A Deal that Defines You: Being the King/Queen of Your Island

When I was early in my venture career, I was easily impressed by buzz around a deal. If the deal had high quality firms circling it, I felt FOMO. The reality is that I didn’t have confidence in own ability to assess companies independently, so I was easily swayed by others. In reality, most venture capitalists feel this way – not just early in their careers, but throughout them. Many in our profession are steered by “consensus” thinking and I was no different. To me, breaking into venture was a dream for someone who went to University of Richmond, not Harvard or Stanford. Shouldn’t I be happy to be in the pack? Wouldn’t that be enough?

Ultimately, I realized I wasn’t in the pack. I found that if a deal was making its way through the consensus circles to me, a VC with limited insight or value-add to those opportunities, then chances were it wasn’t an amazing company. Perhaps some of them could be, but the reality is that I couldn’t really tell which of those consensus deals would be great and which were simply the herd marching over a cliff. The more I thought about it, I realized the negative selection bias I had for those deals. I wanted the opposite – how could I create positive selection bias for the deals I invested in?

As I was speaking with another investor about this, they said “every investor’s goal is to be one of the first 5 phone calls for that opportunity.” This really stuck a chord with me. I quickly realized that if I didn’t feel that I was one of the top 5 phone calls for that opportunity, I should probably pass. That narrowed my funnel a LOT and I found a lot more time on my hands. More time to research, more time to spend with potential customers and more time to spend on the companies I actually cared about (the deals that could change my life). The result is that I’ve gone far deeper on a few topics (in particular energy, insurance, supply chain and commerce enablement) than most of my peers. Ultimately, these became the spaces that defined me. The spaces where I felt I could confidently evaluate independently and add value. The spaces that I felt I could be one of those first 5 phone calls (at least at seed stage).

A few years ago, my friend Jake Saper gave me a piece of his advice. We talked about the power law dynamics of venture and why being top 5 wasn’t enough, ultimately it was about being #1 – as he called it “being king or queen of your island.” Firms like Emergence have a pretty sizable island – if you’re a founder building an enterprise software company, they are undeniably one of the top firms you are calling for your Series A and/or B. For me, an island of that size and/or scope just simply wasn’t possible. But perhaps I could be King of other islands. Ultimately this is how I started to view the categories we invest in at Equal – how we could be the #1 seed stage firm for those sectors. To get there, we’re often even MORE prescriptive (making our islands even smaller) to be the #1 firm for a singular thesis such as “Freemium TMS” or “Business in a Box for Clean Energy Developers.” These islands may be small, but our team believes these to be some of the most exciting and important opportunities of our time, so owning an island like that can really move the needle for us.

Now that I’ve been an investor for 10+ years, I have a much clearer sense of the deals that excite me. I love companies that have 1) founders who bring homegrown industry insight / relationships (expertise that is earned, not learned), 2) unique GTM strategies capable of differentiating from the market and achieving rapid critical mass (aka “wedges”), and 3) business models with strong flywheels (or what we call “capabilities”) with the possibility for a monopolistic moat in their value chain. Nearly as important, downstream investors, co-investors and other sources of deal flow know what types of deals I like and that’s reflected in the quality of deal flow we see in those categories compared to those outside of our core areas of expertise.

Increasingly, investors will send a deal to me and say “This feels like a Rick Zullo deal.” Some of them are great and some of them aren’t, but I know that I’m in a position to evaluate those opportunities better than most VCs. I’m not investing based on the herd or FOMO, I’m investing based on my own independent views. We’ll see how things turn out, but for better or worse, those are the types of deals that will define me. Those are the types of deals that I know I’m best positioned to do. The types of deals where I’m best positioned to develop conviction in the non-consensus and help that company become consensus along the way.

Whether that island is big, small or underwater (hope not!), it’s me and that’s where I’m going to be investing.

*Read this on Medium here