Most founders never get to reach Product Market Fit with Aaron Michael of 1984 ventures

Summary

Join us as we dive into the world of product market fit with Aaron Michael of 1984 Ventures. In this episode, we discuss the importance of finding product market fit for startups and the role venture capital plays in the process. Tune in for valuable insights and advice from a investor!

Takeaways

1. The key to success when starting a company is learning and iterating quickly.
2. Finding product-market fit requires speed and the ability to pivot when necessary.
3. VCs provide support to founders through advice, founder therapy, and assistance with hiring and fundraising.
4. Investing in unsexy industries can offer unique opportunities for growth and success.
5. Competition can be both beneficial and challenging, and the first mover advantage varies depending on the market dynamics.

Chapters

00:00 Trailer
01:30 Who is Aaron Michael
04:00 How you find product market fit (Espacially for early stage)
15:00 Venture capilalist Raising money criteria and Vc gives support to founder
19:33 1984 Ventures' Investment Thesis
25:00 The Pitfalls of Hype and investing in Unsexy Industries
33:23 The Value of Competition and the First Mover Advantage
38:18 How Vc's Calculating Total Addressable Market (TAM)
43:44 Evolution of Pitch Decks
46:30 Evaluation Method and Favorite Slides
49:30 Importance of the Team
54:30 Pitch Deck and Cap Table Red Flags
58:30 Disagreement with Venture Capital Industry
01:04:02 Three Things for First-Time Founders
01:06:32 Bridge Rounds, Down Rounds, and Valuations
01:09:17 Transparent and Honest Feedback
01:11:37 Being Contrarian as a VC
01:13:50 Ritual
01:15:35 Ending 

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Transcript

Mudassir (00:02.5)
Alright, do a clap for me please, Aaron.

Mudassir (00:07.967)
Awesome. We're rolling now. And welcome to the show. How are you doing today?

Aaron Michel (00:13.11)
Doing well, and thanks for having me.

Mudassir (00:15.336)
It's a pleasure to have you. Thank you so much for the time. Thank you so much for even the considerations. It means a lot to me.

Aaron Michel (00:22.018)
I'm really excited for this and it looks like you've got a great podcast. So I've been excited to engage.

Mudassir (00:29.536)
Awesome. So every single time I have anybody on the podcast, and we've been doing that for like nine, 10 months now, I ask them a specific question, which is the context of their life. But I want to make a little bit of adjustment today in changing the opening question. The question that I wanna ask you at the beginning is, what do you want anybody who's listening to podcasts, who is going to listen to this podcast, what do you want them to take away from this conversation?

Aaron Michel (01:02.246)
to take away that the, you know, that there's, when you're starting a company, the number one most important thing that you can do is just learning exceptionally quickly.

learning, iterating, learning, iterating, and just moving really, really fast. And when I look back at both the mistakes that I made when I was a founder, as well as, uh, you know, what we, what I did well, and then now that I'm on the venture side of the table, looking at our portfolio and the most successful companies, what differentiates them is speed. So that would be the most important thing to take away.

Mudassir (01:44.584)
Speed in a way that you want them to fail fast and learn fast, or speed in a way that they continue to make the wrong decisions again and again and again and again, and hoping they would learn something.

Aaron Michel (01:54.318)
Speed of learning, which also translates into speed of iteration. When you are a pre-seed or seed stage company, what matters is you get a product out the door exceptionally quickly. You ship extraordinarily fast.

and put that product into customers' hands, you try and sell it, and you see if the dogs want to eat the dog food. And the faster you figure out whether you have product-market fit or not, the better. And usually, you know, be one. You probably don't.

And then you move really, really quickly to try and figure out, all right, it wasn't this, but I am feeling some market pull here. And so you iterate again, get that out the door as fast as you can. And the companies that win are the ones that keep on doing that shipping and iteration cycle really fast and find product market fit faster than their competitors and then can scale quickly.

Mudassir (02:58.056)
Okay, very interesting. So I come from a world of product, and this is a personal question that I wanna ask you. So two things. One is, how do you know that you have found a product market fit? It's a very glamorous, sexy term that these days, PMF. PMF, everybody's just talking about product market fit. So question number one is, how do you feel like, okay, so now I have a product market fit, especially in the early stages? So that is one.

And two is you mentioned the speed of iteration, and obviously that sets apart successful companies from the unsuccessful ones.

When should, so suppose I'm gonna give you some hypothetical scenarios. So there's this founder or a team, they're working on something, they're seeing some traction across whatever they're building so maybe they're building three things and same part, three features, they're getting some traction on all of them. And now they need to pivot. So pivoting is a necessity and all of that stuff but when's the right time to give up on one idea and pick the other?

So do you want them to stick for like a month, or just like, okay, just stick around for a quarter, stick around maybe for a year and then pivot. So how do you help founders do that?

Aaron Michel (04:15.678)
So I referenced a moment ago that I had been on the founder's side of the table. So a little bit of context on that, which is relevant here, which is that I had previously started, before as a VC, a company called PathSource. And we enabled people to figure out what career they wanted to go into, show them the school educational path to get there. And where we started was selling into K-12 school districts, which was miserable. But you know, we worked.

Mudassir (04:21.969)
Yep.

Aaron Michel (04:44.592)
We were bad at it. We actually, we got the San Francisco Unified School District on board, Chicago public schools, you know, these were reasonably sized school districts that were leveraging us and it was enough traction.

that I was able to convince myself that we had a product market fit. We didn't, but it took me too long to really recognize that and make the pivot that was necessary. And so now that I'm on this side of the table, one of my favorite things to do as a VC is to work with our portfolio companies and help them really determine whether they have that product market fit. Because what a real product market fit looks like.

is there is a customer who is pulling your half-baked MVP out of your hands and trying to give you money for it. That's product market fit. And so that's really what as a founder you need to be looking for. And if you don't have that, then...

it's time to pivot, right? Like you can think of, all right, here are the one or two levers that I could pull that I think might really meaningfully move the needle. And so I'm gonna pull those two levers and if they move the needle, great. And if they don't, let's iterate and try something else.

Mudassir (06:13.656)
Okay, okay. All right, so what are the events that happened in your life that made you a VC of all the things? Like why, like a person who was a founder, who learned so much, had a successful merger, acquisition as well, and so why VC world? Like what happened there?

Aaron Michel (06:34.882)
So, so about six years ago, March 2017, I...

I had just run a process, we got a few offers, sold my company to a company called Academics Direct, came on board briefly with the choir, didn't wanna spend the rest of my career in ed tech, was trying to decide what I wanted to do next, and had a beer with an old friend and kind of informal advisor on the tail end sale of my last company, got in raw meaty.

And Rami had been working on getting 1984, my venture capital fund started. And he said, hey, you know, why don't you give this a try? I think you might be good at it. And so I really, and there's, the product market fit discussion, just a moment ago, there were a lot of things that I, having been on the founding side of the table, was excited to sort of put into practice

side of the table. So while it wasn't something that I had really been seriously looking at, I was very excited when he brought up the opportunity and I found it far more fulfilling to be transparent than I would have expected. I kind of thought that I would want to, that I would have the itch to start another company pretty quickly.

Um, and I really haven't, haven't had that. This has been a super fulfilling journey to be on the side of the table, you know, working, uh, working with kind of amazing founders on a day to day basis. It's, it's both personally fulfilling and really intellectually stimulating. So it's just super fun.

Mudassir (08:30.822)
Awesome. Very weird, funny question that I have in mind. Probably gonna take it out of the recording, but just personally want to know, when you get to this VC world, so being a founder, I can draw a lot of connections with that because I've been in that position for, I don't know, the last 15 years. When you become a VC, how do you make money? Apart from, your day-to-day job changes so much, it's just like, now you're investing,

As a GP, how you make money? And again, this is not gonna be part of the conversation. I actually want to know. Because doesn't it get weird? Is it like you're working for five years, seven years, just investing, and then one home run, yeah, okay, returns the fund and all that. How do you, mentally, how you take care of that part? Like mentally, it's just like you're working, you're not getting anything out of that. It's just like, stay without a salary for, I don't know, 10 years or something. How do you do that?

Aaron Michel (09:28.822)
Well, you make money in two ways, right? You make money off of management fees and off of carry. And depending on the stage of the firm, whether it's a C stage firm, early stage, growth stage, et cetera, which of those is more important varies.

But to your question, as a seed stage venture capitalist, really a pre-seed, primarily a stage venture capitalist, my day-to-day salary is effectively paid by management fees, but I'm in it for the carry. And the weird nature of this job is...

Company, I started doing this right at the start of 2018, really the very end of 2017. And, you know, so that was six years ago. And we, and it takes.

eight to 12 years, you know, occasionally a little bit less, but it may be six, 12 years, or a company to have a really meaningful outcome, right? And so it's one of these fascinating things where you...

Mudassir (10:48.008)
Hmm.

Mudassir (10:54.884)
Mm-hmm.

Aaron Michel (11:00.634)
You can see your portfolio maturing and evolving and these companies where you invested when they had no revenue or maybe 100,000 or 200,000 of ARR, now all of a sudden these are companies with hundreds of employees, tens of millions of dollars of ARR, great growth, you're getting marked up by...

super strong multi-stage funds and so on. And so you can see the trajectory of the kids growing up and it's super validating, but at the same time, that carry check only comes in when there's an exit or if you sell secondaries or something along the way. And so it's a long, long road.

Mudassir (11:44.018)
Hmm.

Aaron Michel (11:56.802)
for us as VCs to seeing those carry checks. But that's part of being really, really aligned with the founders who we back, right? It's a really long road for them. It's a really long road for us. And we're in it with them from beginning to end.

Mudassir (12:08.08)
Yeah.

Mudassir (12:15.332)
Yeah, thank you for explaining that. What leverage do you think early stage investors have? Because it's a lot of risk game. It's a very risky game at the beginning. It's just like, yeah, there's this idea in the clouds, and then whatever you do is just that idea in the clouds. So what's the leverage that you guys have?

Aaron Michel (12:22.795)
So.

Aaron Michel (12:37.046)
So look, there certainly is power in the cap table, but we as pre-seed and seed stage investors don't take board seats as a rule. Not all seed investors look at this the same way. There are plenty of seed investors who do take board seats. Our...

Our rationale for that, and then I'll circle back to your question is to leverage, you know, our rationale for why we don't take board seats is pretty straightforward. It's, you know, one, that there's just a few of us. If we were taking seats on board seats with each of these companies, we never find time to go find another company, but two, on top of that, you know, if you're a C-stage company, the most important thing to our conversation is to be able to do that.

before is just to move exceptionally fast, right? Getting permission from a board member.

It's not what they need. They just need to just go, go. And so I actually think that seed stage companies, ideally, probably don't have a board. You know, if they do and it's a great board member, great, but they don't really, I think having fantastic board members is super useful at series A and beyond, but when you're just trying to find product mark fit, what you need is just speed. And third, most importantly, you know, if you're a

Mudassir (13:38.924)
Yeah.

Aaron Michel (14:06.68)
I see stage investor.

And you get, you know, that company gets to series A and Sequoia comes in and backs the company. You know, what do they do? Well, they say, well, thank you very much for your work, seed investor. I appreciate all of your time. We'll take that board seat and they boot you off the board, and they take the board seat. And so you think about what that looks like when you scale it up to a portfolio wide perspective. And it means that you're no longer on the board of

your best performing companies, because those of Ray, Series A, Series B, and you as the seed investor more often than not got booted off, but you're on the boards of all of your least well performing companies.

So you're actually spending the bulk of your time with your companies that are underperforming. And while you do want to help those companies, it's not actually where you necessarily want to be spending the bulk of your time. And so that's from a seed investment perspective and just kind of thinking about a portfolio wide perspective doesn't make a lot of sense. So to go back to your original question of leverage.

Mudassir (15:02.159)
Hmm.

Aaron Michel (15:18.198)
Given that we don't take board seats, we primarily influence through self-power. We are deeply aligned with our portfolio company founders, pride ourselves on the fact that we've been in their shoes and that we're the 2 AM phone call and things are going poorly. You get backed by GC or Andreessen at Seed.

and something's going awry, there's a question about if, like deep down in that founder's mind of, well, you know, if I call Joe or Sarah over at A16Z and tell them about this problem, are they going to back me at series A? I don't know.

Mudassir (16:08.452)
Yeah.

Aaron Michel (16:09.147)
And it's like, well, maybe not, but with us, we lead rounds, but we only lead rounds at precedency.

Mudassir (16:18.045)
Hmm.

Aaron Michel (16:19.258)
Our first check is the only lead check that we're going to write. And so they don't worry about that with us, right? We are deeply aligned, which is why we're still getting calls when our portfolio companies are at series A, series B, have really super strong multi-stage funds.

on their cap table, on their board, we take a lot pride in the fact that we're still off in the first call that they make because they're like, hey, Aaron, I'm dealing with this thing. I don't necessarily want to bring it first to the board. I'm trying to figure out how to think about it. What should I do? And so that soft power actually goes a fairly long ways.

Mudassir (17:05.328)
Is there a moment of pride, you know, every single time the companies, the seed stage company that you guys have invested way back in the scrappy days, I call them the days of chaos, you know, when there's nothing that makes sense, it's just like, you know, go, go. And then, you know, maybe five years later, like, whatever, they're raising $20 million, $30 million, something like that, like multiple growth funds. Is there a moment of pride? Is there a proud moment?

My God, like these guys did it. What's that feeling looks like?

Aaron Michel (17:37.066)
Yeah, I mean, yeah, no, it's very much that. I mean, look, financing is a signal and a milestone, but it is something that, 2021 aside, takes place because the company has just been executing really well. And so, absolutely, as a seed investor, we...

We take a lot of pride in the financing milestones. We also take a lot of pride in the other milestones, right? When...

When our portfolio companies, there are a thousand small victories along the way. And starting a company, even the successful ones, just tends to be kind of miserable. And so you really got to celebrate those small victories. And we try to do that alongside our founders. And when I was on that side of the table, I tried to do the same. So that's sort of how I think about it.

Mudassir (18:40.344)
Okay, great. That's very good to hear that. So I want to talk to you about 1984's venture and investment thesis and all the stuff behind that. But before I go to that, there's a personal niche that I'm scratching here. And I have interviewed, I think, more than five dozen VCs on the podcast. And everybody is just primarily in the same state, like pre-seed, seed, series A, that sort of ecosystem. So every single time I hear this one line, and that is,

We support founders. The question that I wanna ask you is because, and a lot of people take pride in that, which, like I really love that. The question that I wanna ask you is, beyond writing checks, two part question actually. So beyond just getting the money from any VC, what should founder look for? Like what should be their criteria apart from just saying, oh yeah, okay, Aaron's gonna write me a half a million dollar check. What should be their criteria? And the second thing is,

once an enhanced rate on the half a million dollar check to any founder, how do you actually support them? Like what the heck does that mean I support the founder?

Aaron Michel (19:48.446)
Yeah. Well, so, so in terms of what I, if I was on the founder's side of the table looking at taking capital from.

from a VC, I would get clarity on to your question, what is the nature of their value add? And I definitely do reference calls. Either ask for references, most venture capital firms list their portfolio on their website, you can do cold references. And wouldn't bother doing this until you have a term sheet.

Mudassir (20:10.416)
Hmm, interesting. Okay.

Aaron Michel (20:28.656)
because that would be kind of weird and waste of your time. But once you've, once you got the term sheet before you take the capital, you know, we do cold reference calls on you, you just do cold reference calls on us. I think that's just fine. And, but in, and then in terms of how we work with founders after we cut a check.

You know, it's a few things, right? Certainly, certainly we give advice. And every VC thinks that they offer good advice, right? Hopefully at a minimum we're doing no harm. But you know, we obviously think that we're being helpful to our portfolio company founders. And you know, according at least to like, YC Book Face is a good example. Allegedly we actually do. But two, on top of that,

Mudassir (21:06.586)
Okay.

Aaron Michel (21:24.774)
Uh, we, you know, we, we try to add value in a few different ways. Uh, one is what we call founder therapy, which is to say, um, you know, we, most of us have, have been founders ourselves. Uh, as I mentioned a minute ago, starting a company is kind of miserable. And, you know, we, we really pride ourselves on the fact that not only can we just help strategize, but we can also help kind of empathize, which.

It's lonely being a founder. It's nice to have VCs who have been there, who have been at the good places and the bad places, and know what that's like. And so that's one. Two, it's helping with hiring. And there are firms, multi-stage funds that have entire hiring and recruiting teams and so on.

We don't have that. But what we do have is we'll help with the conversation around you're evaluating a potential hire. We can help you evaluate them. We can also help you sell that director of engineering who is trying to decide between you and taking the job at Google. And we'll.

Having that conversation and the you'd be crazy not to get on the rocket ship conversation. Let us tell you Why we have conviction on this company is something that we do all day long and love to do that for portfolio company founders and then the third and final thing is I think probably by far the most important which is You know what every portfolio company founder?

Mudassir (22:54.76)
Hmm.

Aaron Michel (23:08.022)
worries about, right? Every founder out there worries about, which is their next round of financing. No matter how well things are going, you always worry about who's gonna back you at your next round. And so we help with timing, with positioning, with iterating on the deck, with practice pitches, and ultimately making introductions to the top series A and multi-stage firms in the world. And if you take a look at kind of who has backed our portfolio companies.

Mudassir (23:12.948)
Yeah, I know. I know.

Mudassir (23:34.256)
Yeah.

Aaron Michel (23:35.546)
after we have, uh, if I, who's marked us up, it's a pretty good who's who.

Mudassir (23:36.84)
Mm-hmm.

Mudassir (23:41.712)
Yeah, that's a good one. And I think that's kind of a motive for 1984 Ventures as well, is just like, you know, the people that we backed are backed by these gigantic, enormous brand VCs. And in many ways, that's a very, very strong signal of success. Okay, coming back to the firm. So I do know where the name comes from, but I want the audience to know where the name comes from, the entire story behind that. And then while you're just hearing everything about

the naming and the why of the company, please also share what's the investment thesis you guys have, and why do you have that investment thesis, especially along the verticals that you invest in.

Aaron Michel (24:22.71)
Yeah. So 1984 is only indirectly a reference to the book. We are not totalitarians. It's a reference to the 1984 Apple ad, which, if you're not familiar with it, Steve Jobs designed and was only shown

Mudassir (24:34.022)
Yep.

Aaron Michel (24:42.91)
once in the Super Bowl. It was actually really the first ad designed specifically for the Super Bowl. And it was only shown once, but it was such an iconic ad that I'd say half the engineers in the Valley will still be familiar with it. It actually just had its 40th anniversary this, just like a month ago. So.

That's kind of the backdrop and the ad sort of stands for a lot of things that we would like to think that we stand for as well. But more broadly, what we tend to invest in is pre-seed and seed stage companies tackling legacy industries using software.

Mudassir (25:15.856)
Hmm.

Aaron Michel (25:29.442)
And so what we, if there is one unifying theme across all of our investments, it is a, an allergy to hype. So we've, we've managed to avoid anything in crypto, in blockchain, in clean tech, in scooters. We just didn't touch that stuff with the 10 foot pole. Unfortunately, our

Our storyline on this broke down with AI because we had already been investing in AI and then AI became the hot thing. You were like, well crap. Now, I actually think that within AI, we do love some of the areas that are a little bit less sexy, machine learning for predictive analytics, as opposed to LLMs. Within LLMs, we tend to look for areas that are

Mudassir (26:03.132)
Hahaha.

Aaron Michel (26:24.89)
Um, you know, that everybody else is not paying attention to, uh, you know, group, a couple of examples, we, we backed a company that is sweet spot. That is, um, of basically enabling.

I come from a contractors to, instead of using sam.gov, which is this website built in the mid 90s that looks and feels like it was built in the mid 90s, to find opportunities way, way faster and to...

And at the same time, too, instead of taking like two months or three months for a proposal to be able to write that proposal in minutes. Right. So the, the sort of space that was very unsexy to VCs previously, or another good example is, uh, rev. We w which is a company where. You know, there are cars have more and more sensors in every generation. And if you're an auto shop.

I...

figuring out which sensors a given car has and how to calibrate those sensors takes forever, right? You have to literally go through thousands of pages and some of us start out in shops like, well, screw it, I'm just not going to do it. But if you can figure it out, you can charge, you know, a huge amount more on a per car basis. And so that's a great use case for LLMs to be able to go through all that information and in moments say, here are the sensors, here's the calibration.

Aaron Michel (27:56.758)
go charge an extra $750 and do the calibration. And so that's really taken off. And the reason I bring these up are they're great examples of companies that are kind of in unsexy areas as opposed to like, hey, we're going to go build the next.

Aaron Michel (28:20.655)
AI for sales tool or AI vertical assistant of which, you know, there's a thousand of these. And so we just try to look where nobody else is looking. And that's kind of how we've thought about it.

Mudassir (28:26.8)
Yep.

Aaron Michel (28:37.454)
A couple of other data points on this. So we're usually leading or co-leading rounds, although we're happy to follow as well. These tend to be the $1.5 million to $3 million rounds, although happy to do the $4 or $5 million rounds too. And we're writing check sizes between half million to a million. And this tends to lead us into areas like supply chain and logistics, e-commerce, enablement, not DT.

PC, digital health, a little bit of PropTech, a little bit of FinTech, some DevOps, open source, areas like that.

Mudassir (29:17.688)
Awesome. So, a plethora of questions on all of these things. So, I want to start us off with the thing that you said, unsexy, and especially you're giving the example of users of AI in one of the companies in the car example that you're saying. So, let's start with the two questions. So, one is, why get on a hype train, especially...

VC is getting on a hype train. Why that is a bad thing? So I wanna know from like, okay, so from the founder side, it makes sense. It's just like, yeah, everybody is building something on the AI, might as well you just build something on the AI. Like that's the rationale most people have. Some years ago, that was blockchain, then metaverse, then crypto, or maybe like, you know, upside down or something. And now it's AI. So there's a hype cycle that's going on. So one is like, why getting on that?

that hype train is detrimental to any VC, or according to you, like why is that? So that is one. And the second question that I wanna ask you is.

Mudassir (30:25.84)
In my opinion, most of the VCs, or at least the ones that I have talked to, they pass on to those unsexy ideas thinking either the market is not big enough or the company cannot be scaled to a billion dollar company. Either way, the market is not big enough. So what's the rationale behind investing in these companies from your perspective?

Aaron Michel (30:53.136)
Thank you.

Aaron Michel (30:57.218)
So let's start with what's wrong with hype before we talk about what's right with unsexy. So what's...

Mudassir (31:05.596)
Okay.

Aaron Michel (31:10.078)
And the answer, by the way, is different for different stages of VC firms. But if you are a seed stage firm, by the time that a company is on the, by the time that a given trend is on the cover of Fortune magazine, you know, it's way too late to be investing in that trend. And so let's just break down what a hype cycle really looks like. Right.

More often than not, the way these things work is a really well-known VC had a multi-stage, you know, super brand name, multi-stage fund, makes a splashy investment and says, this is the future scooters, right? And because back then, you know, Uber had come out and, and

everybody was trying to figure out how to get in mobility and into mobility. And they were like, Oh, well, scooters, scooters and mobility. Crazy. Um, but so, you know, so somebody comes out and says, this is the future. And so as a result of that, I, and they make, make a big splash for investment. And so as a result of that,

You end up having a whole bunch of other investors could start plowing into the space saying, this is the future and they'll invest in the second best, the fifth best, the tenth best company in that space. And as they all come in, they're going to start bidding up these companies. So now you have lots of competition and higher prices, which is an awesome recipe. And at the same time,

Mudassir (32:33.902)
Yeah.

Mudassir (32:40.581)
Hmm.

Mudassir (32:50.54)
Yeah, the valuation goes up, yeah.

Aaron Michel (32:54.278)
The next piece of that hype cycle is all of these founders who are trying to figure out what they want to do, see all this capital plowing into this space and they're like, oh, well, this is a hot space and I want to get funded and I don't have an idea yet. All start a company in scooters. And so they're like, well, you know, scooters need batteries. Scooters need networks.

Mudassir (33:11.193)
Oh.

Aaron Michel (33:18.626)
During the scooter craze, there were so many auxiliary versions of scooter companies, you just wouldn't believe it. There's just a thousand different variations on the scooter ecosystem that got started. And so all these founders come plowing into that space as well.

And so now you have even more competition. So you've got a ton of competition, heightened prices, and then you fast forward three or five years and investors are like, oh, why? Like, this didn't turn out well. What happened? What went wrong? The founders say the same thing, right? And so getting in on that type of hype cycle is just not, it's not an attractive place to be. I'll tell you the exception of that role.

The exception of that rule is if you are late stage and, you know, late stage investor and, uh, you back the right super hyped company and are able to even hype it more, right? Like a 16 Z this is, this is part of their growth model, right? They built out a media arm where they'll come in.

back a company with a large valuation and be able to keep pouring more capital into it and take the amount of hype around that company and exit and make that the company. You know, that's fine for a growth stage investor, but for a C stage investor, once there's already these 10 competitors, each of which have venture backing, each of which have strong engineering,

you know, to go in and back the 11th competitor, that's crazy. And so that's just not a place where I would wanna play. And so instead, to go to the second part of your question.

Mudassir (35:03.988)
Hmm.

Aaron Michel (35:10.99)
It's a great place to be if you can go find an amazing team going after legacy, legacy industry where there's, you know, the, the real competition is some stodgy public company born in 1980 that, you know, has stopped innovating, can't recruit a good engineer to save his life. You know, that, that's a competitor I would choose any day of the week. And so.

Those types of opportunities don't necessarily have small markets, right? Like, you know, I'll give you an example. We had a number of years back, we backed a company called FairMarket and it was tackling enterprise procurement. And you know, now today they, there's a bunch of other followers that are starting to, to come after them. But back when we backed them, you know, they really had a very good headstart and, and they've executed well.

that. And their primary competition was like SAP Coupa. It was these large, stodgy public companies like, you know, Coupa at the time had, I think, like a 15 or 20 billion dollar valuation. It was the number two player in the space. And you had this young, hungry team, strong engineering, and great enterprise sales skills coming in and saying, we're going to build a much better...

modern day version of this. And that is very exciting. Now there are instances to your question where a company has phenomenal talents on board and is tackling a space that is...

you know, that's a little bit on the small side when it comes to TAM. And I think the question there, you know, where we've been wrong in the past has more often than not been where we passed because of market size and the founders were awesome and they figured out a way to expand into a larger adjacent market. And I think great founders

Aaron Michel (37:27.022)
If there are large adjacent markets, we'll find a way to execute and expand into those over time. The question is, can you get conviction that from point A, you can move into point B? And what do I have to believe for it to be true that the company is going to make that journey? And so getting to conviction on that.

Mudassir (37:33.828)
Yeah.

Aaron Michel (37:55.054)
just part of investing, but like, you know, Sequoia, I think passed on Uber because of market size initially. So they, you gotta have an imagination about these things too.

Mudassir (38:01.211)
Mm hmm.

Mudassir (38:07.368)
Okay, awesome. So another two part question. And I don't know why I always have two thoughts on every single thing. So I'm sorry about that. Okay, so the first thing that comes to my mind is isn't competition a good thing? Like we've been taught, like I don't wanna say taught, but this is something that I've learned from experience or whatever you wanna say that. Most founders, even like now the founders that I meet, especially the ones who are starting a company or something.

they would come out and they'll kind of pitch deck the moment you connect with them on LinkedIn, which is a horrible thing to do. But anyhow, they do it, they send the pitch deck. And the first thing that they say is, oh, we don't have any competition. And I'm like, ah, my friend, this is not a good thing. This is not a good thing if you don't know, because you haven't researched hard enough, there's always a competition. So the first question that I wanna ask you is, isn't having a competition a good thing? Is it like there's an existing market out there? Because if there's no market out there,

You're going to spend a lot of money in educating people that they have a problem, educating people that they need a solution. And by the time you execute, you're probably going to run out of money. So that is one thing. And then the second thing is, yeah, the second thing that I have in mind is, what we have seen, I think, is people who are runner up in any race tends to finish up higher. The first mover, like, yeah. So people who are.

Aaron Michel (39:19.331)
Thank you.

Aaron Michel (39:30.991)
Excellent.

Mudassir (39:35.076)
So for example, Orkut was the first one to introduce the social spaces and stuff like that. And then Facebook comes along, Leefrog that. So isn't that the first mover is not actually an advantage?

So yeah, two questions on that.

Aaron Michel (39:53.071)
So you absolutely want your founders to understand their market map. Right? If a founder tells you, and this certainly happens, founder tells you, oh, I don't have any competition and they do have competition. It's a huge red flag, right? You know, either they don't understand their market or they're scared of their market and are like, oh, if I don't tell him...

Mudassir (40:09.849)
Yeah.

Aaron Michel (40:17.75)
He's not gonna find out that there's, you know, this venture-backed competitor that's three years ahead of us. And so, no, you gotta be honest about that. But the ideal is that you have a market with a hair on fire need that is not being attacked because it is legacy, because it's unsexy.

Um, and there's not really strong venture-backed competition in there. And you have a founder who is paranoid. I, I love paranoid founders who are like, Oh, I like, I'm always worried about who's coming after me. I'm always assuming that there's going to be two or three competitors who are operating under the radar, who I haven't heard about. And so I got to move fast because I have to make the assumption that there's somebody on my tail.

who's really good. And so, love that, right? Like, that is the type of founder who I would love to find. But like, look, yeah, there's sort of the Coke and Pepsi thing, doesn't Pepsi make Coke better? Yeah, I mean, look, having competition does force you to be better.

Mudassir (41:09.743)
Hmm. Okay.

Aaron Michel (41:35.966)
Would I choose to have competition or would I choose to have a space all to myself? I would prefer to have a space all to myself. But, you know, it's just fine to have competition if we can be. So, and usually, you know, the vast majority of the time you do, right? It's great if you can get a monopoly, but more often than not, you're going to have some form of competition. Remind me what your second question was.

Mudassir (41:36.08)
Hmm.

Mudassir (41:41.208)
All to myself. Yeah, absolutely.

Mudassir (42:03.344)
The second question was, usually what we have seen, so you were talking about one of the companies and then the competition was a legacy competition, you know, these gigantic enterprises like not innovating or something like that. So my question is, we've always heard this thing which is called first mover advantage, first mover advantage. In my opinion, is the runner up that actually leaf rocks the first mover advantage, like the first mover? So yeah, thoughts on that.

Aaron Michel (42:28.586)
Yeah. So, first mover advantage, the strength of that advantage varies depending on the type of company, right? There are, for instance, for marketplaces, there's a lot of value to first mover advantage. There's network effects and so on. You know, there are other markets where...

first mover advantage is less important. And what matters most is just who can get to product, market fit first. But I would say no matter what, it's always to some degree better to be the first to market, right? It just gives you more time to figure out product, market fit before somebody else does. The strength of that first mover advantage varies depending on the nature of the market.

Mudassir (43:30.033)
Make sense. How do VCs calculate time, and sum? Because you guys do not believe. Not believe, like that's the wrong word. Because you guys don't think the founders know how to calculate that correctly. So what's the VC matter?

Aaron Michel (43:44.406)
Look, so I would just say that...

They, I think too much time is put into variants of this question, right? If you just do, if you just do as a founder, your TAM and you just have a simple, like I'm selling a widget, here's the number of potential customers I can sell it to. Here's the price of my widget. And here's the total amount that I can sell.

Mudassir (44:02.716)
Hmm.

Aaron Michel (44:22.466)
You know, that for me is kind of sufficient to get a general understanding of the size of the opportunity. And then, you know, what is spent, there's not nearly enough time spent on is the nature of the market dynamics, right? Which is, what do the tailwinds or headwinds in this market look like? Is there really a why now?

within this market, is there a, you know, a cultural, a regulatory, a business change that is creating real tailwinds that makes this the right moment and the right timing to start this company? Is, you know, sort of Porter's Five Forces type stuff as well. Like, what is the level of industry consolidation in the space? Does this...

Are you selling into a space where there's five players who have 80% of the market, in which case you have zero pricing power. It, you know, these types of questions are given very short shrift very often by founders and actually are much more important. Whereas, you know, this whole thing about, well, I think I can sell like this.

I just sort of make the assumption when I see a TAM number that like, you know, they could probably sell to a percentage of it and then some percentage of it is never gonna buy for X, Y, Z reasons. But I can make all of those back of the envelope assumptions once I understand what that overall TAM picture looks like.

Mudassir (45:50.173)
Hmm.

Mudassir (45:54.061)
Yep.

Mudassir (46:03.628)
Does looking at the TAM influence the investment decision? Like, okay, maybe the TAM is two billion or trillion, let's suppose. I don't know if the company is gonna be big enough. It ends up becoming a billion dollar company. But it's a great idea. There might be a decent market or something like that. So it's worth investing in.

Like the question, like, let me put it in this way. How much of an influence this particular slide has on any of the investment deal?

Aaron Michel (46:41.01)
I mean, it is, it's certainly important, right? I would say at this point with most markets, we generally have, more often than not, we already have kind of a prepared mind and a sense of what size of this market, but not always. And so for markets that we are unfamiliar with, having

Getting that sort of high level sense of here's what the size of the market is, is helpful. But then in that first conversation, if you have doubts about it, that's where you really get into it. It's where you really dig in and say, well, okay, so here's the overall market size. Let's talk about the breakdown of that market. How much of this is divided?

amongst these five large players, okay, you know, what are those five large players using, right? You know, a good example of this was talking with a company that recently that was doing AI for audit, which is a good idea. And

Aaron Michel (48:00.274)
And so they were selling AI tools to, and software to auditors. Um, and one of the key questions here is like, well, so much of that business is driven by the big four audit firms. Are those big four? So you've got this, this big TAM number, but a lot of that is the big four. And so are the big four actually going to buy this product? Well.

Probably not, right? Like you actually look at how the big four operate and these guys, somewhat surprisingly, actually build a lot of their own tools. And if they buy from you, they have so much market power that like you just don't have that much pricing power. So yeah, you know, you think about how that plays in

very seriously when you're thinking about what is the real size of this market. So the TAM is important, but it's sort of a starting point for the conversation about the market. It's not like one and done.

Mudassir (49:13.8)
Okay, great, great. So, and thank you for just covering all of these things up. So what we do is we do have a decent big of an audience, so very, very fortunate to anybody who's listening to or reading the newsletter and the blogs and all of that. So it's just about 25,000 people. So what we do is, before you were hoping on the podcast, we floated out this newsletter asking everybody, hey, Aaron is coming tomorrow on the podcast or today on the podcast, send us all the questions that you guys can think of so we can ask him. So, so.

Aaron Michel (49:41.998)
I don't know, what's coming?

Mudassir (49:43.532)
Yeah, there's all kind of those, trust me, there's like the crappiest of the crappiest that you could ever imagine, so not gonna ask you those. So we're only gonna stick to the good ones, okay? So not in any particular order, and the way that we combine them is like, okay, if there's much of them are on Pitch Deck, so let's talk all of them in a single section so you can answer all of them in a single go, like okay, so this is what Pitch Deck looks like and all that, okay? So I'm gonna start.

with a pitch deck because that's everybody's favorite. When a company was through different stages, it goes from pre-seed, seed, series A and beyond, how does the pitch deck evolve? Like what's the pitch deck looks like at pre-seed, it evolves to seed, eventually to series A because you do help people do that, especially with the portfolio companies and they eventually do it. So what's that evolution looks like?

Aaron Michel (50:40.554)
So you're just going into more and more depth as time goes on. And frankly, you have more data as time goes on. Nothing. My partner has a great saying, nothing kills a good story like data.

Mudassir (50:58.888)
Ha ha ha!

Aaron Michel (51:02.638)
You move into being able to offer a deeper dive into the business in the series A and then series B and beyond with each as the company grows. But in the early going, your basic for that pre-seed deck.

you're telling a story around, here's who the team is, here's what the opportunity is, here's what the early growth looks like, here's a quick look at what the product looks like, right? And here's what the grand world conquering vision is. And the deck...

regardless of whether it's pre-seen deck or a serious seed deck, just tell us a story, right? You've got a...

one line header at the on top of each of these decks or on top of each of these slides that if someone was to just flip through which is how VCs tend to look through a deck the first time they get it you know they go through the thing in 30 seconds if they go through it in 30 seconds will they understand the story that you're telling and find it compelling

Right. And so each of these slides tells a story. They're super easy to understand at a glance, right? These are not McKinsey slides. These are, these are venture slides, right. And McKinsey, the difference of course, being McKinsey slide. You can look at that thing for half an hour and be like, I see something.

Mudassir (52:36.441)
Yeah.

Mudassir (52:42.977)
Yeah, you won't understand a thing.

Aaron Michel (52:46.55)
As opposed to, you know, a venture slide, you look at it for two seconds, you're like, I get it. I understand what this slide is trying to tell me. And so you just want it to tell a story and the depth and breadth of that story just expands with the expansion of the company, right? You have more of a story to tell around the unit economics, around how things have evolved over time and so on.

Mudassir (53:13.304)
Okay, that's a good one. Thank you for just explaining that. All right, so the next one is, what is the evaluation method that you guys have at 1984? Assuming that you guys get a pitch deck and how do you evaluate the pitch deck? So, and there's a plethora of questions that I just jumbled up into it. So one is the evaluation method, like how do you evaluate an idea? And the second one that I wanna ask you is, what's your favorite slide on the pitch deck? Like what's one or two slide that you would like, okay, so I just only have like 30 seconds, might as well just.

Scroll it down to GTM or like whatever. So what is that? So let's start with that and I'm gonna add more layer on.

Aaron Michel (53:53.63)
Favorite slides are... I mean, I don't know if I necessarily have favorites, but certainly two that I'll pay a lot of attention to are team and vision, right? Who's doing this and what are they trying to do? Are they going for a home run swing? So that's... yeah.

I and then sorry the other piece of the question was

Mudassir (54:25.596)
So how do you evaluate the idea?

Aaron Michel (54:29.801)
And then in terms of how we evaluate the idea, so look, we're...

Aaron Michel (54:39.838)
We look at a pretty broad variety of different things, right? Obviously seed investors, if you're not looking first and foremost at team, you're committing malpractice. Um, so we, we spend, spend a lot of time on, on team. Um, but then on, on top of that, it's. I w

spending a lot of time looking at, is this a real hair on fire problem? The caliber of the problem that you're solving is pretty critical, right? And we are about 70% B2B SaaS, about 30% consumer.

Um, and with one of the beautiful things about B2B SaaS is you can just, just ask, you can go find, you know, you can take the product, go to a potential customer and have the, have the founder pitch that customer and ask the customer, does this solve a screaming need for you? Um, and you can do that a few times and get a sense of whether this is a hair on fire problem or not.

Consumers are fickle, right? The proof is in the pudding. We sort of need to see level of engagement for revenue growth and so on. But those are...

you know, pretty significant pieces of the puzzle that we look at. And then understanding the market dynamics, understanding the competitive map. All right. You know, there's these three competitors in the space. Where are they? Let's look at their teams. Let's understand kind of really what's, what's happening in this market and how do, how is it evolving, right? And just looking at the world through very clear eyes, ends up.

Aaron Michel (56:28.546)
playing a pretty important role.

Mudassir (56:31.02)
Awesome. So the next question was actually linked to the team slide. And the question is, what's more important to you, the team or the idea? But the question that I want to ask on top of that is, so I've heard this thing like a gazillion times, like the team makes everything, it has to be the team and all of that. The question I want to ask on top of that is, what do you look for in a team beyond just the headshots?

And how many of those headshots should be there? Because there's people who would just put like, I don't know, 10 people, like everybody on the fish tank. So, yeah.

Aaron Michel (56:57.612)
Yeah.

Aaron Michel (57:08.074)
Yeah. So yes, the answer of course is team. But I like your question, which I'll rephrase as what makes a great team. And so the answer to that for us and for me is a couple of things, right? One is you've got somebody who has really strong product market insights.

And you combine that with engineering excellence. And, you know, but this goes back to the need to move fast, the need for speed. And...

that is enabled by great engineering, right? Agility is only possible because you have great engineering talent on board. And we had actually looked at, when we went from fund one to fund two, and we looked at the sort of winners in fund one.

One of the things that really differentiated them was the fact, you know, all of our teams had strong, all of our teams had engineering, but the teams that were the best performing had truly exceptional engineering talent on board, uh, which was part of what enabled, uh, really fast, uh, shipping and excellent execution. So, so product market insight.

Mudassir (58:24.036)
Hmm.

Aaron Michel (58:36.422)
engineering excellence, usually combined with great storytelling and understanding of what great looks like. You know, have they worked for a great company like an Amazon or have they seen the zero to 100 path with, you know, with a startup? Do they know what great looks like? Are they, as a result of that, are they going to be able to hire well? Like, do they, when they think about hiring, are they going to hire a B plus player or are they going to recognize?

and be able to sell to an A plus player and get that person on board. These types of questions, along with a thousand smaller nuances. I'll give you an example. For enterprise sales companies, when you're raising capital,

Mudassir (59:14.378)
Hmm.

Mudassir (59:25.896)
Peace.

Aaron Michel (59:35.318)
That is effectively an enterprise sale. Uh, and I always worry when I see a founder who's starting an enterprise sale company that during the fundraising process is not particularly responsive. Uh, who, you know, I send them a note at 10 AM and I hear back from them at 8 PM that night, it's like, well.

Mudassir (59:38.981)
Hmm. Mm-hmm.

Aaron Michel (01:00:01.39)
Responsiveness matters. The best enterprise sales founders in our portfolio, who, you know, these are people who are running series B and C companies in many instances, I send them a note and even though these are some of the busiest people in our portfolio, they'll get back to me within two hours. And so it, it's crazy to me and they've already, you know, they've got my capital, they don't need anything. Uh, for me, but if, if you are raising.

Mudassir (01:00:31.926)
It's the responsiveness.

Aaron Michel (01:00:32.024)
and enterprise sales founder and you are not responsive to the person who you are effectively selling to, that is concerning. So there's all these little nuances like that we keep an eye on as well.

Mudassir (01:00:36.143)
Hmm.

Mudassir (01:00:47.328)
That's interesting. I recently come across a stat. I forgot the resource of that. And they said something like, if you are selling something, which is a subscription or whatever that thing is, if it's more than $500, so that's expensive subscription, whatever that you're selling, one time, whatever. And you do not respond to your customer within the first 15 to 30 minutes. Chances are.

your sales lifecycle is going to be three times longer than it could be. So responsiveness is very important. And I was like, yeah, it totally makes sense. If somebody sends me something or I send something and I don't hear back for two hours, it usually means I'm not going to hear back for the rest of the month. So it's usually that. Okay. Awesome. The next one is what are the pitch deck red flags for you? And might as

Aaron Michel (01:01:18.41)
Yeah. Yep.

Aaron Michel (01:01:33.25)
That's right.

Mudassir (01:01:43.376)
the cap table red flags for you as well.

Aaron Michel (01:01:47.854)
I mean, so, so pitch deck red flags, that there's unfortunately for founders, sort of an endless list, right? Like if it's a solo founder, that's a red flag. If it is a...

Mudassir (01:02:02.152)
Okay.

Aaron Michel (01:02:08.078)
Uh, if you look at the founding team and neither of them has sort of seen what great looks like, uh, that, that could be a red flag. If you, you know, if it just looks like not much effort was put into designing that it's deck and it just kind of looks like crap, you kind of wonder what sort of product they're going to put together. Um, there's, there are things like that. If, um.

Mudassir (01:02:26.736)
Hmm.

Aaron Michel (01:02:42.975)
So, you know, there's a lot around the pitch deck that can go wrong, right? And so it...

Mudassir (01:02:47.548)
Hmm.

Aaron Michel (01:02:51.13)
You really just want to make sure that in that pitch deck, you tell a story. And that story is going to be easy for someone to understand who has never heard of your business before. And so if, if I was on the founder side of the table, look, you are deep in your problem.

on a day-to-day basis and sometimes it's easy to forget that everybody else is not equally deep. And so I would put together your deck and then send it to somebody who is going to give you very blunt feedback and ask for, you know, ask them did you flip through it in a minute and what did they think? By the way, ideally doesn't know much about your company.

Mudassir (01:03:26.012)
Hmm.

Mudassir (01:03:44.408)
Interesting. And what are the cap table red flags in your opinion?

Aaron Michel (01:03:49.474)
Yeah, I mean, you don't want to beat up cap table. Right, like, you know, it's obviously concerning the more of the cap table has been eaten up by the time that the company is reaching someone like me. Right, so.

If I'm a pre-seed or seed investor and the founder has already lost like 40% of the cap table, it's cause for concern. Right. You're like, how did that happen? And so they just want to be careful in the early going that it's, you know, each round you should be giving up somewhere in the range of like.

15, 25% of the cap table. But if you've given up like 35% or 40%, that you should be questioning why you're doing that and what other options you have.

Mudassir (01:04:42.117)
Thank you.

Mudassir (01:04:51.313)
Yeah.

Mudassir (01:05:01.268)
And one thing that I would like to add is, and let me know if you agree to that or not, most people who are raising these safe notes after safe notes after safe notes, they're having this sort of problem. They don't know how much the company they've already diluted, and then by the time they get a price equity down, they're like, oh, so there's only 55% of the company left. So we've already diluted like 45%. So yeah, that's another thing that we're seeing these days.

Aaron Michel (01:05:26.93)
Yeah, well, that was much more of an issue when pre-money notes were, saves were kind of the thing because nobody knew, including the founders, how much they had, and it was disastrous and you have to spend a lot of time sorting through it. One of the nice things about the post-money save is clarity.

Mudassir (01:05:42.615)
Yeah.

Mudassir (01:05:50.596)
Yeah. Yep.

Aaron Michel (01:05:52.01)
Right? Like, you know how much you own, we know how much you own. It's just clearer. And it's not like, oops, we hit the series A and it turns out that you own like 15% less than you thought you told us. Um, so that, that I think the post-mode safe was a, a lovely innovation that way.

Mudassir (01:06:05.755)
Yeah.

Mudassir (01:06:13.66)
Yeah.

question that I want to ask you separately, not from the list. Do you think the cap that we have on a post money save is essentially the valuation as well?

Aaron Michel (01:06:27.744)
Do I think that the cap on a post-money safe is equivalent to evaluation?

Mudassir (01:06:31.535)
Yeah.

Aaron Michel (01:06:35.512)
And, you know, edge cases aside, that is effectively how it functions more often than not. You know, there's, if you have an MFN and there's, you know, there's all this, there are certainly instances where it doesn't really quite functionally evaluation but effectively, yeah.

Mudassir (01:06:41.172)
Yeah.

Mudassir (01:06:56.072)
Usually you could say that usually it is okay. I did great. So I said that's a good one Yeah, one of my favorite question that we have on the list is what is one fundamental belief? About venture capital industry that you disagree with

Aaron Michel (01:07:14.734)
No, just that it's focused on shiny things, right? Like, you know, I mean, look, right now, space, let's just talk about space, right? There's, there are all these founders and all these VCs who are like, oh, space is going to be in this trillion dollar industry and it will.

Mudassir (01:07:19.644)
Hyping, hype.

Mudassir (01:07:29.583)
Okay.

Mudassir (01:07:38.728)
Hmm.

Aaron Michel (01:07:40.386)
One day and like there's one company, SpaceX, that's done exceptionally well. And everybody's like, Oh look, because of SpaceX, we should be pouring capital. And I'm glad that the people are investing in it. I'm glad that we're founders are working in the space.

Mudassir (01:07:46.103)
Yep.

Aaron Michel (01:07:59.102)
I want us to go out and explore space. Like my imagination is as captivated as anybody else's is, but that doesn't make it a good investment. I'm friends with one of the very few people who's had a major exit in the space space. And he would never make an investment in that space because it's just very rare for those types of companies to.

Mudassir (01:08:18.04)
Okay.

Aaron Michel (01:08:29.282)
to succeed or another example of this is artificial intelligence or not artificial intelligence, artificial reality, right? AR is one of these areas that's been the next big thing for like, you know, 15, 20 years, and it's always in virtual reality are always like just around the corner and you know, there's, there's this tendency to look at cool tech.

Mudassir (01:08:37.569)
Yeah, yeah.

Mudassir (01:08:49.772)
Yeah.

Aaron Michel (01:08:57.31)
uh, to look at the vision pro and be like, Oh, this is so cool. This is going to be the next big thing. Everybody's going to start, start using artificial reality. It's like, no, you know, the, instead of, I prefer instead of trying to predict the future.

Mudassir (01:09:10.472)
Hmm.

Aaron Michel (01:09:21.11)
Just look with very clear eyes at what's happening today. Don't make the assumption that because tech is cool, it is going to lead into a major new trend or change consumer behavior or anything along those lines. Just look at what's actually happening. And so that is something that I very much disagree with in venture capital is,

Mudassir (01:09:23.811)
Mm-hmm.

Aaron Michel (01:09:51.318)
They get very, very excited on average about shiny things. And I think that tends not to play well.

Mudassir (01:10:00.757)
I agree with that.

Mudassir (01:10:04.864)
It's a very interesting sort of a stake. Interesting sort of a stake. And the reason why I say that is because I think when you are a seed stage fund, primarily you're betting on future. It's like the company they're gonna invest in today, they're gonna come to fruition probably, I don't know, like 12 years ago, 12 years later or something like that. So it's a very much of a future game. But then again, you know, it's...

In many cases, yes, it's not a problem of today, it's a problem of future. You're solving that. But then comes all these things. AR and then the space tech and then there's all kind of these things. So yeah, there's always a balance. And I think it's more like what you align the fund with and what you don't align yourself with. So I think it's a personal preference. It's a personal preference that we can invest in this thing and not in that thing.

Aaron Michel (01:10:59.086)
Well, so I... I would... I would...

suggest that there is a difference between looking at tech and making assumptions about trends that it will create, which is what I mean when I talk about shiny space versus looking at trends that are happening today. And the forces behind those trends and making, uh, and making an extrapolation effectively about where.

Mudassir (01:11:17.128)
Hmm. Okay. Got it.

Aaron Michel (01:11:34.44)
the existing trend will take you. So, you know, I'll give you a couple of examples. We, we had invested a while back in a company called Kite, which is basically if renting a car is easy as ordering an Uber and, you know, there was at the time a, a very significant trend in, uh, of a drop in car ownership nationally and internationally.

Mudassir (01:11:36.976)
Hmm, okay.

Mudassir (01:11:45.828)
Yeah, yeah, the current of. Yeah.

Aaron Michel (01:12:00.282)
And, you know, the people would still need to get around. And so we were willing to bet that there was a strong why now for, well, if car ownership drops and people still need to get around and they want to go farther than an Uber ride will take them, you know, what do they do? And, you know, it turns out that

waiting in line at Avis and Hertz is miserable. But if somebody will drop that car off to you and you can make the unit economics work so that you get closer to software gross margins, like that's how I'll business. Or Postscript is another company that we were the first investor in and...

Mudassir (01:12:42.944)
It's the SMS one, the one that sends the marketing SMS. Yeah. Yep.

Aaron Michel (01:12:47.158)
Right, exactly. Almost like Milton for SMS is where they started. And when they were getting going...

Mudassir (01:12:50.755)
Yep.

Aaron Michel (01:12:55.798)
At that point in time, you were in this place where people had really, the trend was people had stopped opening emails from brands because they thought those emails were spam. They were spam, but they were opening text messages. They were opening SMS. And so they...

Mudassir (01:13:11.644)
Thank you.

Aaron Michel (01:13:17.59)
basically being the company that would drive that transition and build the playbook around that transition from email to SMS and being at the right place at the right time at that trend and seeing that trend clearly was powerful.

Mudassir (01:13:35.612)
Okay, three things that every first time founder should do beyond just building a business.

Aaron Michel (01:13:43.182)
And so.

Aaron Michel (01:13:49.049)
Three things first time founders should do when they build a business. So.

Mudassir (01:13:54.372)
beyond just building a business like, yeah, okay, they're building the business, they're building all of that stuff, but what else they could be doing? Could be a skill, could be anything that they're acquiring, like.

Aaron Michel (01:14:05.474)
So, you know, let me maybe rephrase that as three things that they could do, maybe as a precursor to building the business. Would that be a reasonable rephrasing or do you mean it differently?

Mudassir (01:14:23.912)
No, no, that'll do. But I was coming from, obviously gonna take it out because we're just discussing, but my idea would be to answer around, maybe they should build a personal brand, maybe they should do the networking, that kind of thing. Yeah, the business is important, but if you don't know how to do the networking thing, oh, whatever you're building is not gonna be worth it. You should build a personal brand. This is the way that I would assume that the answer should go.

Aaron Michel (01:15:06.562)
Honestly, I...

Aaron Michel (01:15:11.99)
I'm not sure they necessarily have three things. I want them very, very focused on what they're doing. So, I'll give my best shot at answering that, which is to say that the best founders are neck deep focused on solving this one thing.

I actually don't really want them to be doing a lot of other stuff. I do think, you know, from an engineering standpoint, there's a lot of value in. You know, keeping your eyes open as to what's happening, what's coming down the pike, what could be, what could be helpful to you? Um, but you know, the, the B beyond that.

Mudassir (01:15:43.092)
Interesting.

Aaron Michel (01:16:09.918)
I'm not necessarily sure that founders should be having a really wide angle lens in terms of doing a whole bunch of stuff, spending a lot of time networking, spending a lot of time on personal brand building. If you build a great company, if you're building something compelling, when the time comes to raise...

You don't have had to spend a lot of time in networking and you just go out and, you know,

Aaron Michel (01:16:49.902)
you knock on a few doors with the help of your existing investors, advisors, friends, et cetera, get a few warm intros, and you should get the interest that you want. You don't have to have spent a lot of time networking. And frankly, most of these networking-oriented conferences are kind of a waste of time. Where that's not true is if it is

Mudassir (01:17:04.388)
Hmm.

Aaron Michel (01:17:21.4)
networking from a sales perspective. So I'm going, you know, I'm starting.

Mudassir (01:17:25.93)
and

Aaron Michel (01:17:28.394)
a logistics company and so I go to a logistics conference to go meet respective customers, that's just fine. But I, I would put all that under the umbrella of company building. And so the, the perhaps disappointing answer here is I don't really think that founders should be doing all that much other than building their company. I want them to wake up thinking about that and I want them to go to sleep thinking about that and that's how it was when I started my company.

Mudassir (01:17:31.95)
Yeah.

Yep.

Mudassir (01:17:50.772)
Yeah. Good. Yeah, become paranoid about the problem and that's how you build a great company. Okay, cool. Do you believe warm intros work?

Aaron Michel (01:18:01.324)
Yeah.

Aaron Michel (01:18:09.066)
Yeah. Sure.

Mudassir (01:18:12.388)
Great, all right. So there's a thing that I want to discuss, but after the recording, so not that important. All right, so what are your thoughts on bridge downs, down downs, and crazy high stupid valuations?

Aaron Michel (01:18:18.862)
Okay.

Aaron Michel (01:18:31.541)
So we certainly saw in 2021, and have seen other points of hype in the past.

outlandish valuations that were not tied to revenue, not tied to traction, not tied to the market. And I think ultimately, while those felt good in the moment, there's a hangover that a lot of founders and investors are waking up with right now and over the course of the past year. And so, you know, I think generally speaking...

It is, it's healthy to try to, you know, try to get a valuation that is a little bit on the generous side, but not so massive that you're like, how in the world am I going to grow into this? Right? Because there will always be a downturn somewhere around the corner. And when that happens, you want to have valuations that were, you know, that were not unreasonable.

Um, and that you can, you can really grow into now. Sometimes things don't go quite the way you expect. Sometimes you took evaluation that was, you know, that, that just didn't match where the company was at. Um, and you're running low on capital. And when that happens, you know.

Sometimes you have to do a down road, right? It's part of life. And when that is the case, the most important thing is just getting the capital in the door, right? Making sure that your company survives until you're able to really get back to growth, get back to a place where this...

Aaron Michel (01:20:34.446)
really looks like a compelling trajectory again. So nobody likes down rounds, nobody loves flat rounds. These are things that anybody wakes up in the morning rooting for. But, you know, sometimes these are necessary. And when they are, you just have to, again, look at the world, your options.

Mudassir (01:20:41.572)
Yeah.

Aaron Michel (01:20:59.495)
and the market through clear eyes and figure out, you know, what is it going to take for me to raise my next round, stay alive and put myself in a position to be able to execute and grow and get the company back on the path that I want to be on.

Mudassir (01:21:18.328)
Okay, the next one is, and you're gonna love this one, I read on your website that you guys provide transparent and honest feedback, okay? Why most species don't do that?

Aaron Michel (01:21:31.502)
Oh, look, I don't want to speak for anybody else. I would just say that when I was on the founder side of the table, the feedback that I most preferred was blunt feedback that did not beat around the bush. And now that I'm on the venture side of the table, I try to pay that for. And I've found that...

Mudassir (01:21:39.174)
Okay.

Aaron Michel (01:22:01.49)
that founders, when I position it to them as such, view that correctly as a mark of respect for them that I don't wanna waste their time and I wanna give to them straight. Here's what the situation is. Here, let's kind of think this through together. And...

You know, I would, I think that a lot of VCs hopefully do that. I'm sure some don't, but this is why you do your reference checks when you're, when you're deciding what you want to work with.

Mudassir (01:22:36.694)
So you don't say, oh you're too early for us? That kind of thing.

Aaron Michel (01:22:42.178)
So it's an excellent question when it comes to past emails. I try, 90% of the time, I can be pretty transparent about why we're passing. 10% of the time, you know, it's because of the founder and you don't wanna be a dick.

Um, so that is an instance where I am not transparent, right? I, if I'm just like, you don't know, I'm sort of saying, Hey, I don't, I just don't think that this person has it. Um, you know, I'm not going to tell them that that's sort of a. Just a dick move.

Mudassir (01:23:03.122)
Hmm.

Mudassir (01:23:08.165)
Okay.

Aaron Michel (01:23:21.178)
Um, and so, uh, in, in those instances, I'll, you know, pass for what is usually a secondary reason. Um, and you know, that I think a lot of VCs probably do something somewhat similar, which is why as a founder, you know, it's important to pay attention to the past emails, but not too much attention because there is a little bit of bullshit to this.

Mudassir (01:23:39.133)
Hmm.

Mudassir (01:23:49.688)
Okay. Okay, thank you. Thank you for the honesty. All right, the last one that we have on the list is why VCs can't be contrarian.

Aaron Michel (01:23:58.582)
Well, so one of our advisors, Andy Rashcliffe, who founded Benchmark as well as Wealthfront, has a great saying that to succeed as a seed stage venture capitalist, you have to be non-consensus and right. And so it is hard to do that. It's hard to be right, hard to be non-consensus.

And it's particularly hard in an environment like today's because there's downstream financing risk. We can be non-consensus for 12 to 18 months until the company's next raise, at which point somebody else has to believe what we believe. And so,

You know, that's the scary thing. And that is a leap that we have gotten very comfortable making. And fortunately, I think we've actually gotten to the point now where a number of

of VCs who are a little bit downstream of us, see 1984 coming in as a signal that this space might be getting more hot over time. But that is the risk. You're making this bet that the space that everybody else is like, well, that's a terrible space. Why would we invest in that? That this company is going to execute so well that they will defy those expectations about

the space and make other great investors look at that and say, all right, I didn't think, I thought this market sucked, but look at how well this company is doing. I'm going to make a bet on it too. And so, you know, that's a tough bet to make. It's so much easier to just say, well, everybody else is plowing capital into foundational models. I should do that.

Mudassir (01:26:06.34)
Okay, awesome, thank you for that. So, and we do have this one small ritual on the podcast. So what we do is we ask all our guests a question for the next guest without revealing who the next guest is gonna be. So I have a question for you, also gonna take a question for the next guest. So the question that the previous guest left for you is, do you think Apple Vision Pro will be a flop or a success? And why do you think so?

Aaron Michel (01:26:32.107)
I think it's... Probably not.

Mudassir (01:26:33.228)
I know you mentioned that, but I was like, okay, please, please save it. Please save it for the end. So, so yeah.

Aaron Michel (01:26:39.658)
Yeah, I question whether it will take off. But I don't think it is intended to take off. If I had to guess, and I don't have any particular insight into Apple's product management, but I would imagine that this, given the price point, was designed to go after the.

Aaron Michel (01:27:05.886)
real tech enthusiasts who also have plenty of capital. So this wasn't, at the current price point, it wasn't intended to be like this massive consumer success. I think what they are betting is that they will be able to, you know, evolve the product line over time into something that is gonna have much broader consumer adoption. I'm skeptical.

Mudassir (01:27:16.341)
Yeah.

Aaron Michel (01:27:35.254)
But at some point, AR is going to be a hot thing. Maybe this is the timing, but people have called that timing incorrectly over and over and over again. I'm not prepared, based on what I'm seeing today, to be like, oh, this is it. So that's sort of where my thinking is there. In terms of a question for the next guest, say,

Mudassir (01:27:40.551)
Yeah.

Mudassir (01:27:47.025)
Yep.

Mudassir (01:27:51.477)
Mm-hmm.

Aaron Michel (01:28:03.53)
What's the worst decision you ever made?

Mudassir (01:28:06.892)
Okay, personal or professional? Their choice. All right, awesome. Let me pause the recording, say the bye's and thank you's and please stay after that, okay? All right, thank you so much, Aaron. Really lovely talking to you. Thank you so much for the insights, for the wisdom, for all the things that you shared with us. Really fun talking to you.

Aaron Michel (01:28:10.498)
their choice.

Aaron Michel (01:28:30.378)
This was a pleasure. Thank you for having me.