I. Book recommended in this interview
II. Episode Transcript
BOOK RECOMMENDED IN THIS INTERVIEW
Jeremy: Mark lives by the motto, “The more you give, the more you get.” He has invested in more than 40 companies including Coinbase and Warby Parker. He released the book The Fundraising Rules in 2013. He’s worked with Bain, KPMG, Draper Fisher Jurvetson and is currently a managing partner at Interplay Ventures. He holds degrees from Columbia and Duke. Mark, welcome to the show.
Mark: Thanks for having me.
Jeremy: It’s great to have you here. Thanks so much for being on air and we’ll go and get started. You’ve published articles on a variety of topics about hiring, with some of your articles having great headlines like Why Never Hire Jerks and Your Company Is Who It Hires. What are the top three mistakes or areas that people miss when they’re hiring?
Mark: I think hiring distills down to getting someone who can do the job and getting someone who can be happy in a functional part of the team. I think the mistake I was living when I was getting into the game of employing people was that I was focused very heavily on finding people that can do the job. It turns out most business is literally not rocket science. I believe if you find people with the right energy, will, effort, organizational skills and beyond, they’re going to succeed in almost any capacity, even if it’s not something they’re not trained in or have a lot of experience in.
The biggest mistake I made in the beginning - and I have a feeling a lot of people still do it - is they get the resume out of the pile, they scan through it, they’re looking for people who did the same thing in another company. I couldn’t give a shit about that. It’s helpful but it’s not the core thing for me. One of the biggest mistakes is hiring for function over fit. I would much rather take someone who’s got the hunger, the cultural fit of the organization, is happy and maybe has never done the role before, than take someone who’s done it for dozens of years but is non-energized by it or a force of negativity.
I think the cultural fit thing, if you get that right since very few areas in business is so complicated and hard to learn these days, I think the game is getting people with the right energy and positivity. If you do that, it tends to work itself out. That’s the biggest thing people make a mistake on. It’s the fear of getting to hiring wrong so they hire people who did it before because it seems safe. In doing so, they often hire people that may not fit with the organization.
Jeremy: In a sense, you’re using character qualities, like someone’s work ethic or how humble or egoist they are. You’re looking for evidence of that in the interview process.
Mark: Yes. Unfortunately, hiring is a game of probabilities. You’ll never know for sure if it’s going to work out. But if you have five or six people meet somebody, they’re looking for certain characteristics. Sure, qualification and experience are good things too. I’m not saying those should be dismissed. It’s kind of terrifying for me, the idea that people would just be hiring based on a resume. I don’t look at people’s resumes first. I just want to figure out their fit, their character, and how do they match against these adjectives that we define as what it means to be a [inaudible 04:30]. If it’s a technical job like an accounting role, sure, they have to be trained. There’s some jobs you need training and some where you don’t. It’s got to have this common thread of fit. But again, it’s just one ingredient. When you’re hiring people and people are your most important ingredient in the business, to not take every opportunity to increase your probability of getting it right is an injustice to the team you’re hiring for and also the candidate. If you hire the wrong person, it’s awful for that person. There’s a matching game here. They have to end up in a place where they’re happy and successful.
Jeremy: One of the things I found in addition to some of the elements you’re describing in hiring as an effective indicator for an applicant’s success on a job, I found that the ability for the individual to do the work being requested can and maybe should be one of the primary determinants in hiring. I found that doing some kind of preliminary exercise or asking the candidate to do some approximation of the work that’s being done oftentimes ends up proving to be one of the most reliable indicators.
In my own work, that’s what I use as the core. I use some of the other elements you discussed like character and fit to complement that. When those two are synchronized, I find it the most effective.
Mark: I agree with that. It’s a good insight. You do references, you do everything you can to increase your odds because getting it wrong is economically and more importantly, emotionally expensive for a lot of folks.
Jeremy: Absolutely. That makes sense in the context of using personality tests or any kind of indicator that could add some degree of additional context on that candidate. Do you think that personalities for individuals change over time or do you think they’re somewhat fixed?
Mark: I’m sure they change. The people who know this framework better than I do would probably have stronger viewpoints. But the way it was taught to me in some of these personality tests is that it’s like a right hand, left hand. You’re born with the predisposition and the trades they measure. You can strengthen your left hand and you can become almost ambidextrous but you’re always right-handed. So it’s understanding where people start, and then how close to the center they are or how ambidextrous they are. Those are all interesting indicators in trying to match and find fit, again, in that one part of that evaluation process. It’s not the only thing.
Jeremy: How’s investing in companies different or similar to hiring people? I’m curious on your experience in that.
Mark: I think there’s probably some parallels in that in both cases, you’re making decisions in areas of tremendously imperfect information. So that’s probably a parallel that holds. Whether people look at it this way or not, you are investing when you hire somebody. You’re buying their time just you’re buying equity in a venture investment.
Jeremy: How did your role as an investor translate into the rest of your life and what is the takeaway around that for you?
Mark: I’ve been doing this for a dozen years now. One of the things that really stunned me when I was probably about six to twelve months into the venture gig I was trying to get my bearings on what was a good investment was that very often, wonderful companies are not good investments. That seemed very counter-intuitive to me. When I first started, I thought, we can find companies who can be profitable or grow in a certain way and have other right characteristics, why would you not want to own a piece of that company? What I learned was that there’s a subset of good businesses that are good investments. What a good investment has to have is not just a good fundamentals business, it’s something that’s going to create value in one way or another and there’s a couple of ways a company can create value. Most notable is revenue and profits, but there’s a couple of others. But it also has to have certain investment criteria that fit. So it has to produce the right level of return for the risk and the lack of liquidity the investor’s taking.
The third dimension which is not really obvious to the entrepreneurs on the outside is that it has to be a fit with the fund. That’s not just their thesis. If it’s a biotech company, it’s not going to be a fit for an IT investor, that’s pretty obvious. But it also has to be a fit with the fund’s overall strategy. Based on the internal fundraising cycles, it might be that it’s only going to do a deal every quarter, or two deals a year, or a deal a month, or some other pacing. It’s timed well to raise more capital and stay in business in their own way, to operate they way they need to operate. All those other dimensions, all those other criteria that are kind of internal operations strategy were a shock to me.
When I showed up at the door of my first venture capital job, I thought the job was to go find the biggest, baddest companies that were growing really fast and write checks. But the filters and the lens you have to apply has a number of other dimensions that makes it more complicated to find deals that are the right deals at the right time. It also creates this paradigm where a lot of wonderful companies with wonderful teams and founders hear no from investors when they’re lucky to own equity in the company because of timing and other aspects that are related to the business venture firms. Saying no to a VC sucks. It’s an awful thing. Imagine when you have to say no to people a couple of hundred times a week. It’s draining. You could be the biggest dick on Earth and it’s still exhausting. So to say no to great companies in particular, I think it can feel a little offensive and it’s confusing for folks in some cases. It’s a very challenging part of the venture job.
Jeremy: In some ways, based on what you’re saying it’s easier for the entrepreneur to not take it personally if they receive a no because it may be based off factors like it doesn’t fit with the venture fund’s overall strategy.
Mark: Or a venture fund might have rules. There are some venture funds that take money that are funded by the state they work in. That state requires that the venture fund only invest in companies that have economic impact in that state. So a company from Illinois, Chicago, shows up and they’re pitching to a New York investor with New York money, which is not our situation. But they knock on the door and the VC says no, and it’s perplexing. The CEO knows he has a wonderful company. It has all the right things, and the VC may or may not want to advertise that to discourage other deals from showing up. So it’s this opacity between the decision-making process that happens internally that has a number of facets. If it was a little more transparent, it’ll probably be less stressful for folks. Fundraising is awful. It’s a hard game for everything. Those other dimensions complicate it so much more inside the venture firm that the entrepreneurs know about or see.
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In many ways, what you mentioned a moment ago about a company being a great business for its customers and executives, but the investors just have these criteria that they have to meet that aren’t always parallel with the company, whether or not it’s a good business on its own. A lot of people who are thinking about starting a business or already have one, they tend to forget that sometimes, those disconnects are not just out of their control, but also they shouldn’t impact how they go about their company or their business. It may just simply not be in line with the way the company needs to go.
Mark: I’d like to add one thing to that. There’s a section in my book, I think it’s page 30 or something. It’s about fundraising rules. I spent a lot of time and this is probably the most important thing I wrote about. The book goes through the whole venture process, all the terms, what the cycles are, why these seeds are saying no. It tries to illuminate transparency around these issues we’re talking about. This one section is the most important. It talks about aligning the fundraising strategy with the scalability of the business.
To your point about what we’re talking about here, good business hearing no, I’ll give you an example. I have a friend running a company and it has $5 million in revenue. He’s got an 80% profit margin. He makes $4 million a year. He drives a Maserati. He’s killing it. But if he was to raise venture - which he didn’t - the VCs would say, “Hey, you got to $5 million. That’s awesome. But it’s not growing anymore so we’re not going to get a big exit. It’s not going to move the needle for our fund. Let’s go take one more capital, which will dilute the CEO/founder and/or let’s try new business strategies that are risky. They may or may not work. If they don’t work, they may put a big crater in the core business.” This particular person had done it right. I think he understood that the opportunity to be about a $5 million a year, top-line and plateau there. He angel funded it, he bootstrapped it and it got it to a phase where it was a cash cow for him. Had he gone out to raise venture, he probably would be rich and he wouldn’t have made anything. The company may have imploded.
On the other side, if you have a company that needs venture capital and the kind of amounts of capital to scale and capture markets and big opportunity, not taking ventures is a great way to lose in the race. There’s a two by two in the book that talks about this. I think it’s one of the most important thing entrepreneurs can do and that’s to take a good hard look at their financing strategy. When entrepreneurs are thinking about starting companies, if you ask them, “What can go wrong? What has to be true for this to work?” They’re tell you team, market, same things the VCs will say. There’s a litany of normal things people will talk about. Very few people talk about how you finance your company. But if you get the financing right, if you get things lined up just right, your odds as an entrepreneur of making money on your venture - which ultimately at some level is one of the goals, if not the goal - are much, much higher.
It’s fine to be a good business that isn’t a good investment for VCs. Just understand that and don’t raise venture. It’s fine to be a business that needs venture to win the race. Understand that and get venture, and don’t bootstrap it. It’s about aligning that strategy.
Jeremy: Absolutely. That decision making framework of either going down the route of venture funding or not, there’s not necessarily a right answer. It’s just to be clear on what makes the most sense for your company.
Mark: Yes, there’s a right answer for each company. Very few are in between but there are a few in-betweeners. I think most of them should not raise venture but the reality is most assume they should.
Jeremy: Yes, and there’s also this glamorous idea that raising venture makes your company more credible or more important when in fact, it may actually work against you.
Mark: It’s as though a funding announcement is an economic outcome, whereas the economic outcome is acquisition or profits or an IPL.
Jeremy: Yes. So you co-founded a company in 2012 and you’ve been quoted saying the mistakes you made were the defining moments in your career. What were some of the top takeaways from that experience?
Mark: I’d like to say it was a very painful experience for me. If I got my MBA in Columbia, I got my PhD running the startup. Had I not gone through that experience, I don’t think I’ll be having a lot of the operational success we’ve been having today. One of the big takeaways which I didn’t understand then and I spend time thinking about now is when I started that venture, I didn’t really tick off all the things that could go wrong very objectively. I knew it was a new idea. There was a lot of things that had to happen. But I didn’t draw up a board and said, “Here are the six things that have to be true that are not obvious. I have to change the way of operating. I have to build a product that does XYZ.”
I didn’t go through those risk factors and think whether or not they were overwhelmingly not in our favor or there was ways to mitigate them. Now, when I start companies, I do this exercise. I sit down and say, “What has to be true that’s not obvious?” You don’t have to assume basic things like economy or there’s not going to be a war. There’s things you don’t bother thinking about. If you go through the probable risk factors, I go through [inaudible 21:38] and there’s usually five to eight. I try to start companies where it really boils down to one risk factor and it’s something I feel that I can very safely control.
There are some assumptions I’m making, like, “Hey, you have to be able to sell this service or this product.” I’m writing that one off because we’ve been good in the past at building sales operations. But I’ll try to do those and reduce it back down to one thing. “Some people buy this thing from us some other time.” That literally might be the thing is that I’m betting on. If I get to that exercise correctly, my hit rate, my odds of success in the venture are much higher.
The interesting thing is I think the risk factors that people can check off laterally varies by the person’s background. So for someone who’s a product expert, they can probably do this exercise and say, “We’re building a great product, no problem. That’s my bread and butter.” Whereas I am not a product person by training. I can’t check that one off. That’s a risk factor I have to mitigate. Maybe I bring someone onto the team. So it’s kind of a personal exercise. You have to go through and give an honest look at what has to be true in the company. And then, you think about ways to mitigate risk factors in the team construction, in the investor construction, who’s involved etc. Try to get it down to one or two things, or nothing if you can. I think that process put a gulf between the naive, optimistic entrepreneur version of me and the scientific, calculated version of entrepreneur that I am today. The success rate I have today is very different from what I had before.
Jeremy: What you’re referring to, it’s zeroing in on the most critical risk factor that needs to be addressed that either the entrepreneur sees as one that would allow the business to actually grow or he/she does not have the skillset to [inaudible 23:52], and then zeroing in on that risk factor, seeing if you can address it and in a sense, whether you are or you are not, should determine how far you go forward with a company.
Mark: At least you’ve isolated the bet. Take Facebook. There are probably six or seven things, if you’re going to start a Facebook today. People like to share photos, right? They also like to communicate. Okay, fine. Do they want to to do it in a different place? That’s a big bet if you want to start a Facebook. I think the game is to go through and identify the five, six, seven things that have to be true. You mitigate everything you can. If there are one or two things you can’t mitigate, you better really think about whether that’s the bet you want to make or not. That’s what you should be focused on.
When I started companies in the past, I probably had five things I couldn’t mitigate. That is not an efficient way to be an entrepreneur. The first takeaway is write them all down that has to be true. Be realistic about it. Be practical. It’s usually five to ten. Figure out what you can mitigate, then decide whether or not you want to make the bet on what’s left. It’s a kind of way to have a more objective process and thinking. I hold a higher bar on this process. I try to get each bet down to one thing, one bet.
Jeremy: Yes, I think it’s essential. A common mistake I’ve seen is people make assumptions and ignore the key risk factors in a new venture. With your example of someone starting a new social network, an assumption might be that since people like sharing photos, they’re willing to invest the time to do so with a totally new company or service where their friends are not yet present. That’s why it matters to think about critically about consumer behavior as a real risk factor.
Mark: That’s the fallacy, that people build what they think people want. But often, it’s what they want at that moment. There’s a process for that. It’s customer development main strategies where you can go through and say, “I’ve got my five risk factors. Four of them are not a problem. Here’s the bet. Before I build the product and raise money, how do I test that psychological choice? Even if it’s with a landing page with no functionality.” There’s ways to continue to mitigate. Very often, a bet that I like to take is on operational capability, that we as an organization can deliver, execute, win some sales, and do the marketing. That’s the bet I like, to bet on us.
I’d like to get everything else as mitigated as possible before jumping all the way in. It’s just a different mindset I had before that I learned the hard way. I wish things worked out in that venture but at least the silver lining is I learned quite a bit.
Jeremy: Mark, I’ll share the book that you wrote, titled The Fundraising Rules in the shownotes so that listeners can check it out if they’re interested. What is the one book in the last few years you would definitely read the second time, outside of your own?
Mark: My favorite book is Sapiens. (available on Amazon here) I have a feeling that’s probably a fairly favorite book in the tech and innovation community. For those who don’t know it, Sapiens does an incredible job of packaging the history of mankind in the way not taught to us - at least not taught to me - in high school. It’s all the way back from our beginnings based on where man came from, but very interestingly, how we evolved socially, why the agricultural revolution came about, industrial revolution, what impacts those have. Facts and figures were useful before the Internet. They’re not longer useful. It talks about things conceptually, kind of creates a thread, a narrative, the brush strokes that explain how man has gone from back then to here. I think it’s a fantastic perspective and to a certain extent, I don’t know if it’s going to change business mindset, but it does have a very powerful set of insights around life and what it means.
I guess the one business insight that it illuminates is it talks a lot about inner subjective realities, which are things that don’t really exist, but we all commonly believe to be real. These are things like countries and the value of money which is just a piece of paper in reality. But we think of it as something different than paper. There’s very powerful implications on what that means because companies are also inner subjective realities, how you think about what you’re building when you’re an entrepreneur. It’s a great book.
Jeremy: I agree. After having spent a number of late nights finishing it, I found that to the point you just made, it was fascinating how it illuminated the human constructs that we’ve created about our own world and about things like the economy, about money, and they are all in a sense, human creations that we take at face value as being real. In fact, they’re all a product of our imaginations, originally. I did find that fascinating.
Mark, I’m going to go ahead and recap what we covered today for our listeners. We covered how to make more effective hiring decisions and why the right fit is just as important as the right skills.
We covered an investing topic which is understanding when venture capitalists may or may not be the right fit for your business.
Finally, an entrepreneurial approach of isolating the biggest risks when you’re starting something new, whether that be a business or a new project, and addressing those risks as one of the first thing you do. Mark, thanks again for being on the show.
Mark: Thanks for having me.