Stacking asymmetric outcomes
After almost 7 years since graduating, I went back to the classroom of McGill University — only this time, I was the one writing on the blackboard. Stepping into the old concrete building on the corner of Sherbrooke and Peel, I took a moment to reminisce before going up to the classroom to give my talk as a guest lecturer.
For my readers, I won’t share the nitty-gritty of the talk. Instead, I’ll highlight the key aspects of strategy and tactics I used for my fundraising as a founder that made a 10x difference:
Going from barely raising less than $1m over months… to closing an oversubscribed round of $5m+ in written commitments in a week.
The class was MGCR 423 Strategic Management. I’ve thought about strategy and tactics frequently, especially when it comes to career. Sometimes it worked, and sometimes it didn’t. My observation is that a lot of it is luck. I have friends and colleagues who timed joining a startup that became a decacorn in a few years. Some made all the “right” decisions, who ended up getting laid off due to office politics and economic downturns. And others who were killing it, but couldn’t time their exits and stock options.
However, there are at least a few variables that we can control based on available information and balance of probabilities — that’s where strategy comes in.
Strategy is an underappreciated concept in startups in the name of “moving quickly” and executing. While as a founder, I think this is mostly true, there are times where a little bit of thoughtfulness can yield meaningful ROI. I started off the class with a juxtaposition of my pre-seed and seed raises in my startup to show that strategy works in real life.
Having been a venture capitalist at Softbank Vision Fund, I knew a thing or two about playing the fundraising game. I knew how to structure a deck and communicate the main points of team, market, and idea. I knew how to have an honest, rational discussion of every point with which an investor may be concerned.
Yet, when I started my pre-seed round back in 2021, it was a lot harder than I expected. I spoke with 70 investment funds, and received 68 rejections. One of the worst calls was going over a three statement, five-year projection model for over an hour — for a pre-product, pre-revenue company. That’s insane. By the way, each rejection took an average of 2.7 calls per fund, so that’s over a 180 calls with VCs across PST, EST, and GMT during my finals season while I was at Oxford — it was such as disaster and definitely not good for my mental or physical health. Ultimately, I was able to raise about $700K over 2 months or so.
Four months later, my seed round took me a week to have an oversubscribed round, with more than $5m in committed capital. Now, to be clear, I didn’t take the whole committed amount, and took only what we needed to minimize our dilution as per advice from Y-Combinator Group Partners.
The point is that in 4 months it is night and day in terms of outcome.
How did I pull this off? There are many strategic and tactical areas I’ve discussed when it comes to fundraising, but for this piece, I’ll focus on two main points.
From a conceptual perspective, I talk about playing a game of asymmetric outcomes. Over the last few years, I’ve talked a lot about creating luck by doing things with asymmetric outcomes.
Here’s how I define it.
The first dimension is that the downside is floored, and the upside is uncapped on a balance of probabilities. So the upside is disproportionately good compared to the downside. The second dimension is that the probability of the upside is a lower than the downside.
Decisions don’t need to be grand for this to apply. For founder, the downside is usually floored at “opportunity cost” — learning or earning — of working somewhere else and doing your hobbies. The upside is basically uncapped with chances of perhaps becoming a trillion dollar company.
Assuming you know what you want, you only need 1–2 of these to work out for a successful career, and 3–5 for extreme success.
Quick conceptual point. Separately, if the downside of working on a startup is personal bankruptcy, your family living on the streets, not being able to afford care for loved ones, or going to jail (because you lie to investors), this isn’t a game of asymmetric outcomes, it is a game of leverage (where the upside and downside are multiplied by taking risk) — and a pretty bad one too. Don’t do this.
So what’s the catch? If the downside is floored and upside uncapped, why doesn’t everyone do this? One explanation is offered by behavioral economists like Dan Ariely say people are not rationale thinkers, and in fact, bad at calculating large numbers.
While economists continue to base theories on the idea that humans are rational — that we make optimal economic choices based the information we have — the notion is fundamentally flawed. Not only are we irrational, but when and in what form irrationality surfaces is predictable.
— Dan Ariely
Even if people are rationale, there are at least two issues that come up.
- The upside vs. downside is often binary, and not linear.
- The probability of the upside is often very unlikely.
What that means is that on an expected outcomes basis, taking these shots will become less attractive, especially as commitments in your life grows from family, career, and love. I’ve seen people literally not submit a CV because their experience was 6 months short of the minimum experience written on a job post. So how do we play this game and win?
On its own, each play of asymmetric outcomes can feel a bit like playing the lottery. This is why you need to stack the odds. Here’s what I mean.
Stacking your odds will linearly increase your chances
Flipping a fair coin twice does not mean you’ll get heads with a 100% certainty. That’s not how probabilities work. However, a game with 100 flips will have a higher chance of getting AT LEAST one heads than a game with 2 flips. Similarly, if the probability of getting your first cheque (upside) is say 0.1% — and not just the empirical probability, but the adjusted probability based on your candidacy — every incremental N meetings should increase your chances.
For both VCs investing in companies, and founders raising money, the game being played is asymmetric outcomes. VCs typically expect more than half of their portfolio will go to zero, and a few will 10x or 100x. This is how they make returns. For founders raising, they’re trying to be the one company who received the investment out of the 50 companies with whom the VC is speaking.
So one obvious strategy is to increase the N. Many founders are actually bad at this. They’d schedule 20–30 meetings over a few weeks, and then walk away discouraged when people say no. This is a bad way to start your fundraise both for outcome and moral.
For those who feel stuck here, here are a few starters.
- Expand the definition of investors. For many, the first round is from former bosses, colleagues as well as friends & family. Hopefully in your past as a student or employee you’ve left a good impression on people who can help. Taking $1–5K checks are okay. Don’t be proud.
- Leverage introductions. This can come from your co-founders (complementary value) or in some cases, advisors. I’d caution taking on advisors for the sole purpose of intros and tie their compensation to their outcome. Hierarchy of intros are on average warm contacts > intro from portfolio companies > intro from investors > cold outreach.
- Just do it. You only one investor to commit in for them to make introductions to their fellow investors. Investors know a lot of other investors.
However, even if you take this advice, it increases your change linearly, at best, for every N. Here’s why. First, the N is finite. There is a finite number of venture capital funds within your reach, especially if you’re outside of the US or Europe. Second, the strength of introductions will deteriorate with in increase of N. If your first meeting is your rich uncle and your 100th meeting is your friend’s sister-in-law’s former boss’ daughter who works as an analyst at a VC fund, what’s the quality of that intro?
Ordering your stack will exponentially increase your chances.
This is why the order of your stack is important.
Imagine that you’re playing blackjack. Each decision is like a hit. Stacking the odds is like playing based on optimal strategy based on probabilities. Ordering the stack is like arranging the cards in your favor.
In YC, we’re talk about high vs. low leverage fundraise. You always want to raise with leverage. In the lecture, I talk about four main sources of leverage. For most first time, early-stage founders, their primary source of leverage is going to be the Fear Of Missing Out.
Most early-stage companies don’t have product-market fit, so awesome growth is not going to work. Most early stage companies also start with an MVP, not a refined product. Finally, a first-time founders typically don’t have a track record impressive enough to raise on their merits alone.
Stacking the order of your investor meetings in a short, intense period allows you to play on the two errors that investors fear. The first is a type I error, which means investing in a horrible company. The second is passing on the next unicorn — this is the FOMO.
Key to maximizing FOMO lies in game theory, specifically auction theory, with the most recent contributors, Paul Milgrom and Robert Wilson from Stanford, winning the Nobel Economics Prize in 2020. For the scope of this piece, we don’t need to go into the details, but it would have similarities with the Vickrey auction or sealed-bid second-price auction for readers who are interested (like I was). For simplicity, I’ll highlight the most important components of ordering below.
- Fixed, short, intense fundraising timeline. All of your meetings should be scheduled into a block of 4–8 weeks. Each day should be filled with 5–10 meetings with investors or bidders. How it’s done: You do this by saying “hey we’re just about hit an important milestone can we schedule the call for the first week of August (1–2 months from now) for a more valuable intro to our company?
- Winning bids. Fastest to commit above your reserve price will win until a $ threshold is reached. The reserve price is the minimum valuation you’ll take for this round. The $ threshold is the amount you’ll need to raise for you to build your business.
- Bidding order. Each week or waves will be intentionally scheduled with types of bidders. The first few waves should be angels or funds you know can decide quickly and will have a high probability of investing. The proceeding waves should be smaller VCs and Family Offices with a simple investment processes. The waves after that can be your dream investors.
By using ordering your meetings intentionally, you build speed and momentum. As a result, you minimize the fear of the Type I error through positive signals from closing investors and maximize the fear of Type II error as your round continues to fill up. Once you reach your $ threshold, you now have further leverage to walk away and build your business.
Strategy and tactics have their place. They are real tools that can achieve objectives. However, I don’t want to overinflate the role of any strategy.
At the end of the day fundamentals matter. For example, I raised my seed on a pitch deck with no product or revenue. I raised my seed with an MVP with paying customers after Y-Combinator. Without fundamentals and integrity, it can be a quick path to fraud. FTX, Theranos, Terra Luna all had successful fundraises with impeccable strategies and tactics to do so. Even if they got away with it, I cannot condone the way they operated. If you disagree on moral grounds, I think my point stands even from a pragramatic perspective. Asymmetric outcomes, at least as I define it, needs to have a floor on the downside — going to jail is a pretty low floor.
Strategy and tactics should be used with integrity, not used to exploit investors, customers, your team, and even you — don’t fool yourself into giving up your integrity.
Be kind. Be human.
While I focused primarily on startup fundraising, I do think much of what I discussed is generally applicable in life. I’ve taken my asymmetric outcome plays in my life and stacked the odds to create luck. A part of that is my journey as a founder.
Maybe for you it can start with going to that audition, writing that book, posting that Tiktok, applying for fellowship, even taking that flight to see your partner — whatever fuels your passion that has a floored downside and an uncapped upside.
Start stacking your odds.