always happy; never satisfied

Everyone who invests in startups has their own set of criteria. This is mine. I call it the captain and the current. It goes without saying, but the goal of this framework is to only invest in exceptional startups, of which there are very few.

Three years ago I went through First Round’s Angel Track. In a conversation with Brett Berson, we started talking about the importance of the “current” in which the startup sails, and the “captain” who leads the ship. Maybe Brett already had this as a framework, but for me it was new. I immediately wrote “The Captain and the Current” in my notes and started trying to make it my own. Thank you Brett.

Since that day I’ve invested in about 30 startups (I think at least a few exceptional ones!), and each time I’ve refined this set of criteria a little more. Many of these I’ve stolen from other investors, almost verbatim. But Kobe stole MJ’s turnaround jumper, so I don’t care. 

Disclaimer: I have returned precisely zero ($0) dollars as an investor, so you should likely not care about anything I say here. I don’t know if I am any good at this. But, in probabilistic endeavors like venture capital, it’s good to be process-oriented vs results-oriented. This framework is a part of my process, which I will refine often. 

The Captain

“The principal question that we focus on before an investment is the quality of the person we’re going to work with.” –Peter Fenton

“If you get an opportunity to own a wonderful business being run by an intelligent fanatic and you don’t load up, it’s a big mistake.”–Charlie Munger

• What proof do I have that the founder is exceptional, intense, an outlier, or unreasonable? Is the founder an “intelligent fanatic” and a force of nature?
• In what dimension does the founder spike?
• Do those unique superpowers/spikes match the biggest risks of this specific startup (so the chances of killing risk are higher)? 
• Would I work for this founder (time adjusted)? More generally, will they be able to recruit a special team more talented than themself?
• Is this founder an exceptional storyteller and presenter?
• In what way is this founder authentic to the opportunity? How is this startup their unique offering to the world?
• What is the founder’s unique insight – the earned secret – upon which the startup is based? How special is that insight…..really?
• Has the founder successfully navigated the idea maze?
• What drives this founder? What’s the golden spur? Is this founder obsessed?
• Does the founder want to build an enduring company?
• What examples do I have of the founder bending reality to make things happen, aka relentless resourcefulness? 
• How fast does this founder reply and follow up? Is this founder aggressive enough?
• Do I want to spend time with this person for the next 10 years? Do I get excited when they text me?

The Current

“It’s great to be participating in what is a multi-trillion dollar global market, in which we are so very, very tiny. We are doubly-blessed. We have a market-size unconstrained opportunity in an area where the underlying foundational technology we employ improves every day. That is not normal.”-Jeff Bezos

“I can summarize my entire class in one sentence: what do you uniquely offer that customers desperately want? The entire premise of my class is that execution does not matter for new startups. The only thing that matters is product market fit.” -Andy Rachleff

• What are the signs of market pull? Is there any sign of real desperation in the customers for whom this product exists? Are the dogs eating the dog food? 
• What tailwinds work in this startup’s favor? Which trend are they riding?
• What technological breakthrough enabled the insight? Is there an inflection point?
• Is the founder’s insight non-consensus?
• Which of the 5 paths will they take to $100m in revenue? Can they do it in <6 years?
• Over time, is there a compounding advantage – aka moat?
• How big can this actually get if everything works like magic? Is the market unconstrained? Can they grow a new market ala uber? What is the way for it to return the fund?
• Does this startup have a clear and simple value prop (hook) to fill the top of funnel? E.g. “get rid of expense reports” for Divvy
• Is the product different (non-incremental), not just better? In what way is the product 10x better? Is the product remarkable?
• Will people actually tell their friends about the product?
• Is this product disruptive (in the Christensen sense)? If so, to whom?
• Could this be a monopoly?
• Could this be one of the 30 most important companies started this year?

In case it isn’t clear: I believe the captain is the primary criterion. Captains steer ships. Captains find product market fit. Captains are talent magnets. Captains will something into existence against all odds. Captains find a way or make one. And at the earliest stages of company building there is no company just yet. So the captain is all there is.

“But Tyler, so many amazing founders fail at their first startups, and go on to succeed after many tries. How does this framework account for that?” 

Easily. 

You know what else great captains do? Captains fail. But failure doesn’t define them because they just never stop. Michael Jordan faced the Detroit Pistons for 3 straight years. And 3 straight years they hammered him. Fail. Fail. Fail. Then he broke through. Captains eventually break through. And if it’s not at their first startup, it’s at their second, or third. Aut inveniam viam aut faciam.

Ok, ready for the nuance? What actually happens when big companies get created is a special confluence of the product, the market, and the captain (team). When those three align, you have something special. So it all matters. But what I’m arguing is that the prime mover, the core of the whole thing, is the captain. The current (which could be thought of as the combination of the market and the product) matters a great deal as well.  

Three Case Studies

Each of the three startups I’ve been at (Clearwater, Wealthfront, and Divvy) score very high on the captain and the current framework. 

Clearwater. Mike and Dave Boren, co-founders of Clearwater, were uniquely suited to build the world’s best investment accounting and analytics software after trading bonds for a decade. And they were early to recognize the value of a SaaS model vs installed software, and as a result they were riding a massive inflection in technology. Not to mention they are literal geniuses that work extremely hard. IPO. $5b market cap.

Wealthfront. Andy Rachleff, the co-founder and (former) CEO of Wealthfront had a unique insight: what if I could replicate the investment approach of the world’s best endowments, but bring it to the masses, using newly available brokerage APIs that had never existed before? Andy is also a force of nature, an excellent storyteller, and a magnet for talent. Right captain, right current. $1.4B valuation.

Divvy. Blake Murray, Divvy’s co-founder and CEO, is an intelligent fanatic. He’s hyper aggressive. He’s unreasonable. And his insight was incredible – truly incredible: what if I could get rid of expense reports by tying a card to software? And…what if I made it free? $2.5b acquisition. Right captain, right current.

Captains. And Currents. They’re all that matter.

*Thank you to Brett Berson, Abdou Ndau, Daniel McAuley and Sterling Snow for reading this post and providing feedback