Ok, I'm going to formulate a my next newsletter through Twitter threads. The title of the post will be "Venture Capital Isn't Built For Outsiders". I've never done this format before but if people like it, I may do it more often.

Venture capital isn't built for outsiders. One person didn't decide that they were going to exclude outsiders. There isn't an internal group of VCs that petition other VCs to not answer cold emails. There's none of that. What it comes down to is incentives and business models.

VCs make money by investing in startups. They invest other people's money (LPs), who expect a return on their investment. Specifically LPs want to see a 3x fund. If the LPs don't feel like their money is being put to good use, they won't invest in future funds.

So if a VC doesn't do a good job investing the LPs capital, they pretty much get fired, due to lack of future LP appetite. So as a founder, remember this dynamic. If a VC does not get their LPs, or put more bluntly, bosses, a return on their capital, they need to find a new job.

Now that we have that framing, let's dive deeper. MOST venture capital funds really don't perform well. Many don't even get a 1x, and VERY FEW get a 3x or higher. So VCs are incentivized to make sure they invest in the BEST deals that maximize their chances of keeping their job.

Note, we're not even talking about getting rich yet. Most VCs at the seed and pre-seed stage (where this post is focusing on) have sub $100M funds. This ultimately means that seed VCs with a fund size that small are trying not to get fired today, so they can get rich tomorrow.

Now, it's worth understanding how VCs make money. It's a 2 and 20 model. This means, once you raise a fund, you get 2% of that fund to operate and run the operation, and 20% means this is the carry you get if you hit a winner. Carry = equity split with your LPs. LPs the 80%.

So let's say i'm a pre-seed investor and I raise a $10M fund. The fund's life will last 5-10 years. I need to make 2% of $10M last 5-10 years. IF i'm good, I can raise another fund a few years later but this is not guaranteed. So, I am working w/ a $200,000 budget for 5+ years.

For a pre-seed or seed investor with a smaller sized fund, the riches do NOT come from the 2%. They come from the 20% carry. Which means many of these check writers are:

1. In a position where they could get fired for bad performance
2. And they aren't getting paid well.

I started the tweet thread this way intentionally. Many times, as founders, we are angry at the rejections. Or the no responses. Or the "it's not a good fit"s. But, It's VERY important to remember, that VCs are playing a very similar game to you. They are a startup in way.

OKAY... So pretty much what i'm saying is that pre-seed and seed stage venture capital investors NEED to hit a good fund performance to make this 3-5 year period of their life worth it. Which leads me to...deal flow. And a ranking of best to worst deal flow.

You, a founder who just got a startup idea last week and are now cold emailing every investor you possibly can from your apartment in Phoenix, are the worst type of deal flow. It doesn't mean you are a bad investment. But on paper, you don't look good to other types of deal flow.

The best type of deal flow? Referrals from:

- From founders they've invested in
- Referrals from other investors
- Referrals from other smart "insiders" in tech

Referrals = warm intros. The bain of my existence. The ULTIMATE EVIL. Nevertheless, this is top tier deal flow.

It's actually not evil. It's the best way to use their time most efficiently. If a investor has 1,000 deals to look at one week, and 500 of them came from warm intros, and 500 of them are cold emails, where will they look? Obvi the better source of deal flow...The warm intros.

And if a founder can get a warm intro, it shows a few things.

1. They are an insider already so the intro was as easy as an ask
2. They were able to break into the network and get a warm intro, which takes some amount of skill and makes a founder worth a meeting.

And if a founder gets a warm intro to an investor, and they invest, this shows investors downstream that something is going on with this founder, because great investor X invested. Investor leads a round, momentum builds, the round is closed. Boom. Outsider no more.

So once a founder gets a check from a credible investor, it signals that this founder is of a certain competency, and builds a layer of trust with the insiders. I could tell a rando that Jason Calacanis invested $100,000 into my startup and they'll listen, even if i'm a stranger.

If an investor who isn't that good invests, then it doesn't send the same signal to the insiders, and the heavy capital.If rich Uncle Joe invests in me, this doesn't make Natalie Sandman at Spark any more likely to invest in a meaningful way. This is why smart money matters.

So let's review. There's a spectrum of seed stage investors. Many are SF based or are insiders. Many are not. If a insiders see's another insider invested in you, they trust you more than if an outsider invested in you. This isn't weird or anything. It's business.

People work with others they trust. This is why SF is so supreme. All the insiders know all the other insiders. Most of everyone is successful. Breaking in is very hard. And every insider knows this. They may be helpful one to one basis, but they form a wall as a whole.

So the inner circle. They are all successful, they are all very nice people on a individual basis, and control pretty much most of the smart capital on the West Coast. So it's in an outsiders best interest to break into the insider group, because this is where magic happens.

I want to mention that LA is a powerhouse, but it doesn't come close to SF yet. The inner circle in the bay area is the strongest, wealthiest, and most knowledgable on. startups, hands down.

So, from an outsiders perspective, their goal should be to pierce the inner circle. There are two general ways to do this:

- Work for a bay area company that wins
- Start a company and get great investors, and ideally win.

For the rest of the thread, i'll be covering point #2.

The name of the game is this. You're an outsider. You know no one in SF. You have a startup growing 20% WoW. You know nothing about venture capital because you live in Emblem Wyoming. You do what you read about online. Google the best investors, and cold email them.

Brb. swimming break

And because you are cold emailing them , they put you in that category that we are talking about of sub optimal deal flow. So now a VC needs to do one of the following. Decide to only do warm intros or figure out how to manage all the cold inbound.

This is daunting in itself. If you found their email, so did someone else. They are probably getting tons of cold inbound with all sorts of starts, while they also get warm inbound. And their incentive if to find the deals with thje highest probably to be a fund maker.

The warm intro is easy because it translates trust very quickly. So if a VC is getting lots of warm intros, they may just kick the idea of taking cold emails seriously, because they already have good deal flow from inbound. But this pisses you off doesn't it?

You're probably thinking "but i'm different'. By not responding to me, you're missing out on a great opportunity. 2 things:

1. Most VC backed businesses do not do well
2. If you have never built a VC backed business or worked for one, it will 99.9% not be a fund maker

If the VC has limited time to find the best deals, and they are getting tons of deal flow, they can afford to miss out on cold emails, because the effort to parse through all of them and find the diamonds is not worth the opportunity cost of neglecting the "higher quality" deals

So some investors like @semil punt cold emails openly, which I respect. There is a whole group of VCs than say they like cold emails but never respond or think through to 95% of them. This is not ideal. This is bad for the founder.

Then you got investors like @dunkhippo33 who see like cold inbound , and go through tactics that allow for more "outsiders" to find @HustleFundVC. This is likely due to the fact that she invests pre-seed, she needs to get the check in before the deal is competitive.

But if i'm being honest, managing cold email is a bitch. Most of the founders suck who email them. Most of them are people with ideas, writing their life story out, begging why they need capital to move on. Maybe 2% of cold emails are from founders that should actually raise.

So investors have two options. Figure out how to find the needle in the haystack in their inbox, and take a bet on someone who hasn't found a way into the "network". Or, stick to what has always worked and invest into deals from warm intros.

So here we are. Many potentially GREAT founders don't have the education or context to know how to raise, so they:

1. Cold email and put themselves in the bad deal flow category
2. Don't rase and build a small to mid sized money printing machine because VC was "not possible"

You COULD do what we did. We emails Jason for over a year in a row, with updates about our revenue growth. He eventually invested. It took $24,000 MRR and 1.5 years of updates to get a check from an insider. But candidly, not everyone can grow a company to $24k/mo without capital

You could argue that this is a filtering mechanism for the market.But nevertheless, many of these founders would kill for $250,000 at a $3M valuation to give them a chance to run. And since so many VCs put in millions to oversubscribed seed rounds, 250 on 3 seems like pennys.

Nevertheless, VCs arent in the game of making great founders, they are in the game of finding them. And in this world, founders need to know how the game works, and play within its rules. And even if an outsider has a great company, not knowing the rules REALLY matters.

If an outsider doesn't get an insider to help even with their time to show them the ropes, they'll never understand the game they are trying to play. And this is why VC is not built for outsiders. Insiders have the access and now the tricks. Outsiders just know company building

But it's VERY hard to raise capital on company building alone if you are an outsider. Some go through YC, some do what we did, but most really never get access to that capital. To finish off the tweet storm, I just decided that this whole theme is a paradox.

VCs want outliers. They want outsized returns. They want ownership. But 80% of them are going after the same 20% of the deals. And it's because i don't actually think they know how to find these high quality founders in Kansas and Maine. It's just EASIER to invest in warm intros.

But someone who gets a warm intro probably knows the game, knows the funders, and they know how to raise, so and they get $4M on a $10M validation on a blog post. And VCs BEG to get into this. Yet you got a $10K MRR company in AZ who would raise at a $2M post but can't get attn.

It's just kinda ironic. Kinda hypocritical. Almost laughable. Maybe VCs should think more like founders. Because the system right now is pretty inefficient, at least for the pre-seed stage.

If you're an outsider reading this and you want help breaking in:

- Email me: [email protected]
- DM me on Twitter
- Follow my newsletter: http://forwardthinking.substack.com/ 

And lastly, remember, YOU make the VCs their money, not the other way around. You have the leverage. Always.