A Conversation with Aileen Lee - Moderated by Geoff Ralston

Today I am honored to have my good friend Aileen Lee here, and we're going to have a conversation about stuff. Yeah, well, I hope we talk about like aliens. Aileen is a very public personality in the venture world, so there's lots of great talks she has given online. I hope not to do too much of that with her; she tells a lot of amazing things, so it'll be hard to avoid. But so this would just be the latest version of pearls of wisdom from Aileen. Hopefully, we'll try to push the conversation in other areas if we can. So how about a welcome for Aileen Lee? Welcome to Startup School!

Thank you, I'm happy to be here. So, they might not know that much about your kind of interesting and idiosyncratic career that led you to be the founder of Cowboy Ventures. Maybe we can just start with you giving a quick overview of your background. I don't know, from the Gap to now.

We're definitely going to do a Q&A, and like your time schedule is actually... they can stay because one of the reasons we're doing this at YC now instead of at Stanford is that at Stanford, you're constrained. This is our building, so usually, we talk for 30 or 40 minutes and then do a Q&A, whatever's natural. So, do you have a hard stop at all?

I can't remember, but okay, probably.

Okay, okay, okay. Hi everyone, thanks so much for spending time here. I'm really appreciative. I’m Aileen; it's like I am a first-generation immigrant. My parents are both from China, so I grew up in a very traditional... like our family had nothing. They saved up money to buy a Chinese restaurant; people in the family worked in the Chinese restaurant. I grew up in New Jersey.

So, you grew up with entrepreneurs, kind of?

Yeah, I mean, I guess... I guess I mean, I think immigrants are entrepreneurs, right? Because you come here with nothing, and you have to figure out how to get a job and how to find a place to live and how to make it work. And yeah, like I think there's a phrase at Kleiner we used to say: an entrepreneur is someone who does more than anyone thought possible with less than anyone thought possible. I think that's probably true for entrepreneurs and for immigrants as well. I bet that resonates with a lot of people in the audience.

But I was fortunate that, like, my parents were very focused on education, so I went on to MIT, being completely over my head. Then I did a bit of banking for a couple of years. I guess the idiosyncrasy... I lived in China for a year and taught English and studied Chinese. I went to business school, and at business school, I was always really interested in brands, and in particular, consumer brands and how they generate a lot of customer love. This is like kind of pre-internet, so I used to go to the library and read Fast Company and Inc. magazine to try and find names of companies that were kind of up-and-coming, and I would then look them up in the phone book.

So quick now! I went to the library. How many people have gone to the library, like read magazines?

Yeah, like five. That's how we did it back then! Or you could look up older magazines on something called microfiche. Raise your hand if you know what microfiche is.

Oh cool!

So I found a company called Odwalla and a company called The North Face, and they're both out here. So I called—like I would just call the phone number and just ask to talk to whoever would talk to me. I convinced them to hire me for the summer, so I did two months at Odwalla and one month at The North Face. They were both kind of private companies, I guess. Now they probably would be considered growth companies. I did marketing, and then after business school, I went to Gap.

My family was not that into me going to work for Gap, you know? He was... all this time trying to get a good education, maybe retail is not the place to go. But I feel really passionate about—like I was going to have the opportunity to work with really smart people at Gap. At the time, it was such a talent magnet in retail, like some of the smartest planners and merchants and visual designers were working at the company, and we were just kind of on fire.

I spent three years working in different operating roles; I worked on the supply chain projects trying to figure out where stuff was—it's called the glass pipeline. Then I got a job as Chief of Staff to the CEO for a year, kind of just doing everything from helping prepare for public company board meetings to making sure they’d hit a good parking space when we went to go on store visits.

And then my last job there was with the online store in 1999. Our online store was just... Capcom was the only thing we had! We weren’t sure if we were going to Old Navy or Banana Republic.com because we weren’t sure if this dot-com thing was going to stick.

And it turned out...

Yeah, exactly! I think you and I have been working for, you know, 20-something years since then. We should have just bought Amazon stock and chilled.

Yeah. I mean, you didn’t? I did suggest at one point that while I was at Yahoo, that we buy Amazon.

What happened?

They think that was a smart idea?

No, they said it would screw up our multiple.

Yes, I worked with Friendster, right? And there was this little startup called Facebook. Yeah, and I remember talking to them about maybe... I think they wanted 20 million, and we wanted to make 15 stories. So anyways, I was helping run the dot-com part of Gap in 1999, and it was exciting but also just not a pure-play tech company. So much was happening in the dot-com boom. I just said, you know, I think I should go work at a tech company.

I sent my resume to whoever would read it, and I wound up getting an interview at Kleiner Perkins. I think they thought it would be novel to hire a woman. Your gender is what? And also that I had been Chief of Staff to the CEO I think was kind of like good training to be an associate in a venture firm. So I wound up working for a partner there named John Doar for four or five years, and we just super hit it off. John is a legend in venture capital, and we were working with like Google and Amazon, and just we had incredible relationships and got to meet incredible people.

I was also like the dumping ground of every business plan that was sent to Kleiner Perkins at the time. Every night, I would just take home duffel bags of printed business plans and read them. It was an amazing experience, and it was like a two to three-year job there. Oftentimes, at venture firms, it's very opaque in terms of there's not really a career path—and that was not a career path job—but I wound up staying for 13 years.

But you stayed for 13 years! But there was a gap in the middle where you became a CEO.

I always felt like I didn't have enough operating experience, especially not—I hadn't been a venture-backed CEO. I think a lot of this may be old-school thinking, but at Kleiner, the thought was like, you know, it's really hard to give advice to a startup CEO if you haven't done it yourself. If you haven’t run the functions, you haven’t lived through the experience, you haven't really put yourself on the line.

An opportunity came up where a company that we had invested in, and I was on the board of, had two co-founders, and neither of them was clearly the CEO. They asked me to come in and help, and I was really excited to have the opportunity to work with them and to get some more operating experience. I spent... I took kind of two years off from Kleiner, and I went and ran this company. It was a digital media company; it was like kind of an ad sales-driven business in the digital out-of-home space.

At the time, there was a company in China called Focus Media that had like an eight or nine billion dollar market cap, taking what had been paper billboards and turning them into digital and running basically like kind of a content management system and kind of like an ad network for digital billboards. That’s what we were trying to build at RMG. I wanted to be a CEO. At the time, it was a great experience, and we thought we had our model locked and loaded in ’07, so we raised a twenty million dollar Series B, which at the time was a big B.

And now it seems like a joke.

Yeah, exactly, now it's like a seed joke! But I have seen seeds that large. Then, you know, ’08 happened, and we went from having to lay off half the company. But then we also, like... because we had this nice... we kind of anticipated winter coming, and we kept our powder dry, so we were able to live through it. We went acquiring two of our closest competitors, and then I replaced myself with like a better CEO, and I went back to Kleiner, so I felt really fortunate.

Akito... It was hard though! Really.

So do you feel that you were right and that that experience did help you give better advice to CEOs?

What—so it might be hard looking back now. But what did you learn as CEO that informs the advice you give now?

I mean, I had never—I guess many things. One is I'm kind of a people person; I love talking to people, and I thought that would naturally translate into being a great manager. I had managed some people at Gap, but not a ton. I think it's very different being a CEO or a leader where people—you have to first convince them to work there. You know, work at your company.

It turned out to be not as good at this as I thought. But we have different reports, like you have a head of engineering, a head of marketing, a head of sales, a head of financing; they often have different personalities and you want them to have different personalities. They have different strengths. But that means they often have to be managed in different ways.

You have to communicate with them in different ways and kind of like figure out what is the style of communication and rhythm and like what's the—what are the words that are going to help them do their best? You have to modulate it by person. At least that's what I found. That had not been intuitive to me; I thought you could just be yourself and everything would work out.

I don't know if you know I—I had a mentor of mine who used to call that touch. I think one of the things that's interesting as a startup founder—like most of the folks in Startup School are struggling to find product-market fit, yeah—and they're thinking about that. At some point, they sometimes lose track of the fact that really, especially if, for example, they talk to an investor like you, you’re evaluating that, but you’re also looking at this person and wondering, could you hire a VP of Marketing, a VP of Sales, a VP of Engineering? Can you attract the right people? Can you—do you have what it takes to be a leader as a founder?

I think people sometimes, as you’re struggling just to get a customer, you lose track of actually what it takes to really grow.

That’s absolutely right.

Which is—and I’m sure we’ll talk about that—which is like what are investors thinking? We're thinking about short-term and long-term when we talk to you. Like we're thinking about whether you can accomplish the short-term, but also what comes after that and what comes after that and whether you are demonstrating that you can parallel path, in a way. They’re thinking about how the short term is a setup for the long-term effect.

The reality is the only thing that matters to investors is the future; the present is only an indication of what the future may look like because they're betting on your future.

Yep, exactly!

The other thing I’d say, I guess many things about being a startup CEO, like I had never hired salespeople before. I didn’t know how to create a compensation structure for salespeople or, you know, I’m like, how do you create? Sometimes when you do that, your comp—you create unintended consequences by how you compensate people.

I found like I hired these—you know, different kinds of people—sometimes experienced people, sometimes inexperienced people. Like, you know, what kind of... how do you want to place bets on people who are unproven versus pay up for people who are somewhat proven? But sometimes they come out of platforms where the platform was doing really well, and it's not really clear that the person was really good.

So, I learned a lot of lessons around that and also just in sales in general. And I’m sure many of you who are trying to get product-market fit experience—like, sales lead qualification is really important. Like, you yourself and your sales team can deceive yourself into thinking that making progress by having a lot of meetings, but the reality is a lot of those leads are never gonna close.

So figuring out like what—how should you spend your time and how do you qualify leads so that you're really spending time on the accounts that are a good fit for you and are actually good, closeable in the time and money that you have, is something that I have learned the hard way.

Well, that's good luck! I was thinking about that yesterday because I was talking to a founder whose company was betting on a deal closing, and that deal just didn't close. We were talking about it and the problem was that they didn’t really have that bad a problem; like the problem he was solving, it was a problem, and there were a few people who were kind of interested in solving it, but it wasn’t a real heart problem.

And those are the wrong customers to spend a lot of time with, and if you don't figure that out early...

Yeah, and even if you close them, if it's not sustainable, you're just living kind of campaign to campaign or quarter to quarter, and your churn is gonna be high. You're not gonna build up... sell the people. So you kind of like—like you were saying about short-term plus long-term, it's hard enough just to close them, but you have to be able to like close that same person maybe with more money every quarter.

And if you think you’re gonna be able to close them, but they're not going to come back—sometimes it's not even worth closing them!

That’s all the stuff that I had never done before that I learned. Well, Tyler Bosman from Clever is coming to talk about sales next week, so that’s the perfect setup!

I think we should talk a lot more about what investors are looking for. But I've been thinking—you've talked a lot about that before and said a lot of amazing things, but I was thinking a little bit about from startup founders' perspective how they should look at investors and what they should look at.

I was thinking about you, and one of the things I thought was somewhat different about you was the level of empathy you bring to the founders who come to you. I think it's different. I think that there's a level of help you give, which is not just, you know, here's how you should think about sales. But here's how you should think about believing in your business. Do you think about things that way? Is that part of your calculus?

I mean, you do so much more than just as an investor, and you're interested in in a broad set of ways that the ecosystem is put together, and I think that all is part of the same picture.

I don’t know if it’s... I think it comes naturally, hopefully. My partner Ted, who you know, he was thinking about writing this blog post about making venture capital human. It's like when we were writing, and it’s just the fact that you have to think—it’s so dumb to write that, that we decided not to write it.

Because he’s relatively new to our firm, he's been at Cowboy for a year and a half, but he’s been working with startups for 20 years, and he said that that's one of the things that he noticed joining Cowboy: that we are more maybe empathetic or more human than a lot of VCs that he knows.

But it just sounds so dumb to be like, "Hey, come to us! We're human!" that we didn’t do it.

If you're sure others are, but they're masquerading as people...

Yeah, interesting! A company, I mean, I think I'm a person who a lot of people may look at my resume or what I'm doing now and think like, “Wow, she really has it together!” Like, I have not had it together for much of my life. I have screwed up projects; I have failed at things.

I have been the person on the business school project who’s a procrastinator and doesn’t show up with her homework done when everyone else is ready. I'm the person I have been the person who's like slid into class, slightly hungover, being like, “Hey Jeff! Did you have notes? I did not read this case!" And this is all public, by the way!

I understand that I believe people can change. I believe people evolve; I believe people learn. You have to give people second chances, and you have to believe that they're going to get better over time.

I just think in general to be a venture investor, you have to be an optimist. But, like, also because I was a Series A, Series B investor when I was at Kleiner, and I moved to seed, and so kind of by definition deciding to go earlier means you want to live with people and situations that are more raw and with less that’s baked, less that’s figured out.

You’re not trying to poke holes in what could go wrong; but you’re trying to work with the people and figure out what do we need to go right. That’s just what we do, right, in working with, you know, folks prior to product-market fit, or you know half the time at Cowboy, we—the people haven’t built a product yet and half the time they have. So kind of by definition, it’s what we choose to do.

But it’s also just I feel like I’m a product of people who believed in me. Like, you know, John Doar and the people at Kleiner changed my life when they hired me. I was the first woman; I was the youngest. I did not—I was never a working engineer. I wasn’t working at a venture-backed startup. I was a completely non-traditional hire, and I wouldn’t be sitting here if people hadn’t made a bet on me as a non-traditional hire.

It's interesting when I think about John. The first word that pops in my head, and it might—you know, I’m way better than me, so it might be different, is thoughtful. I was thinking of what are the characteristics of the great investors I know? Thoughtful and empathetic, like those... like—and you don't often hear those. You think about people who like get your product, who are familiar with labor sales, are invested in similar companies, and like your domain.

But if you think about it, the people who I think—if we look at the industry—who are the best at it have those qualities and not just the cold, hard qualities that make for like, you know, investing magic.

You know, I don’t know if I totally agree. Like, I think John and I used to do this presentation called, like, there are mercenaries and missionaries. One doesn't always win; like you can win if you're a mercenary, and you can win as a missionary. You just have to choose what you want to be.

I think that there are plenty of people in tech who are pretty mercenary, like they’re pretty cold, they're very driven, they just care about results, and they push and they push. They’re super aggressive, and you can win doing that.

I mean, I think—I'm guessing in your head you're thinking about brands of companies in your mind that seem like missionary companies or mercenary companies, right? And there are successful companies that are more mercenary than missionary. So I don't think it's completely...

There are people who we know who were not warm and, you know, don’t ask you, you know, how your spouse is doing or your sick mom.

And those people can be successful; it’s just you have to choose who you want to be.

Yeah, maybe there’s a connection between them, which is, you should— you know, we always tell this to founders: usually look for an investor who’s going to be most helpful to you. Sometimes, having your butt kicked is what you need, and sometimes having someone understand and understand what you're going through and hope you still believe in your future is what you need.

I guess it depends, really, is the answer.

Yeah, and you’re gonna both—I think like you can—that’s what you should look for.

Yeah, I think we, you know, we all have a saying at Cowboy: we're always happy, never satisfied. So it's a—you know, we're very grateful, and we’re like positive and optimistic, but you can always do better.

So fundraising is premature for some of these folks, but even if it’s premature, if you’re a startup, you’re moving fast, and it’ll happen. It’ll become relevant soon for folks who are just in the middle, as I was saying, battling for customers and trying to figure out what their—as we say at YC, you know—talking to customers, building code, and running code and trying to find something that works and solve real problems.

How should they start to think about fundraising? How do you think about that? Like, what are your first steps as you approach that stage?

So I think something that we have talked about here at YC, and it’s funny because it's a relatively new thing to talk about, I think it’s always been there, but now we have an articulation of it which is storytelling. Some people are natural storytellers, and some are not. I think regardless of whether you are a natural storyteller or not, it's really helpful to become one for fundraising.

There are, you know, people want to be emotionally engaged in your story and the journey of your company and like—and the arc—and to feel like your company is on an upward arc. So how you lay out kind of how you came up with the idea, you know, what work you did to figure out whether there's a, you know, what is there to validate or de-risk some of the initial potential issues with your company.

Like, I know how you've hustled; like, in a way, it’s like a rags-to-riches story, like you’re engaging someone on the beginning steps of a rags-to-riches story and like showing people what you've figured out and like what challenges you faced, and like where you see it going is part of how—because that storytelling is selling.

You need to woo people who can get paid much more working at Google or Facebook, right? It’s how you recruit talent; it’s how you convince customers to take a bet on you when you don’t have a lot of other customers, right? It’s how you convince people to pay—like move from the free version to the paid version, you know. It’s how you raise money, and so it's a skill that you can use in pretty much everything that you do, and it just takes practice.

Like, I think there are people—like I used to be super nervous speaking on stage, and for the first couple years I worked in venture, when I got invited to anything to speak, I said no—I was too scared—I just have to do it a lot. So, practicing your pitch, getting feedback from friends—like we call them puff off-Broadways; you know, you probably don't want to give your pitch for the first time to that partner that you know at Sequoia. You want to practice it, you know, and you want them to register on your mind.

Yeah, on your code with your co-founders, with other people who raised money, and practice taking questions from them way before you have to start fundraising. Like, you don’t want to—you know, if you have to start fundraising in December, you don’t want to start your pitch in December, right?

You want to start your pitch over the summer and practice it and get lots of feedback.

And, I mean, YC is great at providing that kind of feedback as well.

Yeah, I don't think you can stress enough that aspect of practicing your pitch—in a way that you take feedback and learn and iterate. It's almost like writing code and talking to customers—like they're your customers. Anyone who will listen to your pitch, and writing code is going back and modifying that pitch because it probably won't work the first time you do it.

They might not, but you might even ask them, “Did you even get it at the end?” and they’ll say, “I have no idea what you’re talking about.” So that aspect of practicing in and perfecting the pitch is critical, right?

I think so. How else to think about fundraising?

I mean, Jeff mentioned it before that you know, when you have a milestone that's right in front of you—like, “I want to raise my seed; I want to raise my A”—you're very focused on that. But like Jeff mentioned, the people who have—especially if you're gonna go for institutionally backed dollars, whether it’s a seed fund or a larger venture firm—like when we take money from professional investors, we have to basically guarantee—or kind of to be a top quartile fund—we have to deliver a certain kind of return: top quartile returns for more recent vintages, or let’s say for a 4x return.

Right? So if someone has a hundred million dollar fund, they have to figure out how to generate four hundred million dollars to be able to raise money in the future. So that four hundred million dollars is going to be a combination of, let’s say, 30 different companies; two to four of which are gonna wind up being great, and the rest of which are going to wind up not being so great.

To kind of balance out the averages, the two to four that have to be great have to be really great—they have to be worth a billion dollars or more, especially when you move to—that like for a seed fund, if we are able to get the right ownership—like, you know, our first one was forty million dollars—so if we owned 10% at exit of a four hundred million dollar company, we could return our fund.

But those kinds of—you know, that kind of aperture for an exit really stops at seed, like once you raise a B, the people need the exits to be much bigger because those people all have five hundred million dollar, eight hundred million dollar funds. So they need to own 10% of an eight billion dollar company to be able to return the fund.

And so—and the data shows historically that most funds don’t wind up having 50% of the companies all do four hundred million dollar exits; they have two to three B multi-billion and a bunch of zeros or near zeros. So they’re looking at you thinking, “Is this one of the bullets I'm gonna fire this year to be one of those companies that’s going to be my outsized winner?”

They're not thinking, “Can I get this to two hundred million or three hundred million?” They’re thinking, “Can this founder turn this into a multi-billion dollar company?”

And so the short-term execution and story has to be right, but sorry, for institutional folks, that’s what's going on in their minds.

Yeah, it seems like a lot of founders go into the process not understanding all those numbers that Aileen was just talking about. It’s vital that you understand venture capitalists’ math, so that you understand what the motivations of the person sitting across the table from you are, why they're asking, “How big is your business going to be?” and why they care.

And why—though you might be thrilled to have a thirty or forty million dollar exit might sound pretty good, right? You own 50% of a thirty million, that’s fantastic for a venture capitalist—that's like a failure.

And it's important to do their math because if you want them to give you money, you better understand their math. And I think—I mean, it's not the answer for everyone, right? Like a lot of people can be successful and get to a forty million dollar exit with a party round of angels, and that has happened now.

I think the downside—and I guess I’m a little biased—is a lot of times just having angels and not having anyone who’s a professional investor, like they may not give you the guidance that you need on how to scale your company, on what's going on in the market, on, you know, what could be going wrong or right, because they're, you know, they’re not professionals—they are high net-worth individuals who are gonna write you a check and say, “Keep me posted,” and move on.

So I think, you know, sometimes you have to do what you have to do, but that's always—you have to do it.

Yeah, exactly! Yes, exactly.

You know, ideally, you have choices, right? And a lot of what I think as you think about sequencing your fundraising and building your team is like basically trying to continually put yourself in a position where you have good choices, right?

And certainly, if that’s the only round you ever raise, which by the way is philosophically how you should think about it, but if you do want to continue to be a fast-growth company and raise a Series A, and seriously—having institutionalists who can help you find the partners for the next round is pretty important.

One of the things that also occurs to me that people don’t often talk about when it comes to fundraising is a lot of founders forget that you have to do all these things yourself.

Like, when you started Cowboy, you had to raise money; you had to go to the professional investors and tell your story.

What—like, how is that?

You know, it's humbling—fundraising is humbling! So it's humbling because especially when I started Cowboy, it was just me.

And so basically, you know, any meeting that I had, it was clearly a verdict on whether they believed in me or not. Now, it's good that I went through that because everyone who fundraises is gonna get some no's.

Eventually, someone's gonna say no to you, even if you're like the hottest company ever. Or like some people are gonna pass. But that gives me a little extra motivation to make them really sorry.

Like, I want them to really regret not investing in Cowboy Ventures, so it's good!

Yeah!

I think that not enough investors go through that experience. I think part of the problem is that at some point, if you’ve been there for a while, it’s the—you get these funds that just invest again and again.

You don’t have to suffer the way a startup owner has to suffer. And I say suffer because it's very unusual when you raise money not to get no’s, right? Like, you should get used to it.

And also just like all the things you said, when I was raising the fund for the first time, I got a lot of smiles and a lot of like, “This is great; this is great! I'm totally gonna follow up—send me a link to the data room!”

And then I would know—they were not checking the data room!

When I would check in with them, they’re like “This is great, investment partners are gonna love this.” And then they would come back and say, “I’m so sorry; I super thought we were gonna get this through, but we didn’t.”

And I just wish those people had not wasted my time. So it does give us a lot of empathy and me a lot of empathy for like following up.

You know, if you send me your business plan or we have a conversation, I try really hard to get back to you and tell you if it’s not a fit for us now—and why—and not just smile and kind of like “GFU.”

So that a lot of people, no’s are hard, right? They're hard to get. A lot of VCs I think are afraid of telling you why they're really passing because they’re, you know, if you do well, they want to be able to call you later and pretend that they were just really busy when they passed or, you know, and they’re your best friend, you know?

Yeah, like I just said; about like making you really sorry if I'm not investing—they don’t want to be that person, so they don’t tell you why they’re really passing. But it doesn't really help you.

And I also think, again, in fundraising, getting back to what we talked about lead qualification. So when I did my first fund raise, I had gotten some advice from some other folks who were really helpful, like Steve Anderson and Mike Maples and people who had raised funds as solo general partners before me.

They said—the original super angels, right? Exactly. They said, “Look, certain types of investors are gonna smile, and it's their job to learn about what you’re doing, and so they'll meet with you over and over again. They're not going to come into your first fund; they're too conservative. So be careful.”

And so I decided to create a process; or I tried to create a process where I would screen everybody before I met with them.

And if they hadn’t reinvested in a seed fund before, and if they didn’t know who First Round was or Harrison Metal and didn’t have a feeling like I’ve missed that, or I have now kind of—I’ve got a budget to make sure I don’t miss the next wave of seed funds, then I just—I said it’d be great to keep in touch, but let’s not meet.

So that it kind of made the sales process a little bit more efficient, trying to really qualify leads before spending time with them.

So I’ve never asked you this, but did you find that being a female and trying to raise from LPs for a venture fund colored the process in some way? Did you feel—look, did you feel yes, that you were treated differently?

Yes! And sometimes it worked out and sometimes it didn't.

So I’m sure it’s just—we know there are lots of studies to show that women and men have more confidence in men, right? Like a woman can say the exact same thing as a man, and it will not come across and give the same impression as Amanda’s, right?

And so I could give a great pitch, and people would—some people probably came away thinking like, “I just don’t know if she’s enough of a killer.”

I don’t know, like she has kids—what if she wakes up one day and decides she wants to spend time with them?

Like, you know, who knows what they say? But probably all those things.

And, you know, it would be really great if people said that about men too.

I don’t think we’re gonna hold our breath, but you know, I think it just... you know, we’re all unfortunately biased.

And I mean, is this an asymmetry that’s built into the genders because we are different, or is it something that we can... I'm hoping we can work on it.

Like there’s a study, I think, it’s like a Penn-MIT study, where there was a PowerPoint deck and a voiceover talk track, and they showed it to I think hundreds or thousands of business school students.

And they gave the business school students like, you know, you have a hundred dollars or a thousand dollars to invest in this company—how much do you give it?

And they had in the different classes, they A-B tested; they showed the slides on the screen and had a woman speaking of it, like doing the voice-over, or a man.

The man raised 2x the woman.

The same script!

So we have to—I mean, we have to believe that this is changeable. We have to address it at every stage of a person's life, whether you're in elementary school, junior high, or adulthood to try and catch ourselves on our biases.

Yeah, the thing that gives me pause there, as you said, is that—yeah, women too!

Yeah, and men—and female and male students both gave the man more money. So we got to work on it!

But yeah, I'm sure there were people who just—you know, and, meanwhile, at the same time, there are a bunch of really bro-y guys with not as good track records and probably more like polarizing reference checks who raised money really fast because people were like, “He’s such a good guy; I love that guy! He goes out all the time! Everyone's gonna want to hang out with him and give him deal flow because he’s such a great guy.”

And like some of those guys don’t work in our business anymore because it turns out that they’re not really ethical guys, and they don’t treat people professionally.

But they raised a lot of money.

But I think the great thing about our environment right now is we talk about it, you know. Five or ten years ago, we did not—we just pretended this stuff was not happening.

And you were kind of unique when you started; there were so few women in the industry when you started it.

And I was kind of taught like, as much as I love my former colleagues, it was very clear I should never talk about being a woman.

I mean, like that was just at the time was like, you know, keep your head down, don’t cause problems because then no one will want to hang out with you.

Yeah, and we shouldn’t do that to people.

And, yeah, I know you’ve been active in thinking about inclusion—not just genderless, but diversity as well. You started All Raise, or maybe you can give a quick—since we’re here.

Sure! So All Raise is a non-profit to try and accelerate success for women in the tech ecosystem—so founders, employees, venture investors—but we hope it will create a rising tide for all kinds of people who are different, not just women.

We’re just starting out to focus on women, so allraise.org is the website. We started lots of things; we’re like a little startup, we’re a nonprofit startup that’s all volunteer-driven right now.

If you’ve heard of something called Founders for Change—raise your hand if you’ve heard of Founders for Change.

So if you are a founder, you can go to foundersforchange.org, and you can sign up to be a Founder for Change, which basically says you're going to publicly make a commitment to inclusion and diversity on your team, on your—when you have choices, on your team, on your board, and on your cap table.

You know, it’s not binding; you don’t design and sign anything, but you’re just standing up and saying, “I care about this,” and standing up and saying “I care about this” is gonna say something to the people who are potentially going to recruit and to the culture that you’re going to build, which I think will make your company stronger.

We do office hours for female founders, and we have a matching service to try and help women and people of color who want to get into the venture business to kind of help get them trained and then also match them with firms who are looking to add more diversity to their teams.

So we have a lot of cool products.

Yeah, the cool thing about entrepreneurship is you create seeds, and so like entire communities can change because someone starts a company and shows that it’s possible. We’re talking about belief!

Yeah! How important belief is and you— you can inject, we hope and believe, belief into a community anywhere, right?

Anywhere in the world!

That’s the cool thing about Startup School is that thousands of companies from around the world can change the world. That is amazing!

So before we go to Q&A, I’ll put you on the spot a little bit—hopefully you can remember how you did this—but you give a really great description of what the components of a pitch should be, and I want to—yeah, I'm on it!

You're really good at that, and that’s a really concrete thing. We talked about telling stories, but it’s not just any story; it’s a story that has components that matter.

Because as we talked about venture math, there’s a math component, there’s a results component.

So maybe you can help these folks...

If I talk, if I don’t do a good job of this...

Hopefully, it’s—there is a logic!

Yeah, so I do think that there are like some fundamental elements that should be in generally all pitches.

So I do like it when people start out with the team slide, and they talk about who they are and why they started the company, and ideally why you have a certain background or certain things that you’ve done that make you the right founders or the right people to be solving this problem.

Then you talk about the problem. You know, why is it a problem? And then you talk about how big it is.

Investors are usually looking for problems that are billions of dollars. So if the—then, you know, and not just the overall market, the addressable market.

So you know, if you know, if a market in real estate is five billion dollars, but you can only get ten percent of the market, your addressable market is only two to five hundred million, and that’s often too small for venture investors.

So they really want your addressable market to be at least let’s say five or ten billion because they want to know that if you’re really successful and you get that ten percent of the market, that you could be making at least hundreds of millions of dollars.

So then you talk about your product or your solution, right? Which is like, this is—you know, this is what we've built to solve the problem; here's how it works.

Ideally, you talk a little bit about what's special about it—what's your unique insight, what’s the technology you developed that’s again that makes it so different.

And oftentimes it has to be like a 10x difference; like a 1 to 2x difference is not enough. It’s hard to get people to try new things, and so there has to be a real significant benefit to get someone to switch from what they’re doing to try something new.

Then you might talk about the competitive landscape, and people are looking for your honesty and your transparency.

You know, some founders tend to hand-wave competition like, “Oh, they all suck and they’re all stupid,” like—that doesn’t show that you’re gonna be honest about what’s going on and that you’re—there are other people who are already out there doing what you’re doing or that have certain features that you don’t have yet, because investors and board members don’t want to have to haircut what you’re saying when you’re talking about how the business is going.

They want to know that you guys can be honest and transparent with each other about the reality of what’s happening.

Then, you might have a financial plan and talk about it. Oftentimes, like a three-year plan is a good thing. It doesn’t have to be by month, but kind of like maybe what you’re going to get done by month in the next 12 months and then what the annual revenue in revenues is or what the PNL looks like and what investors are looking for is both the top line in terms of the revenue numbers and the revenue growth, the margins of the business, and that costs that go into the business.

Both the gross margin and also like how much you’re planning on spending on marketing, how much of the money is going to go to technology development and people versus buying ads and things like that.

And then how much cash you’re planning on consuming over the next three years.

That's pretty much it!

That helped?

Yeah, that’s awesome!

I was going to say, in the financial plan, some of that depends on how far along you are, how involved you are.

You might have a CAC, and you might not, but you ought to have some idea how you're gonna make money. Like, you ought to be able to describe why it's a business as opposed to some service that people might want but might not pay for when they end up denying things.

Good to have like a summary slide, like you know, if you’ve ever taken public speaking or a presentation class, they’ll tell you like, “I’m gonna tell you what I’m gonna tell you, and then I’m gonna tell you, and then I’m gonna tell you what I told you.”

So, Kunsan has this slide deck can be that too! Or you start out with a summary slide like, you know, here are the highlights of what we do, and then you go into the whole thing, and then you say, and again, here are the highlights!

So before we take Q&A, there’s—I’m sure you’re so sick of talking about unicorns and that—to have some sides having them—so Aileen is famous because—or infamous, I don’t know—for inventing the term “hated unicorn.”

And I just had like—I had a question: why unicorn? We’re not like dragon, or like why is it an animal? Why isn't it like a diamond?

Dora, where did that come from?

Mike Maples from Floodgate—have any of you? He’s such a good—he’s like King storyteller!

And he used to call big, like, you know, big-winner companies thunder dragons, which is super perfect.

So dragon was taken, thunder dragon was taken. I wrote—I wrote the analysis. So basically, I had this new fund, and I was—you know, the lore had been, you know, out of 30 companies who wanted having two winners and a bunch of not-so-great companies.

And so I had asked LPs for the data, so I was just trying to figure out like, is that really true? And if I could basically aggregate the data of other people's funds to understand what—like, what had the composition of their winners—where did the founders come from?

How did they know each other? What birth order were they? Like, all these questions of, you know, if you have a clean dance card and there's a kajillion seed stage companies out there, are there any things that the most successful companies in the past decade have had in common that I should know to be looking for?

And I could not—I had such a hard time collecting the data, so I wound up starting a spreadsheet and making a list of companies that had been born within the past ten years that were worth over a billion dollars, and I just started like making a list of where they went to college, how many co-founders there were, when they were born, how—like, you know, so therefore how old were they when they founded the company, had they worked in tech before?

Like, it just had a thousand columns.

And how much, you know—so I could learn how much they raised at the A and at the B, what was the time period between the rounds, like all the things to see what they had in common.

And so I kind of wrote up my—and there were a bunch of things that I think were a little bit contrarian at the time, like most successful founders of the prior decade were in their 30s when they started. And you know the conventional wisdom was like you have to drop out of college and start when you're 20.

And I had been meeting with founders who were kind of apologetic when we met; they're like, “I'm so sorry! I'm 32, I know I'm really old!”

And I was like, “No! Don’t—don’t apologize like you have work experience. That's actually important.”

Which is interesting because if you look at the earlier stage—like the first stages in venture, everyone will... everyone starting enterprise companies, and they were all like to start an enterprise company, you need to know something about enterprises.

They were all in their 30s, 40s, and 50s, and that was one of the differences in the analysis that consumer founders tended to be younger than enterprise founders when they founded the companies because...

Yeah, exactly what you said!

So there are a bunch of things in the analysis, like the vast majority of companies had co-founders, and there’s a reason why, like being a solo founder is hard, really. Being a co-founder is really important.

Exactly! And also, they were people who had had contacts. Like, they had lived together or worked together—had gone to college. So it was like very rare that you meet a co-founder on a blind date.

Even those—like, I mean—this whole data set of 39 companies early, they’re all outliers, so it’s not like it’s—there’s no statistical significance.

So these are all just examples or stories of kind of the making of, but I thought that there were some useful things.

So I wrote this analysis up of like what are the things I’ve learned from this analysis, and then I was—I had this phrase of like, you know—public or private companies less than ten years old that have become worth over a billion dollars that I had written over and over again in the piece—and it was just so hard to read.

So I was like, “I got to come up with a shorter word—is it home run? Is it mega hit? Is it like—what?”

And it just all seemed lame.

So I was like, “Let’s go with unicorn!”

And it made it so much easier—just popped into your head?

Yeah!

Well, I was thinking like, you know, the thing is that it is almost like alchemy. Like, you could do all the right things and have the right background and try super hard for ten years, and this could— and it might not happen for you because it just— it really is quite rare.

Out of thousands and thousands of companies being born every year and getting funding, only thirty-nine at the time—and still, even now if the number is 100 or 120 whatever, then—or is it still, like out of all the companies that are born every year, a very, very small fraction.

So the idea was kind of like, it is like magic. And also, I wanted it to feel special and magical, not kind of laboratory clinical.

Somehow, it just—and it immediately caught on; one of those memes took off!

Yeah, so thank you, thank you.

Questions for operations, product, or marketing?

So what’s the distribution of funds, proper distribution of funds during a seed round? What kind of a company, A? Powered—it's mostly probably going to be team and technology, right?

You're probably not going to have—you’re probably not gonna want to spend a lot of money on customer acquisition, right? You’re going to want to build something where the tech is so unique and so attractive that you don’t have to spend money to acquire customers.

So I would think that it’s largely gonna be team.

Probably, yeah.

Like the cost and distribution of funds is hard because the soft, impartiality answer is it depends so much on what kind of company. Most software companies spend almost all their funds on people; hardware companies are a little bit different, yeah.

Back there!

So how do you look at non-traditional founders, and how do they go about showing you that they too can be founders of unicorns?

I guess I—I add at that last part, but I think that's what he meant.

Yeah. I mean, I think like what we were talking before about the story and how you explain like, you know, how you came across the problem that you’re trying to solve, what your personal passion is for it, and what you’ve figured out—like, a lot at seed, there's not a lot of data, right?

A lot—you haven’t maybe shipped your product, you don’t have customers, there’s no cohorts, but what you can talk about is your hustle, right?

Your insight when you’ve hit roadblocks, what you figured out; that’s really what a lot of seed stage investors are looking at is, you know, do you have that grit and the right skill set to figure out?

So seed in the space—I mean, I think it’s a better time than ever to be a non-traditional founder.

I have a friend, Ally Rosenthal, who’s raising a fund right now, and her focus is going to be non-obvious founders. You know, it’s like this was not a thing a decade ago, but now I think both we realized that, you know, investors have probably just been hunting in too much of the same pool over and over again.

Companies don’t need to be based in the Bay Area anymore. Richard Kirby did a great analysis showing that like the diversity in venture is a huge problem, not just in terms of gender and race, but the majority of people who work in venture went to Stanford and Harvard.

There’s just no way that that’s the right answer, right? You know, it just misses opportunity.

Yes, tons!

And so I think it’s a great time to be a non-traditional founder.

So how did—if you meet lots of VCs, how do you choose them?

Less based on just gut instinct and more on some sort of rational basis?

So I would recommend on both! We do reference checks on both sides: like when we're thinking about investing in a company, we try and do reference checks not so much like criminal background checks, but more understanding where you worked before, what your strengths are, how you need to be complemented, what you’ve experienced.

And the same thing, founders should feel comfortable if you, you know, when you have choices—it's very hard; it's very hard to get divorced from your investors, and so you should reference check investors.

Agree—just investment in company, and they did a lot of... So the question is has to do with raising on a convertible with a cap. If you raise $250,000, can you vary that cap across different investors?

I mean, I think the cap question has a lot to do with the market, right? And what choices you have.

So, you know, I wouldn’t take the first offer that you have and assess it with dilution, right?

I’m thinking about what dilution you're willing to live with, knowing that this is probably going to—not going to be the only dilution you’re gonna see, right?

And so, you know, a good rule of thumb is generally you have to imagine that in every round—like your seed round or a round, and then it’s decreasing at B and C, you’re probably gonna sell between twenty and thirty percent of your company over time.

So you think about like how much money realistically you may have to raise over how many rounds, looking at companies in your space, how many rounds—like most people think that they should only have to raise through B, and then they wind up raising through F.

I think it just happens that way for a reason, and so you think about, you know, you want to get the capital and not have to spend too much time fundraising, but also you don’t want to experience too much dilution.

My personal opinion is the different caps is a really bad idea. If there’s a time gap between when you raise—that’s all right—but otherwise, all you're likely to do is have a bunch of pissed-off investors, which, as Ian says, you're gonna live with for a long time, and that's never a healthy relationship.

You are really getting married to your investors, and you’re creating a long-term relationship!

So it seldom starts on a positive foot to find out that the person you talked to 15 minutes before got a better deal than you did.

Yeah!

Thanks a lot for that today! I mean, you mentioned that you used to call the VCs and the firms when you were early on, but today I think it’s all about getting the reference right—the reference times.

You know, we see so many founders who came out of not working; they’re not from us—oh, they're from outside this area—they don’t have high preference.

So what is your recommendation for temp to reach out to the VCs? How do you reach out to VCs? What’s the recommendation?

You know, or get a warm intro if you’re not from the area and you don’t, or you’re not from Stanford or Harvard, right?

I think it's both; you know, I think a lot of—especially seed firms take cold intros all the time. We take cold emails all the time, and a lot of it depends on what you say in the email about what the market is that you’re going after and what you’ve figured out so far.

We meet with people all the time that just emailed us.

A traditional VC was—yeah, you just received a whole bunch of business plans!

But no one knew the VCs; they were sitting off on Sand Hill Road!

No one knew them exactly, and they got business plans. So, yeah, it still exists!

But I do think it’s helpful because I think it’s a—you know figuring out how to get a warm intro in some way is a test of your hustle and your ability to network and build relationships, especially if you're from the outside.

So I think that's one of the reasons why people use it as a filter.

It's like, you know, if you're not good at figuring out how to spotlight from, you know, a cold stop, and then like to get some momentum, then you know maybe you're not gonna be a great entrepreneur.

So I would try both!

Yeah, I think one thing to think about is that like it’s a pretty small world here; everyone knows everyone. So I gotta do it—like, to find someone who’s connected to Aileen—like elbow three people, and you’ll find somebody.

So it’s not as hard as you might think!

Maybe someone from [Music] and happy thoughts about that!

And why that is so? The question is on a study that found that women—the companies founded by women are evaluated 84% less than, I guess, male founders.

I’m not sure if they normalized over industries.

Yeah, I haven’t read that study.

I mean, I think a lot of the studies—if you look at the unicorn list right now, right—there's only like two female founders in the whole list, right?

So if you're doing an average across venture, yes, of course! Like those companies are—the vast majority of the kind of paper wealth that’s been driven in the past decade is in the industry.

And if there's no female co-founders or, you know, that own the equity or—and these are the most valuable companies in our industry, then yeah, it would make sense.

And I think even if you just—if you looked at it like kind of apples to apples across seed, my guess is the analysis would find that—partially for some of the reasons that we talked about, that women-founded companies tend to be underestimated by investors—partially due to bias.

But women also can—I think we can, you know, we can work on it on the investor side to try and take away some of the bias, and then we can also work on the founder side, kind of helping and coaching women on how to tell stories and how to pitch.

Like, I’m fortunate to have worked with some women who have raised a lot of money at very healthy valuations and in very competitive situations where they’ve had multiple bidders and the price—like, you know, the multiples relative to revenue or run rate or, you know, what they figured out have been, you know, quite high.

A lot of times it comes to the story—like, what both what the founders have figured out and how they tell the story.

So I’m sorry; we were going to take one more question because time has flown!

In the back!

So the question is, when you're analyzing the factors that went into the various characteristics of unicorns, were there any factors that surprised you?

Were there factors that were surprising that actually mattered?

Oh, that did matter?

Well, which factors did not matter?

That was it—that were surprising.

Oh, that’s a good question! I don’t know if I have a good quick answer for you on that one, just because I focus so much, and I’m like—where they were signal?

I don’t even know if I remember the things that didn’t have a signal.

Okay, we’ll take one more question, then, right there!

You only get one! You have to pick one—pick the best one.

So they’re looking for especially with the curry optional distribution. And I’m coming at it from—I have no idea how to concisely say that—a question. It’s something about aligning objectives—where—where is...

I don’t know if I get it.

Yeah, can you try to make your put your question in like a very concise, short one-sentence understandable format?

So the test investor who's seeking a higher return—how do you align your objectives with enabling a lot of companies that are looking for the lowest cost to market in terms of...

So how do you balance the high return that investors are looking for with companies that need to very— to compete in a very price-sensitive market?

Is that right?

I think they’re aligned!

I mean, we have—you know, your investors have the same goals, right? Which is we want to help you get to market so we can quickly get feedback on whether there’s a dare there on the product, right?

And so helping you figure out like what are the things that you look—what's your Minimum Viable Product?

One of the things that are nice to have versus need to have?

Like, for example, oftentimes when we hear a seed pitch, someone will be like, “Well, I need all this money because I have to build both Android and iPhone.”

And we’ll say, “Well, we don’t have any market validation yet! Why would we build both? Let's just spend money on one of them, see if people like it, and then we’ll build the other one!”

Right?

So like those are examples!

I think what they're very aligned in—that we work together to figure out how do we get our product out there and get feedback and conservatively manage our cash.

So we don’t blow it all before we’ve actually learned anything; it all comes to the same thing.

Okay! Sorry to cut it off, guys! Thanks very much!

Thank you so much!

Thanks for coming! [Applause]