand as much as possible like below:
scopio-icon-after

5. Organize

You can organize content by color making it easier for people to remember your brand name or for the audiences to differentiate the business.

When it comes to content marketing, color can help you stand out from the crowd. According to NeuroMarketing, “if a good color sells, the right color sells better.”

Color is an important emotional cue in content marketing. Different colors and their combinations will evoke different emotions and feelings. It is vital to choose the right color(s) which represents your identity truthfully and effectively.

According to CoSchedule, people make a judgment about your content in 90 seconds or less. And up to 90% of the judgment in that 90 seconds is influenced by color. Marketer Neil Patel gives further proof of how colors affect conversion rate, revealing that 85% of consumer-based buying decisions comes from color and that full-color ads in magazines get recognized 26% more than black and white ads. Color helps people recognize your brand by up to 80%. It’s important to choose your brand color carefully and stick with it.

My Feedback for Aumet: Aumet allows medical suppliers & distributors to do business with companies no matter where they are.

Here is Aumet’s current website:
aumet-before

Since “Aumet” is a made-up name, I recommend highlighting two different syllables, using two different colors, to help users learn how to spell and pronounce your name

Also, because your target audience is both medical suppliers and distributors, it makes sense to use the same two colors to highlight the two different target audiences.  

Since your brand is targeting the medical industry, the current mint green works well as the main color. I would suggest your additional color be something like blue to compliment the green. Here is a simple mockup of how this could be done:aumet-after

If your business market is facing both B2C and B2B, like Aumet and ChangeJar, I would also suggest using two different colors for the two different consumer audiences.  


6.
Visualize

A picture is worth a thousand words: Applying effective visuals helps to arouse emotion within your audience, creating an instant connection with your company.

My Design Feedback for TalentBase: TalentBase is an HR software for growing enterprises in Africa.

Below is their current website homepage:

talentbase-before

Very straightforward website with all its functions. My overall feedback with your current branding & logo is: It’s too plain and there’s a lack of engagement.

If you are a B2B company, remember the foundation of business is still human. I love what Jack Ma suggests, whether your business market is B2C or B2B, it’s all about P2P, People to People.

I suggest you either add a secondary color that works with the existing blue color or add a set of colors inspired by your market, African HR (Human Resources) professionals. Start with Africa, and its people!

I have mocked the site with photos of real African professionals,  with the same text/content from the current site. Do you see and feel the difference?
talentbase1
talentbase2
talentbase3
talentbase4
talentbase5
talentbase6

Showing the faces of the workforce arouses emotion within your audience, thus establishing trust and loyalty between your audience and your company.

7. Elaborate

“Elaborate” means provide more context and add additional details, which can help others (e.g. your users or investors) to have a better understanding of what your business is.

My Feedback for ChangeJar: ChangeJar is a mobile cash platform optimized for small retail payments.
changejar-logo

The width of the logo type and the symbol in the current logo looks a bit too thin, especially when it’s being scaled into a smaller size. It’s hard to see. Keep “change” in white, but change “jar” to green.

Also, add a dollar sign or currency symbol in the logo. At the moment the logo only conveys the notion of a jar, but it doesn’t indicate money. Adding a money symbol will help your audience subconsciously digest what your company (a payments provider) does. As you scale internationally, change the currency symbol. You can already create multiple mockups with a dollar “$” sign, pound “£”, euro “€”, and Japanese or Chinese sign “¥”, etc.

I mocked up the above suggestions below:
changejar_after

If you want, you can even animate it with the different currencies, like this:
changejar-logo-animated

To summarize, here are the 7 Design Thinking Tips to Improve Your Growth Rate:

1. Integrate: 
Combine marketing message with effective visual content
2. Manifest: Make your message clear and obvious to the mind
3. Portray:
Depict your product / service vividly, let it come to life
4. Reuse:
Re-apply visual elements to achieve visual consistency
5. Organize: 
Categorize content by color to help users read & remember better
6. Visualize: 
Use visuals to engage and establish emotional connections
7. Elaborate: Provide context to help users understand your business better

And if you are paying close attention, you will notice the initials of each tips make the word “IMPROVE” (I know, so nerdy 🤓 right? But admit it, this just made your day!)

💰🦄🔑

500 Batch 22 begins July 24th, 2017 in San Francisco.

Click Here to apply for our the Batch 22 Seed Program.

 

See also:

7 Marketing Secrets from 500 Startups Demo Days
7 Design Hacks to Improve Your Startup Logo Designs


yiyinglu-profile-square

Yiying Lu is award-winning bilingual (English & Chinese) artist and designer. Born in Shanghai China, Educated in Sydney Australia & London UK, now based in San Francisco, Silicon Valley, she currently is a Design Lecturer at the NYU Shanghai Program on Creativity & Innovation. She is also an individual creative consultant who provides talks & workshops for global startups and corporate innovation teams on design thinking, entrepreneurship & creativity. Her projects have been featured in many publications, including The New York Times, Forbes, NBC News, TIME, CNN, BBC, San Francisco Chronicle, TechCrunch, Mashable, and The Huffington Post. She was named a “Top 10 Emerging Leader in Innovation” in the Microsoft Next 100 series. For more from Yiying, you can follow her on TwitterLinkedin and Medium.

 

What does unconscious bias mean for entrepreneurs, investors, and the tech community?

Guest blogger – Rory Gerberg, Partner at Refound

Bias at work

Every second your brain is flooded with 11 million bits of information, but it can only process 40 bits consciously. To cope, the brain uses mental shortcuts to instantly identify which 40 to notice and remember. These mental shortcuts function like a newsfeed algorithm that filters your lived reality: there’s way too much information out there, so rules of thumb determine what comes on your radar in the first place.

These mental shortcuts or rules of thumb let you focus on the job. But the drawback is that they can cause you to miss important information. This is why after an investor meeting, one investor confident in an entrepreneur’s capability is ready to invest, while another concerned about market prospects isn’t ready to jump the gun. The same goes for entrepreneurs pitching to investors–you might think you nailed your pitch, but your co-founder thinks it didn’t go so hot.

Bias about people

For teams, the most detrimental category of biases are your beliefs about people.  Your ability to communicate and collaborate at work is hampered by how you see social identity groups. Social identity groups include gender, race, sexual orientation, religion, disability, religion, age and class. These biases filter what you notice, hear, and remember–and what you don’t. When a person’s actions are consistent with your bias toward that group, you are actually more likely to remember it. For example, given the bias that women are ‘less financially savvy’, an investor will more vividly remember a woman entrepreneur’s discomfort with her financial models compared to a male entrepreneur in the same position. When both Joe and Barbara are confused by the numbers, Barbara’s confusion will remain etched in your memory.  

For colleagues on the receiving end, biases can create experiences of exclusion. This exclusion decreases the likelihood that excluded colleagues will be creative, speak up in a meeting, or take professional risks. They’re bad for company culture, and they’re bad for your bottom line.

Internal organizational dynamics

Unconscious bias is everywhere. By definition, startups endeavor to create innovative solutions to problems, disrupting the status quo. Given the startup ethos, it is tempting to conclude that startups must be ahead of the game in tackling bias. But in fact, the opposite is the case: a startup’s organizational structure–or lack thereof–makes it even more prone to bias. With few, if any, established standards for conducting business, there is greater opportunity for bias. Bias is more likely to occur in situations of ambiguity, where employees either have increased discretion or are applying a set of rules for the first time. Without established rules of thumb that indicate how to act and respond at any given point in time, biases can inadvertently become a fallback for team interactions.

Questions to ask to start uncovering unconscious bias in your organization:

  • Onboarding: How do you welcome a new member of your team? When does an employee feel like a “culture fit”?
  • Team bonding: How do you bond with your team? What activities or locations do you frequent?
  • Daily decision-making: Who do you consult when making decisions? Who takes the most air time in meetings?

Fundraising

Investors aren’t immune either from unconscious bias faux pas. Initial meetings between investors and entrepreneurs provide only a bird’s eye view of a startup’s team, business model and product.  Investors must make an evaluation based on highly limited information, and often that information is based on uncertain financial data and market conjecture. In early stage investing, there is a strong role of intuition: their “gut feel” about entrepreneurs, the market, the product. In the end, a significant part of the decision to invest in an early-stage startup is the decision to invest in the founding team. And that isn’t an objective evaluation. Rather, it opens up space for investors to fall back on biases. Investors can be influenced by biases about the entrepreneur ranging from salient social identity categories, to seemingly irrelevant characteristics like the geographic distance between the startup and the investor. Generally, the need to make hasty decisions based on limited data leaves investors in a situation ripe for unconscious bias.

Additional questions investors should ask before deciding on a second meeting:

  • What are your biases about the entrepreneur’s social identity group?
  • How has the entrepreneur demonstrated preparedness, commitment, and trustworthiness?

Both entrepreneurs and investors need tools to bust unconscious bias at work.

 

How do you bust bias in your organization? Find out at the Unity Inclusion Summit (Get 15% off with RoryVIP) for a chance to meet 1:1, or learn more about Rory Gerberg’s work on unconscious bias here.

 




rory-refound-professional-headshotCreating diverse teams and inclusive organizations is at the heart of Rory Gerberg‘s work. At Refound, Rory designs and facilitates unconscious bias workshops for clients across all sectors—from tech startups and large corporations to nonprofits and public sector agencies. With a master’s degree from Harvard, she has also advised educational institutions and foundations on gender-sensitive program implementation and sexual harassment response strategy. Originally from New York, Rory moonlights as a salsa dancer and looks forward to her next backpacking trek.  Follow Rory on twitter

Are there ghosts in your convertible notes?

Guest blogger – Adam Sterling is the executive director of the Berkeley Center for Law, Business and the Economy, co-founder of Startup@BerkeleyLaw, and a former venture capital and startup attorney.

Are you investing in convertible notes or securities? Do you know what a phantom liquidation preference is? Did you know it could cost you hundreds of thousands of dollars? Let’s illustrate how with a simple example…

Sally purchases a convertible note with a valuation cap of $5 million in Tuber Corporation for $100,000. Six months later, Tuber closes its Series A with a pre-money valuation of $10 million, selling new shares at $1/share. Thanks to its valuation cap, Sally’s convertible note converts at $0.50/share and she receives 200,000 shares of Series A stock. Sally’s very happy about this outcome.

Source www.billionbackrecords.com

A year later, Tuber is acquired. Unfortunately, the acquisition price is not enough to trigger a conversion of the preferred stock. Series A holders will just receive their liquidation preference. Assuming the Series A investors negotiated a standard liquidation preference, each Series A holder should receive the “original issue price” of their Series A stock. The question for Sally then becomes, is the “original issue price” of her Series A stock $0.50 share or $1.00 share?

Assuming Sally’s convertible notes were silent on this issue, Sally would most likely be entitled to receive a liquidation preference of $1.00/share in the above example or $200,000 (an outcome that greatly benefits Sally). This benefit to Sally, getting $1.00/share as opposed to $0.50/share (which ends up being worth $100,000), is known as a phantom liquidation preference.

While most investors would prefer to keep this phantom liquidation preference, many companies are drafting convertible notes to avoid it. Their argument is that investors are double-dipping — benefiting from the discount/valuation cap when their security converts and again with the liquidation preference. This argument may be valid, but as an investor you should at least be aware of it. As some investors successfully retain the preference, it could be worthwhile to fight to keep it. 

Understanding nuanced concepts like this can provide investors with a critical edge in the crowded venture capital space. To this end, UC Berkeley will be partnering with 500 Startups at Venture Capital Deal Camp in February to breakdown concepts like this and explore other mechanics of early-stage deal making. Deal Camp also features VIP access to 500’s famous Preview Day and simulated negotiations with real companies. Check it out and consider applying!

Thank you to Adam Sterling for contributing to the 500 blog. For more insights from Adam, follow him on Linkedin or Twitter.