Shortening Feedback Loops

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Initially published on Medium — August 26, 2016

“How do I know if I’m a ‘good’ VC?” This is a question I often find myself wondering. It’s no secret that venture capitalists are largely judged by their successful investments. However, it’s rarely talked about how long those feedback loops are. Especially when investing in early stages, it’s not uncommon for your feedback loops to be 4+ years for each investment. In stark contrast, when working at Google, Nest, and SpaceX — it was common to receive quantitative and qualitative feedback monthly (if not weekly).

At Ludlow, I’m extremely thankful to be in a position where I have the ability to source and lead deals through our process. This responsibility and freedom is equal parts exciting and scary. I will be judged based off the investments that I source. As a result, I’ve made it a top priority to shorten these feedback loops by tracking other goals to ensure I’m treading on the “right” track as a venture capitalist.

Feedback From Founders We Pass On

The unfortunate reality of being a venture capitalist is that you can’t invest in everyone. We talk to thousands of companies a year, and we only invest in a small handful.

A lot of venture capitalists have talked about sending anonymized surveys to founders after initial meetings, but I can list dozens of reasons for why this is flawed.

Instead, at Ludlow, a huge indicator of whether we are doing a good job is determined by whether we are sent interesting companies and introductions from founders that we passed on. Truthfully, there is no higher compliment in the world to us than to be introduced by founders that we passed on. The same goes for founders that we funded, but I think there is something very special about a founder you passed on still recommending you as a potential investment partner.

Brett, one of the partners at Ludlow, once mentioned this on a call, and it has forever resonated with me.

Portfolio Companies Are Family

Each company we invest in, we do so with the intention of becoming best friends with founders. By best friend, we don’t mean this as someone constantly giving them praise — we mean someone that you can come to about anything.

Jonathon and Brett are some of the smartest and down-to-earth people I know in the world, and they do an incredible job of teasing out the real YOU. By simply being ourselves and genuinely caring about our founders, we have built some amazing relationships.

Heck…I even play Counter-Strike regularly with a couple of our portfolio company founders. In those few hours that I spend playing with them, I gain extremely candid insight into their lives, company, challenges, etc.

This is a bit harder to measure and monitor, but every time a founder feels comfortable enough to ping us about anything — is a good indicator that we are doing our role as a best friend. Each time we can successfully refer a new hire, help with meaningful introductions to potential customers and venture capitalists, or just give actionable product feedback, it’s a strong indicator that we are on the right track.

Exposure To As Many Deals As Possible

This should ultimately be the goal of every venture capital firm, especially early-stage firms. It’s obviously impossible to know of every company at their seed stage, but it’s a big reason why a lot of firms have started to develop scout programs.

It is far better, in my opinion, to pass on a unicorn in their early stage, than to have never even seen them. It’s why firms like Bessemer has their anti-portfolio. The hope is that you learn and understand why you passed, so that the next time you see a unicorn, you don’t make the same mistake.

Hunting For Companies & Founders

Given that we are a small team of three based in Detroit, we often find ourselves having to get creative to find the best founders and companies. For us, that means cold e-mailing founders of companies that pique our interest.

A surprising number of companies in our portfolio actually came from outbound cold e-mails. I don’t think there is a better way to prove that we don’t have “egos” than to actually cold e-mail founders and ask to chat.

This is something we are incredibly proud of as a firm, and a metric we monitor quite often. Building close relationships with other firms, angel investors, etc. is obviously incredibly valuable and a large source of deal-flow for us; however, hunting for the best companies is something I will always strive to do.

Although, the main criterion for being a “good” venture capitalist has an extremely long feedback loop, I think it’s important to acknowledge sourcing companies is just one component of our roles. My career in venture has just begun, and I hope to reflect upon this over the next couple years and never lose sight of these other fundamental pillars.