📕 Startup term you should know

Ever heard of Total value to paid-in capital (TVPI)?

Measures the total value a fund has created, both cash already returned and value still on paper, against the money investors put in. Above 1.00x means the fund's investments have grown; below 1.00x means they've shrunk. The formula: total value / paid-in capital.

My insider scoop: The Angel Capital Association pegs successful angels at 2.5x-3x TVPI over 7-10 years, with the top quartile hitting 4x or more. But most of that comes from just 10-20% of your deals. The power law is real: your winners need to return 10x-100x to cover all the zeros. David Rose's rule of thumb is to build a portfolio of at least 20-25 companies so you actually catch one.

📰 Today's topic: When You Can't Judge the Category, Borrow Someone Who Can

A great founder can give you a compelling pitch and make you want to invest. But what happens when you don't know the category well enough to evaluate the company?

A lack of category knowledge shouldn't be a blocker. Here's how to stress-test your instincts.

Recently, a founder who sold his last company in about nine months came to us with his new company: a “single pane of glass” for chief security officers. After the meeting, one of our GPs said she was likely to invest. It was unusual for us: we don't typically invest in cybersecurity.

The LP who made the introduction to the founder asked a reasonable question: “Why don't we do more in that category?” The honest answer: we don't have deep internal expertise in it.

We realize that this can create a trap. A deal lands in front of you, you realize you don't know the space well enough to evaluate it quickly, and you drag your feet. Meanwhile, your attention drifts back to what's comfortable. The round closes, and you miss out on something great.

You don't have to know everything, but you have to know what you don't know.

The pitch itself is usually pretty easy to follow. The founder walks you through the workflow, the dashboard, the problem that wakes the buyer up at 2 a.m., and you can understand what the product does.

What's harder to evaluate is the technical claim underneath it.

Is there actually something technically differentiated here? Or is it a standard practice being dressed up in fancy clothing?

That's especially difficult when the founder knows the category cold and you're sitting across the table without anyone in the room who does. A founder can sound incredibly impressive because they are explaining a complicated market fluently, not necessarily because what they're describing is genuinely differentiated.

The answer isn't to pretend you understand the category.

It's to find someone who does.

Borrow expertise from someone who has it

We're working on getting cybersecurity operators into our next venture fellow group. It's a new space for us, so our GPs are tapping their networks for people who know it cold. That same network can be valuable when we're evaluating an investment.

The goal is simple: understand what a real technical edge looks like in cybersecurity right now, and which claims sound like moats to outsiders but are actually table stakes to people who work in the category.

This is the kind of expertise you can borrow, and a tactic you can take into investing decisions too.

You don't need to become a cybersecurity expert before you can evaluate one cybersecurity company. You need to know who can tell you whether the thing you're hearing is genuinely differentiated. One lunch with the right operator asking the right questions can get you surprisingly far.

Have that conversation before you wire the money, while the answer can still change your mind.

Talk to the people who would actually buy it

Back to the founder building that “single pane of glass” for CISOs: the GP evaluating his company decided to speak with CISOs before committing.

That makes sense: the CISO is the person who signs the contract and then has to live with the product.

Get three of them on the phone and ask them what they use today. Ask what isn't working. Ask what it would take to switch. And ask whether the problem this company is solving is painful enough that they'd actually pay to solve it.

Three calls is a small investment of time relative to the decision you're making.

And sometimes you should still pass. If you can't get to conviction on a specific company, that's an honest answer.

The trouble starts when one company-level pass hardens into a category-level rule, and the category quietly leaves your universe because you don't have anyone on your team who can evaluate it.

A small check can be an advantage

There's another reason we don't think a lack of internal expertise should automatically keep us out of a category: we're writing small checks.

One of our GPs pointed out that cybersecurity has a lot of investors already. That's actually an advantage for an early-stage fund like ours.

Series A firms have stage requirements. They have minimum check sizes. A company may be interesting to them but simply too early or too small for their model.

We can meet that founder earlier.

That's the advantage of a small check: you can get to know a great founder before you know everything there is to know about their market.

Build the list before you need it

The practical lesson is simple: write down the categories you know you can't judge on your own.

Cybersecurity. Bio. Devtools. Defense.

Then put one name next to each: someone you can call when a deal lands in your inbox and you need to get smart quickly.

You don't need to turn that person into an advisor or build an elaborate expert network.

You just need to know who you trust to tell you: Is this actually differentiated? Would you buy it? What am I missing?

The goal isn't to become an expert in every category. It's to make sure that “we don't know enough about this” doesn't automatically become “we don't invest in this.”

– Brian from Angel Squad

🍫 A snack for the road: Come hang out with us in SF!

Join us for an exclusive investor demo day featuring the top startups from Orange Planet's Global Market Expansion Program (GMEP) — a Korean accelerator backed by Smilegate, one of Korea's leading tech companies.

​These founders have spent the summer in San Francisco immersing themselves in the US startup ecosystem, and now they're ready to pitch. You'll hear high-potential Korean startups deliver sharp 2-3 minute pitches, followed by Q&A and open networking.

​This event is designed for investors — come ready to engage, give feedback, and connect with the next wave of founders making their move into the US market.

Overheard in SF…probably

“Our AI is fully proprietary in the sense that the API key is in my name.”