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When pushed for specifics, these same investors would often say something about the lack of exits and the distrust of entrepreneurs. Although I haven’t done the research, I’d bet that there’s a strong correlation between their pessimism and the year that they raised their fund: if they raised their fund five years ago and they haven’t had any good stories emerge from their investments, it makes perfect sense to now take the contrarian position on the market. Especially if they’re planning to raise another fund. In other words, when you can’t accept the responsibility of your actions, you might as well blame something else.

On the investor side (and, perhaps by extension, on the founder side), there are three main problems in India:

1. The market for private companies is not well understood by someone that has the financial capability to write checks.
2. There are other asset classes within India that have (and continue to achieve) high rates of return. (The Indian real estate market seems to be a good example of “up and to the right.”)
3. The vast majority of VCs in India simply haven’t innovated in any meaningful way. (I spoke to one “early stage VC” that raised a ~$30M fund a few years ago and he’s written three checks to date. All for less than $1M.)

The point is that there aren’t enough early stage companies being funded in India. Which means there simply won’t be enough good ones that make it to the VC level of funding.

The obvious answer here is to encourage more angels to invest in early stage companies and/or for VCs to start writing some of those early stage checks on their own. (I’d argue that the first idea is the only viable one in the long-term but that’s another post itself.) I’m sure one or both of those things will start to happen as the Indian startup ecosystem matures. (I know that we’ll play our part in helping the ecosystem evolve as well: Pankaj Jain recently joined us in Delhi, we’ve announced our tenth investment in India and, amongst other things, I’ve been running angel education events all over India for the past year.)

For the Indian VCs reading this, what this all means for you is that access to few deals that make it to those larger rounds is going to be incredibly competitive. If you can’t (or won’t) write checks at the earlier stage, there’s an increasing likelihood that you won’t even be given an option to consider fast growing companies. Regardless of what happens, there’s one important thing you can do to improve your chances: build a brand. Preferably, a founder friendly brand. (One way to do that, as Naval once put it: less meeting, more tweeting.)

With that definition in mind, what we’re really talking about here today is mitigating uncertainty which is risk that is hard to measure. Particularly in India, the uncertainty (or fear) from investors is that the founders may have demons lurking in the closet. Mitigating uncertainty, in India especially, is about discovering the “unknown unknowns” behind the founders or anyone else involved.

We should recognize that risk and uncertainty are fundamentally different. More importantly, we need to start building that risk and uncertainty into our models. We need to approach Venture Capital as a startup. We need to innovate.

Quoting Nate Silver, who correctly predicted the outcome of the recent US Presidential election in all fifty states, “risk greases the wheels of a free-market economy; uncertainty grinds them to a halt.”

WE SUCK AT PREDICTING THINGS

We, as an industry, need to admit that we have a prediction problem. We love to predict things—and we aren’t very good at it.

What disappoints me is that we expect the founders we fund to innovate. Yet we choose to stay the same. We choose to continue doing business the same way as the VCs that came before us. That’s a shame.

The big opportunity in Venture Capital is to start thinking of ourselves as the card counters at the casino. Rather than the casual gamblers that randomly play tables and hands at the casino.

THE GOOD NEWS

The good news is that most of the risk we see in early stage tech today is reasonably well understood. Most of the uncertainty can be removed by creating better systems and processes to assess incoming deal flow.

As we’ve all advised founders at one point or another, we look for warm introductions and we generally discard cold introductions. That’s one way we’ve already started reducing risk and uncertainty.

We’re increasingly moving to a co-investment model, we’re reducing the risk to ourselves.

More recently, we’re starting to request introductions to founders on AngelList. We’re friending them on Facebook. We’re interacting with them on Twitter. We’re engaging with them through their blogs. The point is that much of what we need to know about a founder is increasingly available and visible online. We’re doing all that to further reduce the uncertainty.

THE BAD NEWS

The market for private companies is especially vulnerable to the ideas of fear and greed. As an investor’s fears increase, her greed decreases. As her greed increases, her fears decrease. Economists might say that the relationship between fear and greed is an example of negative feedback. (The relationship between supply and demand is another example of negative feedback.)

The bad news is that we’re humans. We’re herd animals. As much as we hate to admit it, we look to other investors to get a sense for how we should feel. And this is where many investors begin to make bad decisions. This is where investors begin to lose money. Usually hand over hand. (As an aside, I believe committee-based decision making is one of the leading reasons why venture capital has been so good at losing money.)

IT’S TIME FOR VENTURE CAPITAL TO EVOLVE

The silver lining in all this is that there’s an arbitrage opportunity that exists for investors that are willing to think innovatively. In fact, that’s why a firm like 500 is able to exist — we’re here because there’s a gap between what early stage tech companies need and what early stage investors are currently doing.

To be clear, I’m not suggesting that what we’re doing at 500 is the “right way” to invest. Rather, my hope is that you’ll see that we have a thesis that we’re executing upon at 500. More importantly, my hope is that I might inspire you to consider whether you (or the funds you invest in) have a thesis as well.

Thank you.

Early-stage investors are increasingly useless for anything other than money or introductions

My last exit was in 2009 (read: 2009 was pretty much the last time I was actually in the trenches thinking about customer acquisition, product development and anything else a founder loses sleep over). More broadly, many (definitely not all) of the investors out there today probably were never founders (or even worked at startups) themselves. To put it bluntly, being an investor is probably one of the few jobs on the planet where you’re considered a genius if you’re only right 1% of the time. The rest of the time, we get to make hand-wavy assertions (perhaps like this one…) and pat ourselves on the back while founders listen intently.

Here’s the thing though: what worked yesterday probably won’t work today — as the web gets bigger, more startups come online causing the most common customer acquisition channels to get saturated. In other words, the pace of change in the startup world seems to only increase and investors can’t help much when it comes to many of the tactical issues that founders face.

At best, investors can provide high level strategic guidance or direct introductions to mentors that have recent tactical experience in the areas that a founder might need help. (And, anyways, early stage investors are almost always better off searching for new deals rather than trying to deep-dive into a particular startup that might be going sideways. But I digress…) If a founder needs tactical advice on legal and finance, it’s probably OK to ask an investor for specific advice. Otherwise, smart founders should ask an investor for an introduction to someone that might be able to help with an issue.

Most of the tactical help that founders need is available online or through other founders

One of my favorite quotes from Michael Lewis’ Moneyball:

By it’s nature, the internet undermines anyone whose status depends on the privileged access to information.

In other words, most of the challenges that startups face have already been dealt with by others and those people probably talked about it on their blog, Quora, Hacker News or some other online community.

What this really means is that founders need to stop asking for so much advice — most of what they really need to know is already online (for example, many 500 demo day pitch decks and videos are online) and the help they need with tactical issues (such as SEM, SEO, user retention) is available via other founders.

As I said earlier, investors need to lose their egos — these days, there’s little we can do to directly help a startup succeed. Rather than pretend to have superhero-like powers, let’s just try to stay out of the way until our founders call us.

On the other side of this, founders need to gain some confidence — don’t ask an investor for “feedback” on your idea, talk to your customers. The default state of your startup is failure and the only one that can change that is you.

Let’s all do our respective parts to make the startup ecosystem better. Everywhere.

1. Inspire them. Get them to fall in love with your vision.
2. Get the timing right. Catch them when they’re already making a move.

Regardless of which one you choose, have a game plan before you do anything. (The same could be said about fundraising and anything else where one side is pitching to the other.)

• Internet penetration is rapidly rising all around the world. More importantly, internet penetration within the US will begin to slow in the coming years… if it hasn’t already. (To be clear, all I’m pointing out is that >75% of US homes have internet access and, depending on which reports you believe, >60% of US cell phone accounts have some sort of internet access. Conversely, places like India and Brazil have incredibly large populations that are just now starting to get access to the internet.) The web is getting bigger, the world is getting smaller.
• As the internet becomes more accessible across the planet, early stage internet startups can increasingly operate from anywhere. From an immigration standpoint, it’s incredibly important that we encourage the best startup founders around the world to start their businesses here in the US — after all, they’re less likely to move here once they’ve planted their roots elsewhere and business starts booming. It used to be safe to think that the best internet companies would start in the US (usually because most of the money came from here, most of the customers/users were here, etc.)… but that’s not true anymore. Places like Brazil and India are seeing a rapid growth in their middle class and, more importantly, their populations are rapidly coming online. In parallel, more US investors are willing to invest beyond their backyards.
• The US’ strength, in the context of internet startups, is the functional expertise we’ve gained while building companies like LivingSocial, Facebook, Instagram and Mint. One of the big opportunities in early stage investing is to be the API to venture capital and functional expertise for companies that aren’t already in the US. In other words, let’s use our experience with things like data, design and distribution to help foreign companies climb the learning curve faster than their peers — regardless of whether they’re targeting the US or foreign markets.
• Taking the above point one step further, the US already has the most angel/early stage investors that are ready to invest and understand what early stage companies look like. If we can encourage the founders to incorporate here in the US, we’ll be able to pave the way for even more US investors to put money into the company and, whenever the company ultimately exits, the monetary gains would come right back to US citizens. As Carl Pierre recently wrote, “If you take a look at the history of wealth-generation in this country and how companies have generated hundreds of millions in returns regarding what they invested in, it wasn’t in a 2% allocation of gold as a hedge, it was from investing in privately-owned companies that triggered market growth and job creation.“

A few days later, I was selected to join the team and we hit the ground running earlier this year. We spent the first 48-72 hours getting up to speed on the various non-immigrant visa categories. In the early weeks, we also traveled to the processing centers where the bulk of the paperwork is handled. Suffice it to say, it’smuch more complicated than I imagined — USCIS is a large scale operation that must balance policy, logistics and execution.

Now, a few short months later, I can tell you that we’ve made quite a bit of progress and I’m extremely proud of what we’ve accomplished. Amongst other things: we’ve implemented new startup/business related training, we’ve updated internal documents/procedures to streamline the information gathering process and we’ve even taken the USCIS team to visit a few startup accelerators so they can get a feel for what today’s startups look like. The bottom line is, we’ve accomplished quite a bit in 90 days and our efforts caught the eye of the White House which launched the Presidential Innovation Fellows program.

There’s still quite a bit of work to be done and, more importantly, all the folks I’ve worked with (at USCIS, DHS, The White House, The State Department and more) have been incredibly supportive of the work we’re doing. So supportive, in fact, that they’ve extended my appointment for another year — we’ve accomplished an incredible amount in the first 90 days, I’m looking forward to seeing what we can accomplish over the next 12 months.

As much as I’d love to say that the next big-ass internet stories are going to start in the US, the fact is that they can be based anywhere now. If we can’t figure out how to at least help them incorporate and raise money within the US, we’re effectively shooting our own economy in the foot.

• What are common mistakes that founders make when they pitch an investor?
• Do you ever get used to saying “no” to founders?
• Why is your beard so epic?
• What questions should I ask investors to build trust, uncover hidden problems, overcome objections and speak to desires?
• What’s Dave like in real life?
• What is the most effective way to follow up with investors that are slow to decide (or have previously said no)?

• Indian founders don’t have clear role models… at least not within the Indian startup ecosystem. That being said, that will likely change over the next 3-5 years as the founders of companies such as SnapDeal, FlipKart, Naukri, MakeMyTrip, Inmobi, Directi (along with many other fantastic companies) continue to grow.
• The communication style of Indian founders is quite different than other places. It seems like a cultural thing: founders (and perhaps most people) seem to think that they are establishing authority by giving longer answers to specific questions. I’d like to see founders improve their communication styles: be direct, be crisp and be passionate. By doing that, they’ll be able to better communicate with cofounders, potential team hires, press and investors (both foreign and domestic). More tips here:Your Solution Is Not My Problem. (On a side note: There’s huge opportunity for a speaking coach to make a metric shit-ton of money in India.)
• Pound for pound, the Indian technical founder has far more raw horsepower than I’ve seen anywhere else. I suppose that’s why nearly every pitch I’ve heard from Indian founders has been heavy on the technology powering the solution. Unless you’re building a startup that *is* technology, your pitchshouldn’t contain any mention of the technology you’re using.
• I’d like to see more Indian founders try to solve problems for the Indian market. Until now, it seems that most focused on building online products that could be sold to the West and that made sense: the Western internet user was way more likely to buy online. Internet penetration is rapidly increasing in India, that’s no surprise — Indian founders should start to focus on the Indian internet user because more of them are coming online daily, their comfort with purchasing on the web is growing and, frankly, because outsiders are less likely to understand the cultural nuances of the Indian customer.
• No surprise: most of the Indian investor community isn’t founder friendly. They can be very slow, deal terms can be onerous and the overall experience for founders is rough. For investors, there’s a lot of opportunity in this — just be more founder friendly and I suspect your dealflow will rise considerably.
• Investors seem to inherently distrust founders. Investors should only take referrals from trusted sources and initial check sizes should be smaller while the relationship is still new. Founders should take it upon themselves to present themselves in the most truthful way. Regardless, I think you’ll begin to see investors prosecuting founders publicly in an effort to make a statement to the market.
• As a first generation Indian-American, I find it interesting that many founders and investors born and raised in India seem to be more pessimistic about India’s prospects than I (and, by extension, other outsiders) am. As Sasha Mirchandani has said in the past, my hope for India is that it changes from a pessimistic society to an optimistic one.

I’m certainly not the first one to say this but, even with all the challenges that exist, India has no where to go but up — the question isn’t *if* but *when* it will happen. We’ve made a handful of investments in Indian startups over the past year and we’re planning to aggressively ramp that up immediately. Watch out India, the 500 train’s coming!

This rule came from a three-day poker camp I went to seven years ago. One of the pros got up to the front of the room and asked the question, “What’s the goal of poker?” Of course, someone put their hand up and fell into the trap. “To make money” they said.  Wrong. “The goal is to make good decisions, not to make money,” countered the instructor. If you make good decisions — better, more consistent decisions than the other guy — then you will end up making money.

In poker, if you approach the game to make money as opposed to making good decisions, you can fall prey to things like going on ’tilt’ after a bad beat, feeling ‘lucky’, continuing to fire bluffs at an opponent who’s clearly shown you he’s willing to call you all the way down, or playing in games that you can’t afford. When you hunger only to make money *now*, then you end up making bad, mostly emotional, decisions.

It seems to me that many people tend to “armchair quarterback” other investors’ thesis. (After all, if it seems crazy, it must be crazy – right?) Unfortunately, there’s no crystal ball when you’re dealing with early stage internet startups.

Here’s the analogy I like to use: if you’re going to walk into a casino, you already know that the odds are in favor of the house. Always. So, you’ve got two choices on how to approach the games:

1. The first option is to wander around the gaming floor while you try to “feel” a good table. In the process, you’ll likely spread a few bets around while you try to get a sense for the momentum on the table. If you win, you’ll pat yourself on the back. If you lose, you’ll likely move on to the next table. If you’re investing for fun, altruism or any other non-monetary reason, this approach is probably OK as long as you recognize what you’re doing.
2. The second option is to have a plan before you enter the gaming floor. Pick a thesis (eg, a game and a plan: “I’m playing blackjack, hitting on any 17 or lower.”) and play the hell out of that thesis until you’ve either uncovered new information that suggests you should change the thesis or you win.

To put it more bluntly, would you rather try your luck at the roulette wheel or do you try counting cards on the blackjack table? If you’re an angel, you’ve got the option to choose either path. If you’re a VC (eg, investing other people’s money), I believe the second option is the only option.