UVC: John Zeratsky from Character on the role of design in venture capital, the OATS scorecard, sprint methodology, and gaining an edge in VC through strategic differentiation

Rahul: [00:00:00] Welcome back to Understanding VC. I'm your host Rahul and today we have a special guest John Saratsky. John is a co founder and general partner at Character, a seed stage VC fund that provides capital and sprints. Sprints allow startups to validate their hypothesis by rapidly building and testing prototypes within just five days.

Rahul: John is also the author of books, Sprint, which delves into this methodology as well as Make Time, a book exploring strategies to regain control of your time and energy. And before founding Character, he served as a design partner in Google ventures. Now let's talk to him. Hi John, thank you so much for joining me today.

John: Thanks, Rebel. It's really, really fun to chat with you. Thank you.

Rahul: So before we start, shall I read a paragraph from your book, Make Time?

John: Yeah, sounds good.

Rahul: Yeah. So first day there, I met a guy named John Saratsky. At first I wanted to dislike him. John is younger, and let's be honest, better looking than I am. Even more despicable, however, was his constant calm. John was never stressed. [00:01:00] He completed important work ahead of schedule, yet somehow found time for side projects.

Rahul: He woke up early, finished early, went home early. He was always smiling. Uh, what the hell was his deal? So, the interesting thing is, I had this exact same first impression when we had our first call.

Rahul: Yeah, uh, so, would love to know more about, you, uh, where you grew up, your family background, and your interest growing up.

John: Yeah, sure. I grew up in a very small town in Wisconsin, in the United States. So about a thousand people live in my hometown. There were about 30 kids in my, my grade at school. and I was interested in a lot of things. I was interested in music, playing music, and then later on, writing music and recording music.

John: I was interested in. Exploring, both on foot, there was a lot of rural land, forests around where I lived. [00:02:00] So kind of exploring and, you know, trying to, to find grand adventures and then, um, exploring on boats as well. So going on little, uh, uh, boat adventures. we live near a lake. And, and I was really interested in, in making things.

John: So, you know, building things, working with my dad, he had a small workshop, and we would, we would build stuff. And then later, once we got a computer, making stuff on the computer. So, some, nobody uses the phrase anymore, but desktop publishing was sort of this, this era where you could, you know, design.

John: Posters or brochures or things like that on the computer, you know, which hadn't been possible really before. but then, you know, building early applications in hyper card, which is kind of this, it's like the original no code tool for building apps, and then getting into HTML and learning how to make websites and, and all sorts of, of different things.

John: So those were, um. Those are some of my interests. And [00:03:00] because I grew up in a small town, there wasn't, wasn't a whole lot to do. and so I, I feel that I, I had a lot of free time to pursue some of these interests.

Rahul: What about drawing? You know, usually designers like drawing.

John: Yeah,

Rahul: I've not come across a designer who cannot draw, so.

John: it's interesting. Yeah. I don't think I'm a particularly good illustrator. but I have always been interested in more technical drawing. so, you, you, you know, I know you read make time. So maybe you, you know, how much I, I like sailing and boats. And I mentioned exploring and boats when I was a kid.

John: I also, really liked to, To draw boats, so I, I learned, sort of some of the basics of, of naval architecture and how to create hall shapes. And so I would do very detailed technical drawings of those things, but I never really, developed the ability to draw like. You know, I guess what I would consider to be like art drawings, like, [00:04:00] you know, landscapes or portraits or like cartoons or anything like that.

John: It was always, much more technical, which I guess makes sense in the context of like The the types of design that I ended up doing, you know, where it was drawing a lot of Uis and and web pages and and layouts and and flows for apps, more so than than drawing illustrations or or Things like that

Rahul: Yeah. So, you were a designer, now you're a VC. do you think there's an unfair advantage for a VC who's a designer?

John: but maybe not in the way that you're imagining and maybe not in the way that most people would imagine. And I think that, the way that we usually talk about design, in tech, but also just in sort of our culture more broadly is that it's about craft. It's about making things that are beautiful or delightful or elegant or functional or whatever it might be.

John: And I, I really view the role of design. As not the work that you do at the end to, to [00:05:00] make the thing, but the work that you do earlier in the process to figure out what you are making in the first place. And I think that kind of design is really, really important for investors. And I think it's something that a lot of investors do anyway, without having any background in design, and it's really trying to figure out.

John: is this the right product is this team approaching the market in the right way? Do they have the right strategy for what they're building and how they're bringing it to market? And so, you know, the way that I first got into venture capital was as a partner on the operating team at Google ventures.

John: So when. When GV started, they recruited, people from, from Google engineers, designers, marketers, product managers to come in and support the portfolio companies. And I was one of those people. I was one of the first people hired onto that team. And so the work that I would do when I would go and. You know, help a startup like Slack or Uber or Gusto was not, [00:06:00] you know, to design the UI.

John: So they didn't need me to do that, but it was to help them figure out what are the next features we should build? How should we, position this product in the market? and so that. That way of thinking about design really helps me today. It helps me both understand, you know, is, is this team doing the right things?

John: But then after we invest, we run design sprints, which is, is, you know, the methodology that we created at Google ventures, we run those sprints with our portfolio companies, a character to help them de risk that part of the business. Because we, we know that they don't need our help making the thing.

John: They're really good at making software at designing the end user experience. But, but we do think that we can help them. figure out whether they're on the right track and help them do risk a particular path that they're on.

John: Yeah. You know, one of these, one of my favorite quotes these days, is a, is a Pablo Picasso quote, where he talks about, you know, he says that, you know, when art critics get together, they talk about form. [00:07:00] Function and, meaning, but when a bunch of artists get together, they talk about where they can get cheap turpentine. So, yeah, I thought that was really, relevant even for me, as a podcaster. I really shouldn't care about what the end, product is with the podcast, but more towards the process and the structure that I put in. yeah, that's such a good point. That's a really interesting quote. And I've never heard that 1 before. And it, it reminds me of, um, reminds me of this story, about a pottery class. And perhaps you've heard this 1 and there's, it might be a made up story, but there's a pottery class where, half the class was instructed to make the best, works.

John: Possible pot. They could, they had all semester to create one pot. The other half of the class was instructed to make as many pots as they could. So they were going to be graded on the number of pots that they created. And it was that second group who, who made the better pot in the end, because, you [00:08:00] know, perhaps this is the meaning of the Picasso.

John: Well, they, they had plenty of turpentine. They had plenty of opportunities to, to try and screw up and try again and do it again and again, and learn every time. So, Yeah, I think about that, that idea a lot that, you know, increasing the cycle speed of, of the things that you're making so that you can learn as much as possible is far more important than, than knowing exactly what to make or having, you know, the luxury of infinite time to, to go and get it, you know, quote unquote, perfect.

Rahul: Yeah. Yeah. Yeah. I mean, going back to GV, I've heard this, on another podcast that you were on, you talk about, some of GV's infamous failures where founders who didn't want, did not want to adapt was like most stubborn, with their vision, and except for, Tony Fadell and Nest. So, I mean, I would say even if, Me where to make a judgment of a team.

Rahul: I would also say that yeah, it's better not to back founders who are like that, but then [00:09:00] This guy made a big outcome, right? So as a VC, you should be looking at people like that figure trying to figure out Like how I can find the next running feather, correct?

John: I think that part of why we continue to make the mistake of backing the compelling visionary founder, whether it's somebody who is merely unsuccessful or, you know, perhaps in the worst case for, you know, criminally fraudulent, you know, like an Elizabeth Holmes. I think the reason we, we continue to make those mistakes is that we. Is that we look at people like Tony Fidel and we say, well, he did it. He figured it out. I want to invest in somebody like him, but I think there's something that gets lost in that, that line of thinking, which is that, Tony Fidel, he had a great vision. He had a great idea. But he had done it before he hadn't made, you know, smart [00:10:00] thermostats before, but he had led teams at apple creating new products from scratch products that were, um, quite innovative.

John: They were, they were quite new. They did things that people had never done before. And so. He knew how to build a team and more importantly, he knew how to, go through that design process, that process of figuring out what path is the right path. And then getting in lots of iterations, lots of cycles to keep working toward the outcome.

John: and when you look at the, some of those infamous failures, you know, at Google ventures, whether it's, just Sarah, or, you know, there's a handful of others that are less well known. I think that those founders. They hadn't done it before they, they had a compelling vision, but they didn't really know how to bring a vision to life.

John: They thought it was, you know, they thought the way you did it was to surround yourself with people who would just say yes and do whatever you wanted. They didn't realize that what you needed to do was to build a team who was totally [00:11:00] obsessed with. Testing hypotheses with trying and failing and trying again, and to keep that team moving in the right direction and use vision to help them sort of find their way, but not not as your, your hands, to, to bring your vision to life.

Rahul: Yeah, yeah, probably a second time founder, still backable when it's a personality like him. But there might be some odd cases where it's a first time founder, still, you know, weirdo, but could create something magical, right? So,

Rahul: is there any way to figure out such a personality?

John: Well, we try to, so, we recently invested in a company, that had come from Y Combinator and they were raising around and, and as you probably know, when companies finish Y Combinator, they often have, uh, you know, 50 or a hundred investor conversations because there's a lot of attention and, and, this founder.

John: Gave us some, some [00:12:00] really gratifying feedback. He said that we were the only ones who really spent time trying to understand him as a founder and how he worked and how he was going to, you know, operate, his company, how he was going to bring his team together around. Building the product and bringing it to market.

John: A lot of other investors were focused on, well, what's the market size, you know, what's the, the sort of, go to market strategy, you know, do you have the right answer versus do you know how to find the right answer? And so we really try, we really, I think if you were, if you were able to look at, you know, sort of analytics of our calls and what we ask about and the types of questions we ask, you would see that.

John: Most of them are really about understanding. Is this a hypothesis driven founder? Is this a founder who is comfortable with failure? Somebody who is obsessed with, building quickly, focused on, on developing the conditions for, for velocity and for rapid learning inside their team. and, you know, it's, it's like super.

John: Basic, but the way that we do that is by asking them [00:13:00] about their past experience, you know, the, the best way to predict somebody's future behavior is to look at what they've done in the past. And so, even if they've never been a founder before. You can ask people about the projects that they worked on at their previous company and, you know, or if they've never, if they're right out of college, you can ask them about the, you know, things that they were working on in, in college and university, you know, if they're, we invested in, well, a team of, recent high school graduates, they didn't go to university, but they had been hacking on this particular product for a couple of years as high school students.

John: so, you know, we, we really just try to look at. Past behavior. And I think for us with our background as, as product designers, we're able to recognize those patterns of like, okay, this is what it should look like. If you're somebody who really is obsessed with, with de risking and with answering questions and with learning.

John: And this is what it looks like when you're, you're too obsessed with, with vision. You're too obsessed with kind of bringing a vision to life in that sort of like, um, you know, uh, outcome [00:14:00] oriented way versus a process oriented way.

Rahul: Yeah, uh, would love to know more about the strategy at character. It seems like there's a lot of clarity there.

John: Oh, I'm glad to hear that. yeah, so to me, strategy is really important because I think that, well, I should say it's, it's really important if you want to be the best, if you want to win in the market that you're in and, you know, VC firms. Are a business, we are, you know, business that's operating in a market where there's competition.

John: and just like any business, we feel that we need to have a strategy in order to, to be the best to, to reach our potential. and. You know, strategy, it, it comes from understanding the dynamics of the market that you're in. It comes from identifying, some source of competitive advantage that, that you have, that's unique from, from others, from, from [00:15:00] your competition and then constructing, uh, sort of a, a policy or a set of principles and guidelines around that source of competitive advantage.

John: That, um, that drives your actions so that the things that you're doing and not doing are taking advantage of what's uniquely good and special about you that will help you overcome the challenges or the difficulties of the particular market that you're operating in. So in VC, there's a few things that are really, really hard to do that are really important in our market.

John: The first is finding great companies. The second is, deciding which ones to invest in. The third is, earning access or sort of, you know, winning, you know, that, that opportunity to invest. And the final one, the fourth one is, supporting those founders post investment to hopefully improve their chances of success.

John: And so our strategy. is rooted in the sprint methodology that we [00:16:00] developed at Google ventures, and it leverages that methodology and the work that we've done around sprint for all four of those key components. So we have. Unique ways of sourcing founders, because we have people who have read our book sprint, or they've seen one of us speak at a conference or a class that they were in.

John: or they've run sprints previously at companies that they worked with. So these are people who are specifically interested in working with us. We have the ability to decide, we think, you know, which, which founders are going to be successful for some of the reasons that we were talking about before is because we've, we've personally worked with some really successful founders and some really unsuccessful founders, and we have a unique lens as designers to understand which ones are likely to be successful.

John: Then we have a really unique pitch because we say to these founders, Hey, if you raise money from us, we're not just going to be on your board and give you advice and introduce you to customers. We're going to run sprints with you. We're going to help you de risk your [00:17:00] business. and that's a really unique pitch to them.

John: And then after we invest, we deliver on that. We run those sprints, which not only helps them, but it gives us a great level of insight into when things are going well in that business, and it helps us build a relationship with that founder so that we can. Put more money to work, we can invest more money and increase our ownership in the companies that are going really well.

John: So that's our strategy. And as you can, you can probably tell it's something that I think is really important and that I, I kind of get, get excited, talking about, but I think it's, um, honestly, I think it's something that a lot of VCs don't think nearly enough about. Um, so it's, something that, that, yeah.

John: I think will differentiate us. I think it has already in the 1st, couple of years. And I think will be really, uh, a source of, of competitive advantage for us, over the coming years as well.

Rahul: Yeah, so the interesting thing is, uh, VC is, I'm not a VC yet, but this is what I want to do. and so I study the venture very [00:18:00] deeply. So, I see character as like a, like, A benchmark VC, you know, I've spoken about character in a couple of other episodes where there is a There is a clear differentiation on the value add.

Rahul: It's not like you're promising everything under the Sun like a lot of VCs do So yeah, this is what it takes and in terms of the brand and the value add and everything So that's the reason why I reached out to you as well

John: yeah, thank you so much. And I, I think it can be helpful sometimes to, look at really simple examples of, of, of things like strategy to understand them better. And so, you know, it was before this. This conversation, I was thinking about, an example, and I was thinking about, like, a restaurant and imagine a restaurant that doesn't have particularly good food or particularly good service.

John: And the interior is not particularly nice. they're not particularly affordable. You know, there's nothing particularly special about this restaurant. They have no particular strategy, but if [00:19:00] that restaurant was situated on a busy street in a busy city, that's highly likely. They'd probably have some business, right?

John: They would survive. They wouldn't be the best restaurant. It wouldn't be the most popular restaurant, but they would probably survive. And I think that you see that in every single market. You, you see that in the VC market with, you know, undifferentiated investors who either promise you everything under the sun, like you said, or they promise you the exact same things as all the other VCs, which is, you know, we'll, we'll be your trusted advisor.

John: We'll introduce you to customers and employees. And so I think, you know, in, in the market that we operate in, where there's a lot of founders building a lot of cool things, you, you know, that's the equivalent of being on that busy street. And so I think you can survive. I think you can, you can, you know, grab some, some cool founders who are walking down the street and bring them into your restaurant.

John: but, but I think again, if you want to be the best, if you want to stand out, you need to have, need to have a strategy. You got to have something that sets you apart.

Rahul: Yeah, it's not just a desire, [00:20:00] right? You have to be the best. And this, I mean, like 85 to 90% of the funds don't make any money. I mean, don't generate enough returns. So, you're wasting your time if you're not really the best.

John: Yeah, that's, that's true. And I think that the, one of the things that's really unique about VC is that the, it takes a long time before you find out. If you're good or not right with most businesses, you find out pretty quickly, you know, like, Hey, nobody's buying this. and we're losing money and we're going to go out of business VC, you raise a fund and you have guaranteed management fees that pay your expenses for a number of years.

John: All you need to do technically to be a VC is to invest that money in some startups. and you don't know until, I don't know, five years in whatever, if, if you're any good. And so I think that, you can, you're absolutely right. You have to be the best in order [00:21:00] to, to survive, and, and to make it as a sustainable sort of franchise in the VC world, but you can make it a long time.

John: And you can make it for, for, for 10 years. Cause 10 years is the average life of a fund, getting paid to be a VC. you know, being a cashflow positive entity, you know, because of the management fees that you get in without actually being any good. so it's kind of this weird distortion that, that happens in the, in the VC market.

John: That's pretty unique.

Rahul: Yeah. Yeah. So now let's talk about the, the sprint method. So you help startup, reach product market fit, faster. So, I'm curious to know, do you measure the impact, of running, the sprint method with a startup and, internally and if yes, what does the metric look like? You know, how fast can they reach or yeah, what is the success rate?

John: yeah, we keep track of it, but it's much more in a qualitative way than a [00:22:00] quantitative way. And so, we're, we ask, you know, we're always asking founders for feedback on sprints and we're looking at, you know, how did this affect the trajectory of the company? And usually the most, um. Usually the clearest result of running sprints with a startup is that they are able to reach a product milestones, including product market fit much more quickly.

John: And so, you know, as an example, the sprints that we ran with our portfolio company, Phaedra, which. Is the team from Google DeepMind building, AI control systems for industrial facilities. they have a quote, I, I forget the exact numbers, but they, they basically said this would have taken us months to get to this point with our product.

John: And instead we did it in a couple of weeks because of sprints, because it was just that much more efficient and the learning that they needed to do to develop that product happened so much more quickly. So. It's those types of things that we track. It's really, it's really speed. And I think that we, at least with character, I think [00:23:00] we're still a bit too early in the life of the fund to be able to say, well, you know, because we ran these sprints with these companies, they turned out in this way.

John: I mean, certainly looking back at GV, you know, if you pick up the, the sprint book today, which came out in 2016, um, Basically all of those companies have had really good exits. so, you know, there, there's at least some kind of loose correlation between companies who want to work in that hypothesis driven way, who want to use sprints and, you know, building successful businesses.

John: The, the other thing that we do that is, is really interesting is we have this program called character labs, which is our sprint program for pre seed founders. So the idea is if you're a very early founder, you're a little too early for us to make a core investment. But you're working on something interesting.

John: We think you're a very high quality founder. you can apply to join character labs and then we take you through a sequence of, um, of 4 back to back design sprints along with a cohort of other founders. [00:24:00] And 1 of the things that we do during that. Program during those 4 weeks is we ask each of the founders to record a product market fit confidence score and it's totally subjective, right?

John: It's, it's, it's a, we asked them to distill it down to a score because we think it's really clarifying, but it's totally subjective, but basically what, um, what we want the founders to do is say, okay, based on everything that I know today, how confident. Am I that I've got product market fit, that the thing that I'm building is, is going to, it's going to click.

John: It's going to connect for the people that I'm building it for. And then I know how to find those customers and get them converted. And it's really interesting because what we typically see is that. The founders who begin character labs before they've done any sprints, maybe they've built some product.

John: They've been, you know, building some prototypes or hacking on some stuff. They tend to have fairly high confidence, you know, of course they're founders and they think, yeah, there's a market for this thing. This is great. but we usually see is after the first sprint. or, or maybe the second sprint [00:25:00] there, their confidence drops a lot because they've now taken something that they've built and they've put it in front of real customers and they've done a kind of a, a test with customers and what they're learning is that, maybe it's not quite as good as they thought it was, right?

John: It's, it, there, there's still a lot to figure out, but then. After that, then that score starts to climb again. And so, we think that that's a really interesting indication. Again, it's, it's subjective. It's not perfect, but it's, it's 1 of the ways that we try to track, product market fit with, which ultimately is a subjective measure, right?

John: There's a lot of different sort of approaches to how do you measure and how do you know when you've reached it? But the end of the day, Okay. It's subjective. It's a, you know, it's a feeling, it's a sensation that you have when things are clicking, things are going really well. And so we've seen, you know, pretty, pretty reliably that sprints, initially kind of, you know, make you realize how far away you are, but then help you get closer to product market fit.

Rahul: Yeah. so if you can really, you know, like, [00:26:00] instill this in founders, this, this sort of, uh, uh, way of doing things, I think we can save a lot of money and resources and time.

John: Yeah, totally. Which is really important to us. I mean, you know, obviously as investors, we want to, you know, not, invest money that's Going to be lost. and we want to be as efficient with our capital as possible. Also just as people, you know, we care a lot about time. you know, it's the whole reason we wrote make time on this part of the reason we wrote sprint as well as, you know, we really want.

John: For ourselves and for people that we work with, we really are motivated by this mission to help people spend time on the things that really matter to them and are really important to them. And if something's not working well, we would rather than find out quickly and, and switch to something else, then just keep, you know, trudging along down that path when, you know, maybe they're not, not even going in the right direction.

Rahul: Yeah. I wasted a lot of years in the past.

John: We all [00:27:00] have, we all have

Rahul: Yeah. Uh, so I, I've heard that you also have a scorecard system, for your assessment of, of, startup investment. Uh, so very curious to know what are those, you know, checklist items in that scorecard, when you meet with a startup.

John: Yeah. So we're, we're kind of obsessed with scorecards. We use them for a lot of things and we think that, you know, just like the example of product market fit, even when you're dealing with something that's subjective, if you have a structured form to, basically to capture it on paper, and if you can then quantify it in a way that allows you to track it.

John: Longitudinally, we think it's, it's really, really valuable. It really helps the quality of your decision making. And so we use this. This principle in a lot of different things that we do, we use it in sprints. And like you said, we use it in our investment process. So, we have a scorecard that we call OATS, [00:28:00] O A T S, it's an acronym.

John: It stands for opportunity approach team and success so far. And this scorecard is based on some work that we did at Google ventures in studying and understanding what are the characteristics of a successful founding team. And then it's also based on other characteristics or other criteria that we've kind of identified or picked up along the way as investors and designers and operators.

John: And so within each of those four categories, there's a handful of criteria, there's 21 total criteria. And each of those. Is phrased as a question. Um, and so actually, I'll pull up my, Browser here, and I'll, I'll just read you 1 of the questions. let's see here. So I've talked before about this idea of being hypothesis driven. So under a, for approach under that category. 1 of the criteria is, are they taking a [00:29:00] hypothesis driven approach? Are they methodically validating ideas and assumptions? So I guess that's two questions, but that's one criteria. That's one line in the OATS scorecard.

John: And then we score that. We answer that question using a scale of zero to three. Zero is unacceptable. So that would be a disqualification. So the founder said, I have this vision. I know it's going to work. I just got to get my team to build it. And then, you know, it's going to be great. That'd be a zero, right?

John: Disqualify them. One is acceptable. So I'm just kind of like, yeah, it's okay. Two is excellent and three is exceptional. So to get a three on a particular criteria, you have to be in the top. 10%, 20% of, of any company or any founder that we've ever talked to or worked with. And so we do that for each of these 21 criteria.

John: We go through after we meet with a team and after we've gathered as much information as we need, and we, we score each of these things and then we [00:30:00] average those scores together. And so we generate an oath score for, based on. One, one of us, so one particular partner about one particular company at a particular moment in time.

John: And so it's really interesting because, you know, there's three of us, on the core team at character. So me and Jake Knapp, who I wrote the two books with and worked with for many years at Google ventures, and then Eli Blee Goldman, who leads our investing process and our fund administration, he was previously a general partner at a fund called Capital Midwest, and so the three of us, if we.

John: We each meet with a company and we each complete the OAT score. Now, suddenly we have this really structured information that we can use to have a conversation about a company. We have a score and we can say, Eli, you scored these guys 2. 5. I only scored them 2. 2. What's the deal with that? Like, what did you see?

John: Let's look at the individual criteria. Wow. You thought that, the market that they were in was a lot bigger than I did. Why did you think that, you know, what data would you, were you looking at? This is. [00:31:00] A much, much better, much richer, more valuable conversation than a typical sort of, you know, investment committee meeting or conversation about whether to proceed with an investment, which tends to be pretty unstructured.

John: It's sort of like, hey, I think we should do this. Here's why. and it's not necessarily structured. It doesn't necessarily revolve around a set of consistent criteria. yeah. And then it becomes really, really valuable for us to use that not only for a single investment decision, but then to compare between different companies.

John: So we can say, Hey, this company, you know, if we average, all of our scores was a 2. 5 and we're considering investing in it, but that other company that we just met with was a 2. 6 and we didn't invest. And then so why, why not? Like, what, you know, how can, how can we reconcile those two decisions? And then finally, we can use these scores longitudinally.

John: So I mentioned that one of the, um, values of running sprints in our strategy is that we gain insights on when things are going [00:32:00] well in a company. And then we have a really great relationship with the founder that allows us to put more money to work. And we actually use this. These outscores in that context as well.

John: So we don't just score the company one time when we're making the initial investment, we'll score them at different intervals. So we, you know, for example, in character labs, we'll do an outscore before they start the program after they finish the program. And then if they get a term sheet from another investor and we're considering participating, we'll score them again based on everything we know.

John: And again, it's just about having a consistent basis for. Comparison so that we can say, Hey, last time we scored this company, they were only a 2. 3. Now there are 2. 5 what has improved. does that make us more excited to invest? And it just really helps us, we think, make a much better, more consistent decisions that are actually going to get better over time.

Rahul: Okay. Okay. Yeah. This sounds, really cool. So, has there been any scenario where, you know, all three of you went through this [00:33:00] process, everyone wanted to invest, and then suddenly you're like, you know, no,

John: That has happened. Yeah,

Rahul: I changed my mind. Yeah. Why?

John: there are, I would say there are three different scenarios in which that has happened. And they've well, there's 3 categories of scenarios. I don't know how many specific scenarios. 1 category is simply a change of heart. And we have our policy, at least for now is that we all need to be unanimous. We need to all support making a particular investment because.

John: The way that we work with our portfolio companies is, very collaborative. And so, you know, we don't want to be in a situation where I said, I really want to do this investment, but Jake didn't want to do it. And then, you know, Jake doesn't want to work with them, right? He doesn't believe in, in what they're doing.

John: So we've decided for now that we all need to be unanimous. And so there have been cases where, you know, we've gotten to the end of the process and, you know, you know, maybe one [00:34:00] person had, had given a lower score to begin with. And then they say, you know, I'm just. I just not there. I just am not ready to spend the next 10 years working with this founder.

John: So that has happened on occasion. the other thing that has happened is that we have learned something, after the scores were made about the founder. Or about the business, the market that has, basically disqualified them. And so sometimes it can be, um, just the, just the behavior or the, the etiquette of, of the founder in a diligence process with, you know, the representation of certain information or, or something like that, that just, you know, is a red flag basically.

John: So we say, look, we do think this is a strong team. We do think this is a great approach. It's a great market. But we just, again, you know, just something feels off with this founder. I just don't think that we can, we can work with them. and then, you know, the final one, and this is probably the most common reason that we would not invest in a high scoring company is [00:35:00] the price.

John: You know, we, as investors, like, you know, we have to consider, for the amount of money that we are able to invest, which is up to a million dollars at seed stage, just based on the size and the construction of our fund, can we, can we buy. Enough ownership in this company so that if they are very successful, it will return our whole fund.

John: And then some, you know, so, you know, we might the reason that we don't disqualify a company, at the beginning based on price is that well, sometimes we don't know it. Sometimes the round is, is kind of actively, you know, taking form as we're evaluating them, but other times. You know, we believe that, um, uh, uh, a company that is raising at a somewhat higher valuation, perhaps it's justified.

John: Perhaps there are reasons why that valuation is higher. And so we're willing to say, Hey, let's give our ourselves a chance to, to be convinced. Let's, let's see if, if actually the valuation [00:36:00] is appropriate, and not just say, Nope, I'm not, you know, there's, there's absolutely no way I'm investing in that company because of the price.

John: so sometimes we get to the end. And we say, you know, they just didn't quite rise to the price that they're asking. And so based on that, you know, we just don't feel that it's a good use of, of our LPs money to invest in this particular company at this price at a different price. Sure. but not, not at this price,

Rahul: Yeah. Curious to know, what would justify a higher price for you?

John: it is a combination of the market that they're in. so we recently invested in a company. In the, material sciences world, this is a very, very large industry. And this company, is they have a really unique, technology that they're building that, if it works, you know, they could be an absolutely massive company, far bigger than your average, you know, enterprise SAS [00:37:00] company.

John: And. the dynamics of this market are really interesting because, there are not a lot of other software companies participating in this market. So, you know, that, that kind of got us excited about the potential there. that that's 1. the other thing that can warrant a higher price is just,you know, revenue and, and, and particularly growth of revenue.

John: so, you know, a company that, has, you know. 500 K and ARR that's growing 20% month over month is worth a lot more to us than a company that has no revenue or, or even a company that has 500 K of revenue, but they're only growing 5% month over month, because, you know, at the end of the day. We are, we're not buying based on the value of the company today.

John: We're, we're buying based on the value of the company in 5, 7, 10 years. And so the growth of their revenue is, is a very, high quality, very clear indicator of the future value. Of that company. And so that's probably the most important, factor that would cause us [00:38:00] to, to, to pay a higher price for a company within, within, you know, sort of acceptable bonds.

John: Like we're not a, we're not a series a investor. We're not a series B investor. We're not going to participate in something that's at a 200 million posts because we, with our check size, we just can't own enough of it for, for it to make sense. It's never going to get to that point of, you know, returning the fund if it's successful.

John: But within some, within some bounds, um, there are different considerations.

John: Yeah. I've already mentioned that, two hard things about being a VC. one is saying no, and the other one is the, the fear of missing out, uh, stuff. So, you know, why do you think these are the two hard things and how do you deal with these? So I think that those are both, those are both really hard things. From an emotional perspective, um, FOMO, I think for obvious reasons, you know, not just in investing, but in anything in life, nobody likes to feel like they are missing out on something, you know, whether it's a group hanging out [00:39:00] somewhere or, or people doing something or people getting something that you don't have, that you're afraid you won't have, that's a universal.

John: Human, emotion and, and it's, it's very, it's very prevalent in VC because unlike other asset classes, it's. It's effectively impossible for us to see all of the opportunities, you know, in the stock market, there's a list of all the companies, you know, within, you know, later stage, you know, VC or private equity.

John: There's maybe no list of all the companies, but there's not so many that you can't. Really understand the whole market, you know, for us, like, I mean, I don't know how many seed stage companies there are, you know, founded every year. I do know that for the most recent batch and Y Combinator, 20, 000 companies applied.

John: So, you know, there's a lot of people starting companies every year and no single VC sees all of them. I don't think maybe, you know, maybe somebody likes acquire and recent is seeing all that, but I, [00:40:00] I don't think so. I don't think any VC sees all of the opportunities. So there's fundamentally always going to be the fear that you're missing out.

John: Not because you made a bad decision. Um, Not because you didn't have a good strategy, but, but because you simply didn't know about something. So that's a big one for sure. the saying no thing's interesting because I, I think that emotionally it's very hard because well, really only for one reason, which is that you have to tell the founder and you know,

Rahul: some BCs just, they just ghost and that's horrible.

John: but if you're a decent person and you're going to follow up and close the loop, like, You have to say no. And it, there's this weird asymmetry. Um, you know, I've written two books and, you know, I think about this sometimes when I walk into a bookstore, and you look around the bookstore and there are thousands and thousands of books in that bookstore.

John: And every single book was like two years of somebody's life. And I know that because I've written two books, like, but to me, I'm just like, eh, There's no good books in [00:41:00] this store. I, you know, I, or I maybe look around and I pick out one book, you know, it's like, but it, you know, if you imagine the people who wrote all those books, if they were all in that store, the store would just be just crowded with, with, you know, humanity of people who had poured their, you know, their life's energy into writing these books.

John: And that's the way it is with startups as well. You know, like for me, I, you know, I'm reviewing, you know, thousands of different startups and, you know, there's, there's, you know, Some number of, you know, hundreds of those that we kind of get to the point where we've, we've talked to them and evaluated them.

John: And then to say, no, it's like, it's 1 of hundreds for me to say no to, but for them, it's like, it's their only 1, right? It's their only 1 startup that they've been working so hard on. And so I think it's just, it's just really hard to say no. but I think, you know, the reason I think it's interesting is that, yeah. From an investment decision making standpoint, saying no is the easiest thing to do, right? There's always a reason to, especially in this market. There's always a reason to, to, to pass, [00:42:00] to say, Oh no, you know, not for this reason. And, and you can feel good about that because you can tell yourself, Oh, like I'm, I'm really tough.

John: You know, I have a really high bar and you, you can tell your, your LPs how prudent you are because you say no to 99% of the opportunities that you see. But I think it takes a lot of courage, to say yes to an investment decision, you know, it feels good to say that to the founder to say, yes, I want to invest, but from that standpoint of putting money at risk, you know, having skin in the game, I think yes, is, is hard.

John: It's a hard decision to make. Um, but saying no, communicating that to the founder is hard from, from an emotional perspective.

Rahul: yeah. so regarding FOMO, right? Um, so when, when you find an interesting startup and let's say, there is competition. and then you, you have to, fight for that deal. so if you're a founder, your mentality, you're wired in such a way that you're, you get invested and then you want [00:43:00] to try your level best to make things happen, right?

Rahul: So, it's just, but, but as an investor, you get suddenly passionate about something, but if you want to make a good decision, you would also want to be slightly detached.

John: Yeah,

Rahul: So, yeah, I learned this,working through, you know, offering a term sheet, as an intern, in one of the funds here, that, that, that I, that I thought was a very interesting, experience because it's 180 degree opposite of, uh, the founder mindset.

John: yeah, yeah, yeah. And it's, it's, it is very challenging to separate that objective detachment that you need to make a good decision from the, somewhat more, I don't know, more human kind of, You know, squishier part of it that you need in order to, to win in order to, to build that relationship and to be enthusiastic and be optimistic.

John: oh, it's really helps us with that. So, you know, having a structured scoring system for the companies that we review [00:44:00] really helps us separate those 2 things because, you know. I think if we take a meeting with a founder, we're always optimistic. We're always excited. You know, we enjoy learning about what they're doing.

John: You know, we, we wouldn't meet with them if we didn't think there was something there. So I think that we can authentically. Be enthusiastic and be engaged and be optimistic with them, but then because we have this structured way of reviewing that particular investment opportunity, it forces us to kind of like, slow down, like, take a couple of deep breaths, look at the scorecard and say, okay, I got to fill this out.

John: I got to answer these questions. Like, you know, and not just like, uh, you know, what do I think overall of this, but like, okay. Is, do I have evidence? Do I have reason to believe that this founder is hypothesis driven? For example, you know, like that example that we used yes or no. And it's really interesting because.

John: Even when we're very enthusiastic about something, when we sit down to score it, you know, a lot of times we realize that it's just not there. You know, the, the [00:45:00] objective evidence that we need to see is just not there. And so we end up, we end up passing, but, but when things do get to that point of, you know, wanting to invest and then it being a competitive situation, Yeah.

John: Yeah. We try to basically get to clarity on the decision and then switch a hundred percent into cell mode. So that's when we will, you know, we'll, we'll have, you know, maybe additional meetings where we start to dig into their product and go to market and walk them through the beginning of a design sprint.

John: we'll ask other founders to talk to them. We will, you know, send them a copy of the book, or we'll give them access to some of our sprint resources. We'll send them a long email kind of detailing, you know, here's how we think we could work together. Um, but we, we try to do that, you know, once we've made the decision that we want to invest.

John: because I think again, like you're saying sort of when those two things get mixed together, and maybe you're at the very end and you're still not quite sure if you want to invest, but you know, you need to pitch in order to win. [00:46:00] It's like, it can create this odd dynamic and, and, you know, it feels bad to be at the end and have pitched really hard to get access to something.

John: And then to say no and walk away from it. So we try to avoid ending up in those situations.

Rahul: Yeah. so, one last thing, uh, why the name character, character VCG?

John: Well, first I'll tell you how, which is that we ran a name sprint to come up with the name. So, uh,

Rahul: God.

John: we, the, the design sprint, which is in the book is this original, you know, process that we created at Google ventures to help kind of de risk, you know, product and go to market, but we've created other versions of the sprint and one of the types of sprints that we've.

John: Done quite a few times with companies as a name sprint, where we use some of the same techniques to come up with a name for company. we actually have a portfolio company now called zest. Um, it's a gifting platform. we, we named that, that company in a name sprint. so we ran a sprint, a name sprint to come up with the name [00:47:00] character and, Maybe I'll, maybe I'll tell you some of the other names that we considered real quick. here we go. So some of the other names that we came up with in this name sprint were Lantern Ventures. I think there is a Lantern Ventures out there. Likely Ventures. Kind of like that one, likely, you know, likely to work. we considered, Sprint Ventures, you know, based on the connection to the book, but we thought it sounded too much like it would be associated with the, mobile phone operator, Sprint, you know, which I think got bought by T Mobile.

John: So maybe, maybe not, not an issue. it was one that I liked called, Query Capital. Which is kind of, kind of a weird one. Query capital was kind of fun to say anyway. So we ran this process and we came up with a bunch of different options. but we ended up deciding on character for a variety of reasons.

John: I think in the end it was the clear, the clear winner. some of those reasons were just very practical. Like, could we get the domain? Could we get the Twitter handle, et cetera? [00:48:00] You know. We liked that it was related to typography and design. so, you know, fonts, characters, we liked that it referenced the symbolism of, programming, you know, so, so, you know, using characters to, you know, as variables, you know, assigning values to variables, you know, sorts of things like that.

John: We liked that it was related to, to story, to the idea that, when we're starting a company, you know, building a product, bringing that to market, we're telling a story and, there are characters in that story. The, the customer is a character. The team that built the product is a character. The product itself is a character.

John: And so, you know, a lot of what we do as investors and as founders is, is storytelling. But I think the, the, the really sort of, like, the deepest meaning was just that, you know, it's, it speaks to the integrity with which we want to [00:49:00] operate as investors. And, sometimes that we say that we provide high integrity.

John: Seed capital, um, and, and I recognize that saying that, it's easier said than done and that it's, it's a big promise to live up to, but, but we kind of like that. Yeah, we, we like that. We right there in our name, we have a reminder, like, every minute of every day to make decisions that we can be proud of, that we can feel a representative.

John: Of high integrity of high character, because we know that that venture capital is a business of relationships and, maybe not always in the short term, but certainly in the long term, if you don't act with integrity and act with character, Things, things come back around and, and you're, you're unlikely to be successful.

John: So that's kind of, that's kind of how we ended up with, with the name is a bunch of those things, but, but we really like the promise that [00:50:00] the name implies

Rahul: Yeah. Yeah. It's amazing how every single thing that you do is well thought out, process driven. Yeah. This is really wonderful. Yeah. Really exciting to talk to you

John: you too, Raul. Thank you. Yeah. Thanks so much. It was a pleasure.