Being money managers, we have fancy labels for the different parts of this process. It’s important to understand this language, but know that it’s all just a bunch of words to try and articulate “HOW REAL THE MONEY IS.” The only real money is the US dollars that get invested in the fund you are managing, and the money you distribute back.

Here are some examples of terms used to articulate money “REALness”:

• PIC (paid-in capital): Real money invested at the start of the fund.

• DPI (distributions to paid-in): Real money returned to LPs. This is also known as the realization multiple.For example, if my LPs paid in $100M and I returned $2B, then DPI = 20.0.

• TVPI (total value to paid-in): Not real money. Refers to how much other people think your fund is worth.
  For example, if I’ve invested in one company and it’s currently valued at 10x, then I can say my fund is worth 10.0 TVPI.

• IRR (internal rate of return): Not real money. Refers to the percentage of growth of the capital each year.

Until the startup exits and the money is returned to LPs, “gains” are imaginary, as far they’re concerned. The startup might be valued at $10B by venture capitalists— but that money could still go up in smoke before the LPs see a dime in return. Realize that when you’re talking to LPs about your portfolio pre-exit—when you’re talking aboutTVPI and IRR—you’re talking about imaginary money and trying to make it feel real.

Become fluent in this language—make charts, share numbers—but don’t get lost in it. VC isn’t like other asset classes. It’s not like private equity or real estate. There’s a lot less liquidity, there’s a lot more risk, and you can’t do it from a spreadsheet. If later-stage fund managers are like scientists, then VCs are like artists. Your LPs know this. Don’t try to be something you’re not.

Entrepreneurs

One of my favorite questions to ask my grandfather is: “What’s your favorite investment you ever made?”

I’ve asked this question dozens of times throughout our breakfasts, to see if there are new stories to unearth. But he always takes it back to the people he most enjoyed working with.

When you ask a good question of my grandfather, he’ll sit and close his eyes for a second to collect his thoughts.

“I’ve worked with some amazing people,” he says. “I helped the founders of Activision get going. But there was a great founder who left a big company to start his own. His name was Dave Bossen. His product had this way of controlling the water amount in paper. The company developed computer control systems for the paper industry.”

Pops leans in to tell the rest of the story.

“You know why it was the best? Great people! And I got to travel all over the world for the board meetings!! One time, we went to Scotland and had the board meeting in a bar.”

That company, Measurex, went public on the Nasdaq stock exchange in 1972 and was bought by Honeywell for $600m in the 1990s.

“I’m not a technologist, so I always trusted my network for understanding the technology,” Pops says. “I’ve always been gifted with people and summing up the commitment and energy of the leadership.”

Pops always says he looks for 3 things in founders:

• The energy to make it happen

• The commitment to see it through

• The integrity to build trust in the market

My list parallels his. I say “authenticity” where Pops says “integrity,” but I think they go hand in hand. I agree that those are the raw textiles that make for a great entrepreneur.

Notice how “company hierarchy credentials” didn’t make the list. Activision, which Pops backed in 1979, was founded by four game developers and a lawyer.

During their meeting at Sutter Hill, Pops asked the five of them, “Who’s the CEO?”

The members of the Activision team all looked at one another. Then one of the developers looked at the lawyer and said, “Jim, you don’t build anything—why don’t you be the CEO?”

So, Jim became the CEO.

Those are the sort of people who build great companies. They’re not like other people.

This is a good time to remember that venture capital is a service job. You serve entrepreneurs. You need to be there when things are on fire and when founders are complaining. You have to believe when no one else believes, including them.

Founders have enough judgment from their friends, family, and the broader market. They don’t need more judgment from you. They’re trying to find the people who can realize their dream of changing the world. You might be the perfect fit.

So, you need to pick those founders who make you feel excited and proud to serve them every day. Don’t invest unless you enjoy the founders and want to hang out with these people for 10+ years.

Here are some of the questions I ask founders when I meet them for the first time:

Why are you doing this? If you’re right, what does the world look like? What makes you the right person for this project? How does it make money?
Why is this important? What’s the most important thing to your business right now? What are your biggest roadblocks?

I also try to get them talking about something that has nothing to do with their business:

What’s something you are proud of that you accomplished before the age of 21? What do you think about dinosaurs? What’s the happiest place you’ve ever been?

As they’re talking—about anything, from cartoons to cheeseburgers to basketball —I’m most often listening for two things:

1. Organic knowledge

2. The ability to default to movement

Organic knowledge is born of curiosity, following rabbit holes, and a drive to understand not only one topic, but the whole network of neighboring topics that might help you achieve goals in that area. It’s distinct from artificial knowledge (the kind you get by following a prescribed syllabus in school). Founders with organic knowledge are able to clearly communicate the complexities of a subject to me. They have such an elite understanding of their market that they can articulate their unique insights with very little effort. It’s something you hear in their voice.

The ability to default to movement is equally important: great leaders are thoughtful, but they live in motion. They’re people of action, fundamentally. Anyone
can entertain an idea. I do that all the time. Acting on those ideas, implementing them, executing a practical plan in the real world —those are things that come from being able to move, not just think.

To discern traits like energy, commitment, and authenticity, I’m constantly asking myself questions about founders. Here are some of the questions going through my head as I listen:

Energy

Can they communicate complex ideas? Am I captivated by the idea or person? Have they started a company before? (A repeat founder, even if failed, is preferred). Are they going to get distracted? Do they have the energy to maintain momentum for 10 years? Have they been punched in the face, and are they still moving forward? Something needs to power their battery through the years when there’s no external validation or reward—what’s their power source, and is it a strong enough reason to keep going? After the meeting, do I want to talk about them or their company with others?

Commitment

Is this more than a job to them? Are they committed to the mission? How committed are they (to themselves, their partners, and the mission)? At scale, does this matter? Is this a technology trying to find a problem,
or is the problem clearly defined? Have they failed in the pursuit of this project before? (It’s good if they have; it means they still want to see it through).

Authenticity

Do they have sufficient confidence in their own ability to solve problems, and/or in the mission of the company? Do they have any unique insights I haven’t heard before? Do they have a unique insight about this specific market? Do they teach me something about the world? Are they consistent?

Finally, I think: Does this person see the ball?

I got the concept of “seeing the ball” from an outstanding baseball book called The Mental Keys to Hitting, by H.A. Dorfman (a famous baseball hitting coach). He writes:

“In dealing with the mental approach to hitting, a player must establish his priority— his core understanding of what’s at the top of the list of requirements for being a skilled hitter. I’ve told countless professional players, ‘However good your mechanics may be, you won’t succeed if I blindfold you.’ First things first: see the ball! ‘Track it and whack it,’ as I have often shouted from the dugout.”

Pretty much exactly the same principle applies to founders. Their number-one priority, the thing they need to be doing “every waking hour,” as Elon Musk once put it, is seeing the ball.

For a founder, this means:

• Talking and thinking about their business during every conversation, and in those conversations, listening to others’ perspectives

• Late nights solving hard problems, with teams or alone

• Identifying the most important things to accomplish, and completing them (1 at a time)

• Talking to customers as often as possible

• Askingtargetedpeoplespecificquestions

• Sourcing potential customers all the time

• Staying up late and waking up early (more hours focused on the project increases the chances of success)

• Surrounding themselves with the right people for their quest

• Reading books purposefully—to get answers

• Exercising to keep their brains functioning

• Trying everything for the sake of the company

• Taking mistakes in stride, constantly moving forward (in the words of Thomas Edison: “I haven’t failed; I’ve found 10,000 ways that won’t work”)

• Having a persistent fly in their ear, provoking radical action to solve the one problem they set out to solve

No individual item on this list constitutes seeing the ball, but these are the patterns.

I myself can’t see the ball. As an investor, I get glimpses into moments of all these things, but I’m not at bat. So I’m looking for external signals that indicate they’re seeing it.

Seeing the ball means knowing when you need to make a short-term sacrifice for the long-term success of the business. Part of it is knowing what the most important thing is today, so you can get to where you need to be next year.

For example:

• Coinbase founder Brian Armstrong spent almost 40% of his early funding on a legal letter that would allow Coinbase to get a bank account—without it, they would never have gotten off the ground. Coinbase went public on the Nasdaq stock exchange in 2021 ($COIN)

• The Favor team (Ben Doherty and Zac Maurais) lived in every office they ever had. Favor was acquired by HEB Groceries for $180 million dollars.

• Talia Frenkel (Founder of ThisIsL) funded her first shipment of product with her savings as a photojournalist, and kept the company super lean to get to profitability. They were a team of 7 when acquired by P&G.

• Spenser Skates slept on a mattress on Curtis Liu’s floor for a few months after moving from Chicago to found Amplitude—and for the following two years, they didn’t pay themselves and lived off their savings. Amplitude went public on the Nasdaq Stock Exchange in 2021 ($AMPL).

All the best founders have similar stories of early and enduring commitment.

What’s the most important thing today, for the long-term survival of the company? Founders who see the ball can answer this question.

In my experience, founders who see the ball are best equipped to attract the most dynamic people through three avenues: mission, product, and charisma. In crypto, especially early on, the people involved were driven chiefly by the mission. Many founders are builders at heart, and they rally people around their product because they love building useful things. And charisma is the ability to inspire. Great leaders inspire the team to persevere, and they also inspire customers to believe in what they’re doing.

At the end of the day, a company is just an organism to attract the most capable people to further the founder’s quest. If you really love the founder, do the deal. Even if you specialize in something else.

Co-founder Breakups

It’s worth mentioning that not all founding partnerships are forever. Co-founder breakups happen. Sometimes, you might even see the possibility of a breakup when you first meet the founders. But that, by itself, shouldn’t disqualify them in your eyes.

Co-founders who share the same values might still decide to go separate ways. It’s a bummer, but it’s okay. Sometimes the founding team that’s perfect for year 1 isn’t the right team to run the company in year 6. If at least one of the founders remains dedicated to the company, the company can survive a breakup.

The founders’ ability to have these difficult conversations openly is the most important thing. Many difficult conversations happen during the life of a company. Some of the most difficult ones are related to the vision —as the founders try to figure out what this thing really is, at the core. Emotions are fine; name-calling isn’t. What matters is that the founders can have difficult discussions peacefully, honestly and openly.

I find the best co-founders will debate almost violently about what the idea of “THE COMPANY” is, but they don’t insult or harshly criticize each other. These relationships are built on a foundation of respect.