5 VC Secrets After 20 Investments

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After investing in 20 startups as of October 2024, here are five non-obvious insights that I have seen about the way that venture capital operates.

And, more importantly, how Tundra Angels finds arbitrage in these opportunities.

1. Venture Capital Often Acts Like Tinder

Investors decide to take founder meetings from the startup’s pitch deck. But the pitch deck is a fallible data point to base such a decision on.

I’m happily married with several kids so I’m not on Tinder. But from what I hear and read about Tinder, a match is based on one single variable - how attractive that person is.

When swiping left or right, Tinder does not account for the other person’s personality, their interests, their emotional intelligence, etc. everything else that actually matters about being in relationship with that person.

Venture capital’s Tinder-like “hot or not” moment often is when the investor looks at the pitch deck.

Investors look at a pitch deck for 20 seconds and decide if they want to take a meeting. But investors optimize for a limited set of variables (i.e. like Tinder) and inadvertently make many assumptions about the company. Yet, they do not know which assumptions are correct… or incorrect.

I once sent a pitch deck of one of our portfolio companies, Pyran, along to a potential investor, who then passed it along to another investor in their network who was strategic to the space.

Several days later, I received an email back from the first investor, who forwarded me the strategic investor’s comments after reviewing the startup’s deck.

The strategic investor drew completely incorrect conclusions about the company. In the visual below, the middle section is the investor’s comments on the company after reviewing the pitch deck. For your benefit, I commented in the margins on what the real truth of the company was. You can see how the investor completely misinterpreted the company’s state of play. Oh no, I wasn’t ticked off at all….

Now, many times, I’ve been guilty of making assumptions about the business from the pitch deck. Then, in the meeting with the founder, I learned that the assumptions that I drew initially about the business were completely off target.

So, what Tundra Angels does differently is that if is within our thesis, I reach out and schedule a meeting. Or, at a minimum, especially if it appears to be quite earlier stage than Tundra Angels typically invests, I email the founder additional questions to clarify my assumptions about the business.

Venture capital’s Tinder-like approach only optimizes for a limited set of variables, but also excludes the possibility that the founding team actually is onto something profound, but just has terrible marketing, messaging, and pitch deck design skills.

✅ An investor’s poor assumptions is the #1 factor that can kill an startup opportunity before it’s even begun. ✅

The only way to combat this is to go beyond the deck and schedule a meeting, or to directly ask the founder about specific things. Investors need to put themselves in a position to ensure that you are not missing a founder that is really hot…. when they look like they are not.

2. An Over-Fixation on Valuation and Stage Sensitivity

✅ I think that it’s a overly convenient for investors to pass based on stage and valuation. ✅

Valuation and stage sensitivity creates an artificial strike zone as a filter mechanism but it’s actually a very poor filter for good opportunities.

At one time, another one of our portfolio companies was looking to fundraise. I carefully curated an investor introduction to a strategic investment firm that I thought would have been an excellent fit for the company. I sent a thorough email to the director of the angel network. The startup applied on the website, and then later receives this email message:

“Our screening committee has reviewed your company’s application, and decided not to invite the company to present to our membership at this time. The Committee members did not consider this an angel investment opportunity.”

Essentially - based on the startup’s valuation, “it’s too late for us.” The firm made a decision based on the pitch deck and a website application.

Separately, I presented this opportunity to another VC firm. In discussing with my contact there, the firm indicated that the current valuation of the round was higher than the firm’s typical valuation range.

Again, that firm passed the company after a pitch deck and a simple screening call.

And yet, the market comparables for our portfolio company with a similar type model start at several billion dollars with a range up to $40B. Plus, the company has a breakthrough technology for its market with robust defensibility. The vast majority of the marquee-level companies in their market are customers. But it doesn’t fit because the strike zone of valuation is $10 million off?

That’s baffling to me. Passing on something that is too late when the upside potential is remarkable, with a de-risked product, market, and technology?

✅ I believe that by over-fixating on valuation and stage and using that as a filter mechanism, investors are missing high potential companies by not swinging at something a bit out of the strike zone. ✅

Investors should instead think like Los Angeles Dodgers baseball player Shohei Ohtani, who in a game in September 2024, swung at a ball far outside of the strike zone and drilled it 423 feet to deep center for a home run. Full article here.

Don’t Heed the Strike Zone as Carefully

It’s not just “investors like us” that face this tension. One of the VCs that belong in the Hall of Fame feel the same tension.

I heard a story once from Mike Maples Jr. from Floodgate VC on his Starting Greatness podcast. On one of the episodes, Mike casually makes a fascinating comment to the person that he is interviewing. In the late 2000s, one of his investor friends from Canada reached out to him. The investor said, “Mike, I know that you and Floodgate do seed stage deals. I have a startup that is raising their Series A. I know it’s a bit later than you typically invest but I wanted to at least mention it. The startup’s name is Shopify.” 

After sharing that, Mike started bemoaning to his interviewee, “I should have had the presence of mind to take that pitch. But I passed because it was a later stage than we typically do. So, I passed on the intro.” 

Passing merely based on valuation and stage is overly convenient.

In Tundra Angels, we’ve invested in a few select companies where the entry price is higher than the average of our other entry valuations in the rest of our portfolio companies. Instead of starting with valuation and stage, we start with the end market opportunity and work backwards to pricing. This approach allows us to see the opportunities for what they are and then evaluate if the pricing makes sense for the opportunity and potential upside.

We believe that it may be a smart investment decision if the company has a check-mate move in their end market and the exit comparables allow us to still achieve a healthy exit multiple.

✅ Filtering startups based on entry valuation and stage almost never accounts for the reason why venture capital exists in the first place - for exit valuation and potential upside. ✅

3. Learning Velocity Matched with Continual Curiosity

The pattern recognition that an investor develops through their learning velocity must be matched with a continual curiosity.

I would have missed Tundra Angels’ 19th investment if I wasn't curious. With EVEN, I held two pre-existing assumptions that nearly tricked me into missing Tundra Angels’ 19th investment, EVEN, with Founder and CEO, Mag Rodriguez.

Assumption 1

Years ago, I had heard about EVEN after their pre-seed round was announced in April 2023 in this article. Do you know what I thought?

“The world doesn’t need another Spotify.”

I thought EVEN was in the same category as Spotify, Apple Music, etc. I carried this assumption for two years because, before my reach out to Mag, I was never confronted with a context to learn about EVEN.

Assumption 2

The second assumption is that I knew about a music tech startup that was a darling of the Wisconsin startup scene. This startup unexpectedly closed its doors. I then assumed that the music tech space was a hard industry to invest in.

So, when I saw EVEN was raising funds in June 2024, I consciously ran through the two assumptions above.

But despite those assumptions, I still decided to reach out, just in case my assumptions were incorrect. Better to give ourselves the opportunity to invest rather than to decline the opportunity without true knowledge of what it entails.

I’m so glad I did. You can read the rest in this article here of Why We Invested in EVEN. Not being curious would have cost us our 19th investment in a solid company.

Investors get into trouble when they let their mental model define their decision too rigidly. That’s why a continual curiosity is paramount.

4. Expanding the Aperture of Deal Flow is Critical

Expanding Tundra Angels’ aperture of deal flow has helped us see more quality opportunities than we were seeing just a year and a half ago.

Startup deal flow is like this. The investor is standing on the bank of a river, watching startups go by. As they go by, you are trying to decide if you want to reach out and grab it, because you don’t know if it’s going to be available later. But, add to the metaphor that every investor at every firm is standing on a different part of the bank, and has a different view of the river. And, there is not just one river, but the river is actually a delta, where the river divides into smaller channels, all of which have startups flowing by…

Ultimately, deal flow is the inverse of a network. Because it’s a network, every person involved in a VC firm is their own deal flow delta.

I counted recently that Tundra Angels has 36 deal flow channels and counting. To be clear, only one of those channels is “Investor Referrals,” of which we have a multitude of investors that have referred deals to us. The other 35+ are non-investor sources.

Over the last year and a half, we’ve seen an increase in deal flow quality. Of course, our sophistication and investing acumen has improved. But all things being equal, what has changed has been how we have intentionally expanded our deal flow aperture. Here are some examples:

• I spoke with a VC fund with $200 million in AUM just last week that sent me a solid Wisconsin startup deal that I was completely unaware of.

• Our 20th investment, Cylerity, came through the Midwest Founders' Community quarterly Founders’ Fest event. (See article here)

• A company that recently pitched to Tundra Angels came from an Indiana-based VC that met through a conference. This investor told me that a portfolio company CEO was based in Wisconsin…. we are now in due diligence with that company.

I think it’s natural for an investor’s deal flow network to reach a point of equilibrium. At some point, the VC firm gets to feel pretty comfortable (or overwhelmed 😉 ) with their deal flow channels, finds an equilibrium with who its primary co-investors are, and continues to execute.

✅ Yet, venture capital is about finding opportunities that others do not. One of the best way to do that is to explore more of the rivers of the deal flow delta. ✅

5. A VC’s Brand Matters Significantly

✅ Most VCs massively under-index how much their brand can activate opportunity. ✅

At some point in 2023, Tundra Angels hit an inflection point. The inflection point was a season of time when startup founders would very regularly comment to me that they were grateful to be considered by Tundra Angels for investment.

Around a similar time, VC investors that we had scattered contact with previously now seemed to be eager to build and maintain relationships with Tundra Angels.

Additionally, again around the same time, an investor friend of mine made a comment to me of, “When Tundra Angels invests, it means something.”

Now, I am not boasting. I use this as an example to say with an exclamatory effect that a VC’s brand does impact perception in the market.

How did Tundra Angels go from making its first investment in March 2021 to a statement of “When Tundra Angels invests, it means something”? Here are a few convictions that we hold to…

Conviction Number One:

The founder is the hero of the story, not the investor.

Conviction Number Two:

The founders are the ones that grant investors the opportunity to invest in their companies. I always have the posture that Tundra Angels needs to do everything we can to the founder to demonstrate why we should be in every deal that we want to invest in.

Conviction Number Three:

Trust with co-investor relationships is one of the ultimate assets. A recent example of this is EVEN. When I first met Mag Rodriguez, he told me their round was oversubscribed. After the first call, I threw out to have another call the next week.

On that second call, one of the things that Mag told me was that he talked to his current investors about Tundra Angels. Both VC firms gave Mag the green light and said, in his words, “Tundra Angels is legit, you should move forward.”

It feels good when an investor gets in a deal they are excited about. But it feels five times more special when co-investors want you in so badly that they tell a CEO with an already oversubscribed round to take you in.

None of that would have happened if our brand was not one of our top assets.

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