Naval: Whatever your brand is, it has to be clearly articulated; it has to be messaged. It has to be authentic to who you are. It should be differentiated from what everybody else is offering, and it should resonate with entrepreneurs. The worst strategy is taking a lot of coffee meetings or saying, “I’m a good, passive, hands-off person. I won’t bother you, and I’m always available to help.” It’s too generic.
You can build a brand through your advisors and limited partners
If many of the investors and advisors to your fund are computer science professors at major universities, then entrepreneurs will want you as an investor because you have access to people who can bring grad students, help with technology diligence, or solve hard algorithmic problems.
You may come from the real estate industry, and all the real estate tech startups want you because you have a deep understanding of the industry, partners and contacts in the industry, and your own properties.
You can build software for startups
Nivi: You could be the world’s expert at helping a startup raise its next round. You can build software for startups like AngelList. There’s still 100 different things in the world of software for startups that haven’t been done.
You can be an expert at raising money from international investors, in China or Brazil. You can break into a new market by backing scientists and technologists in a new market. You can be the world’s expert at scaling. You could build open-source tools for startups.
Naval: There’s extremely little innovation in the venture capital business. It’s quite easy to stand out. You have to be willing to do something that other people haven’t done before. In other words, you have to be willing to take on accountability and risk being wrong.
You can buy common stock instead of preferred
Nivi: Do you think someone will try to build a brand around buying common stock from entrepreneurs, instead of preferred stock?
Naval: People have done that a little bit. Andreessen Horowitz started to do that; they became registered investment advisors so they can do secondaries. You could argue that’s a core part of YC’s brand. They buy at a low valuation in the first round, but they used to buy common; so they were completely in the same boat as you.
There’s no branded firm—or angel investor writing large checks—that is buying common. I think it’s a clever strategy and something that we may yet see happen. It does have the problem where the company can shut down and keep your money.
But there are clever ways around that. You could say, “I’m buying preferred stock, but after two years it converts to common stock.” When they burn through your cash and raise somebody else’s cash, you’re no longer sitting on top of them in a liquidation preference overhang. But at the same time, your money’s already been spent, so it’s not like they can shut down the company and run off with your money.