Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Fun main show episode. Let’s dive in here on the LP stuff. Rahul, as you know, this is a smaller group. The main show now reaches 75,000 folks. This one has a little bit more of a community feel. Definitely, some good stories swapped on the LP show on hot takes on how to raise capital, how not to raise capital, and whether bootstrapping is the way to go. We just wanted to learn from your experience doing all those things all across the spectrum, and frankly doing some very clever and non-traditional ways as you’ve decided to raise capital for Superhuman. With all that said, David, I’ll kick you over for topic number one.

David: Especially since you’ve done the whole gamut here. Before we get into fundraising, let’s get this out of the way first. What types of companies does this not apply to, in your opinion? Who should not be going out and trying to fundraise from VCs?

Rahul: The old and almost inaccurate rule of thumb here is that you should not fundraise for a business unless you think you can build a billion-dollar company. That used to be true. For fundraising, you would actually be raising from institutional investors. But I don’t actually think it’s accurate anymore and here is why. 

Here is in fact the rule, you should not fundraise for a business unless you see the possibility of growing into 10x your valuation. For example, if an investor is offering to invest at a valuation of $10 million, you should not fundraise unless you can see a path to $100 million. If an investor is offering to invest in the valuation of $100 million, you should not fundraise unless you can see a path to $1 billion.

Here’s the perhaps counterintuitive corollary is just worth noting that most software businesses can actually fairly easily grow to $10 million of ARR.

Ben: A lot more than people thought 10 years ago.

Rahul: And a sufficiently great founder can actually position such a business to the right buyer for a 10x multiple. It would have to be a strategic outcome, of course, but a great founder can find these things for a $100 million exit. Therefore, you’re almost always safe raising money with valuations in the low teens. But as the valuation gets beyond this, you should also have a plan or at least belief that the business will eventually be valued at more than $100 million. 

Long story short, if you’re raising low teens, absolutely fine. Go for it.

David: There’s another angle to this question that we wanted to get into too and also curious how you thought about this, particularly with Superhuman. Is there also in your mind a viable reason not to raise capital even if you think you can build a very, very large and valuable business just simply because you don’t want to raise capital or you don’t need it?

Rahul: Some people have done this, but it’s interesting to note when people have been capable of doing this, they often haven’t. Let’s, for example, take Reid Hoffman who from the successes prior to LinkedIn could have actually funded LinkedIn a very long way down the road. He did beyond what most founders tend to do. He contributed a large amount, for example, to his own Series A. But there is value to having other people around the table.

Let’s break that down. There is value in having a board. A board that isn’t just you having that kind of external accountability, cadence, rhythm, and oversight. I didn’t have this for Rapportive. Looking back, maybe had we a board, I could still be running that company and that company could be a billion-dollar company today.

Ben: You just raised a very small amount of money. You did [...] with Rapportive, then raised a small amount of afterward, and then the LinkedIn acquisition happened petty quickly.

Rahul: We raised $1 million. We were one of the first party rounds as now has become a very old term. Back then in 2010, it wasn’t particularly common. We were high-resolution financing. We’ve got all of that very, very early on, and we sold about 20 months later to LinkedIn. 

Now, because it was a party round, I didn’t have a board. I didn’t have a lead investor. That’s not a good thing. You do want these things. Even if you are a super successful founder, super successful entrepreneur, it’s helpful to have a board to provide more wise minds and more guidance around the table. It’s also just good corporate governance to have a board, especially once you have dozens if not hundreds or thousands of employees. That’s one reason.

Another reason is to convey to the outside world—his matters more early on, less later on—that you’re not completely insane.

Ben: This is great. This is exactly the one that we wanted to talk with you about.

Rahul: Early on you’re going to look insane. If you don’t, your idea probably isn’t interesting enough. Early on, you’re probably going to be the person saying, yeah, at the push of a button, the car is just going to arrive and it’s going to take you to wherever you want to go and trust me, one day we’re going to make money and even be passing propositions in California. Or you might say, yeah, I’m going to make an email client and the core thing about this email client is it’s going to be really, really fast. By the way, people are going to pay $30 per month for it.

Most people will think you’re completely nuts. It’s helpful to convey those other professional investors who aren’t investing their own money, they raised it from LPs, institutions, and so forth, and they’re on the hook with their own reputation to deliver that money back. If it’s an institutional investor, they’re giving up one of their very few board slots. They have decided it’s you. They’re not going to have more than 10 board appointments and they have decided that you are one of them. 

These are all very strong signals and a savvy employee or a savvy potential employee is going to be looking to these things, especially when it comes to high-level engineering hires and leadership executive hires.

David: You’ve talked about the journey of starting Superhuman and what it became, from the get-go, were you thinking along these lines of—you probably could’ve financed these yourself for quite a while. But these signaling aspects are really important. These things do become self-fulfilling prophecies as we’ve talked a lot on the show. You wanted this aspect of it perhaps more than even just the capital.

Rahul: I asked around a fair amount and I found this rather odd rule of thumb, which is to contribute 5% of the round yourself. I essentially did 5% of our seed round and I put a little into the Series A as well. This was me showing the investors that yes, I care. This is for real. I’m going to put my own money on the line. I have my own skin on the game, but also balancing it with most of the capital is actually coming from very high-quality professional investors. Andreessen Horowitz First Round Capital and so on. That was a very strong signal that I wanted out in the market.

Ben: Does putting your own capital in help with leverage on either economic or controlled components of the deal?

Rahul: No, not really. Not when it’s just 5% of the rounds. You’re not setting your own terms at that point. If you’re doing a priced round, it’s typically the lead investor who is usually the person who’s either putting in the most capital or the one who’s going to put in the most time, which is usually the same entity that is setting those terms in negotiation with you. I don’t think that the argument, hey, I’m throwing this much is going to be much leverage.

Where leverage does come from is whether or not that investor actually gets to be the lead investor. As with anything else, it comes down to creating a market, and as the founder having the ability to walk away from any deal. There is a corollary here, which is if you don’t need the capital—and I wasn’t able to do this—let’s say you’re fabulously wealthy and you can bankroll the entire round. Then, yeah, you have tremendous leverage. Because at that point you can just say to the investor, fine, you don’t want to invest, I am personally going to finance the next round of this company. I’ll see you when it’s five times more valuable next year.

David: What do you think about contributing capital as a founder yourself into a round, that’s very uncommon—certainly among first-time founders, but even beyond first-time founders. Was part of the motivation that in doing so—you alluded to this a little bit—you’re trying to get a top-tier investor to lead you around for all the benefits we just talked about. You’re signaling to these folks, hey, I am super all-in. This should get your attention because I am doing this.

Rahul: I didn’t even let them know. I don’t recall actually too many conversations about it. It just made sense to me that I would invest in my own company. As you know, I have a fund with Todd Goldberg, and we reinvest the vast, vast majority of our management fee as GP contribution. 

Why wouldn’t you invest in yourself? It is very much a signal that we’re sending to the LPs of our funds by saying, hey, we’re taking the least possible management fee that we can from this. We’re reinvesting as GP commits because that’s how much we believe in our ability to drive a phenomenal return.

David: It’s the old Charlie Munger quote, "Show me the incentive and I'll show you the behavior." It really applies in this stuff, especially on the fund side. This also sets the stage for the next question we wanted to ask which is, what are the things that you think founders should do before they go raise? How do you lay the groundwork as a founder? Let’s take a seed-stage deal—maybe we can take both. Both the seed stage, the first capital you’re raising, and then also, once you’re raising your A or B and you’re established, how do you set the stage and play a successful raise before you actually go start it?

Rahul: I think there are two types of fundraising. There is the preempted fundraise where one fund or one investor will come to you and say, hey, I’ve been watching you, I’ve been using your product, or I would love getting to know you. How would you react if I was to give you a term sheet? And then there’s the marketed fundraise where the founder says, okay, flag in the sand. I am raising money and I’m going to go and talk to all of these investors and let’s see what happens.

Ideally, you want to be preempted. You do not want to be in the market (so to speak) for too long. Not at all, in fact, if you can help it. The best way to be preempted—and this applies whether you’re seed or Series A—is to be perpetually in a state of not raising but simultaneously making great progress with the company and also being open-minded enough to preemption by a good enough firm.

David: Is there a way to signal that?

Rahul: Sure. In order to pull that off, you need a few different things. You need a runway, of course, because you need to be able to walk away from any deal. Every conversation that you might have with an investor needs to feel super casual. At any point, you can just feel like, okay, this is fine, this was just a catch-up. 

In order to get to that point, my advice for the founders who can pull this off—and I actually do think this is everybody—is to get into the rhythm of raising one round ahead of traction. Raise your seed round when you’re a pre-seed company. Raise your Series A when you’re a seed company. Raise your Series B when you’re an A company. Buy the normal metrics and definitions and what the market is doing.

Unless you let the time run out, this will forever put you in the position where when you’re talking to an investor, you can walk away. Why? You should always have four, five years plus of runway. In the entire history of Superhuman, we’ve always had four or five years of runway, if not significantly more.

David: This is such a cool and counter to current dogma of philosophy point that you’ve said before, I just want to pause and highlight. I’ve heard you said before, a version of this is, you always want to raise twice as much as you think you should, but not for the reasons you think. 

I think it’s brilliant because as you say, every time you are making a market for your equity, you are literally doing that, you are making a market. How do markets behave? Will they behave based on supply and demand and they behave based on your BATNA. If you can ensure right off the bat that you’re always going to have an excellent BATNA, ergo, probably, very likely always going to have an excellent fundraising position.

Rahul: Exactly. This gives you that time. It also gives you a whole bunch of other things. It gives you room to make mistakes, which we all of course do. It gives you room for external changes like COVID, which hit so many businesses half of this year. It gives you room for things like a recession or the volatility that I‘m sure we’re going to see over the course of the next few months. Most importantly, to your point, it lets you walk away from any deal. That is how you get the best deals.

Ben: Rahul, what would you say to any listener right now that’s thinking, yeah, but you’re Rahul Vohra and this was Superhuman. This is like the hottest email thing and you’re a second-time founder who had a great exit to LinkedIn. Can you remind us of maybe how you thought about this and what you’re able to accomplish when you were initially raising for Rapportive, or perhaps when there was a lot of skepticism around Superhuman early days? You said that you think anybody can accomplish this. How would someone who’s less well-known among our community of startups do this?

Rahul: It does depend on the stage. Which stage would you like to focus on? Should we do pre-seed going into seed or seed going into Series A?

Ben: Let’s go pre-seed to seed.

Rahul: Pre-seed to seed, the most important thing—and I gave an analogy last time I was on the show—for founders to do is to get the flywheel moving. I like to visualize this thing as this gigantic flywheel made of the densest material you can find and all you have to do—to begin with, it’s just you—is to get the thing rotating. You push it and it barely moves. You’re straining and you’re struggling, and it starts to move just a millimeter at a time. Your entire goal as a founder is to get this thing to move.

Now, as a second-time founder, you get to do this in weird and wacky ways. As a second-time founder for Superhuman, I was able to raise the first million dollars just off one slide.

David: A screenshot of Gmail, right?

Rahul: Yeah. You remember, a screenshot of Gmail, and I just red-inked out the things that I thought were broken and the things that I didn’t like. There was one word, which was speed and that was it. Million dollars raised. How could I pull that off? I had a track record in email. I’d sold a company to LinkedIn—namely Rapportive—and I think the idea was compelling. The investors who believed in it saw and felt that Gmail was getting slow.

But let’s remember all the things I didn’t have. I didn’t have a team. I wasn’t at that point a competent programmer anymore, so I wasn’t able to make it myself. I didn’t have a plan for how it was going to work. I didn’t have screenshots, markups, designs, or anything like that. I merely had a concept and a slide. It wasn’t necessarily easy, but my track record was just enough to get it over the line.

The flywheel starts moving. I then had a million dollars of capital, what do I start doing? Again, very counter-intuitively, the first thing I actually spent money on was superhuman.com. This was not a cheap asset to purchase. I actually spent $175,000 on this asset. The initial check that we’d raised for the company actually was just $250,000. It came in and then it almost substantially went out again in order to purchase superhuman.com.

David: Amazing. Where did you get the idea for the name Superhuman, by the way?

Rahul: Oh gosh, this is an interesting story. This was actually when I was still at LinkedIn. I had two weeks left to go and somehow, Silicon Valley had heard I was about to leave. In particular, Andreessen Horowitz’s firm had heard I was about to leave. This is, props to them, they are an incredible firm. Balaji Srinivasan—who was a full GP at the time doing all kinds of deals—reached out to me and he said, hey, a little birdy told me you’re about to leave LinkedIn and you’re about to start a new email thing. I’d be interested in taking the seed round. Do you want to swing by Sandhill Road on the way back from work one day? I’m like yeah, sure, why not?

He invited me to his office. This is one of the strangest—and I love Balaji, by the way. He’s an angel investor in Superhuman, and of course, Andreessen Horowitz is an investor as well now. I swung by and we had a meeting, it’s 10:00 PM or 11:00 PM, and he had this steak dinner, but it’s in cardboard containers. I was sitting in his tiny office. He’s like, so, what’s the idea, as we’re chowing down on our keto paleo meal—it’s like steak and broccoli. I started pitching him this vision I have for a fast email experience.

David: Did you have the slide at this point?

Rahul: I didn’t know. This was pre-slide. In terms of timing, this was February 2014.

Ben: It’s before your nine-month hiatus between the two.

Rahul: This was before that period of excessive fun times. I’d actually just incorporated the company, maybe the day before or two days before. I’m in the office and he asked me, what are you going to call the company? And my mind starts racing, I said, well, Balaji, I don’t really know. But what I do know is that I want it to feel like you have superpowers. That’s when it hit me. That’s when I was like, we’re going to call this thing Superhuman. I go to superhuman.com just to see if anyone has it.

David: Really, at the meeting?

Rahul: Literally in the meeting. We actually batted around a few different ideas. There was superhuman, there was supercharge, which obviously isn’t anywhere near as good. It turns out that for Superhuman, the domain was owned but it wasn’t used for anything, which for anyone who spent any time searching for domains will know it’s actually really rare. Here is a powerful English dictionary word that has such emotional strength that isn’t being used for anything. That’s when I said, okay, this thing is going to be Superhuman.

David: What a great story.

Rahul: Popping the stack back to the other story, that first $250,000 comes in, the $175,000 goes out, we buy Superhuman. I’m doing this in a really weird and wacky order. Typically, this is not the order that you do things when you’re starting a company. I then spend the next six weeks just writing the landing page copy that is still substantially 99% the copy that is on superhuman.com. 

Again, super strange, I spend the next $50,000 on hiring a design firm. We actually went with Ueno, which has now become this amazing design firm. They worked with Uber, Lyft, and Airbnb, and so many great companies. We were one of their first clients when they just started.

Ben: $50,000 for a design firm is pretty good to do anything.

Rahul: We were just super early. This was like MetaLab to Slack was Ueno to Superhuman. They did this early design work with us where I gave them the wireframes, they turned around beautiful mockups and design assets. All along the way, I was casually talking to investors in exactly the way that we described earlier. Now, remember, I still didn’t have a team.

Ben: You have progress, you have the momentum to show. At first, it was just an idea and then it was an idea and a domain. Now, there’s something physical they can look at in the wireframes.

Rahul: Exactly. Along the way, I’m also talking to potential co-founders. I was talking to Conrad all the way along. I was keeping up my angel and my advisory work all along. That’s actually how I found my two co-founders. 

Conrad eventually got the signal that this train is leaving the station, and there will be a point beyond which he will no longer be able to join my other co-founder Vivek. His company wasn’t doing so well and I was having my advisory calls with him and giving him advice on how he could raise a bridge round, how he could keep the company going. 

In that case, there just came a time where I was like, well, I hate to say this but I don’t think you can raise money for this thing anymore. But I have a train that’s about to leave the station. How about you and your last remaining engineer come and join me at Superhuman? Actually, all three of them, Conrad, Vivek, and BK—who is our founding engineer, joined in the same week.

In June of 2015, which is over a year after I had that meeting with Andreesen Horowitz, we went from one person to four people. The way that I did that is by constantly creating momentum. Now, why the long story? To tie this back, Ben, to your question, which founder sometimes asks me, what can I do? I’m not you. I can’t do these things. I’ll say to them, okay, you can raise $250,000 and you can be brave like I was. You can spend that on something that might seem insane. But you can create progress and then you can raise the next $250,000. And then you can raise the $250,000 after that.

That’s what I did. I raised it in chunks over the course of Q4 2014.

David: And of course, with a safer convertible note or high-resolution financing, you can do that. You don’t have to have all the money come in all at once.

Rahul: Exactly, and I didn’t. In case you think I was raising at superstar valuations, I wasn’t. That first $250,000 came in at $8 million, the next came in at $10 million, the next came in at $12 million, the next came in at $14 million. And then I actually felt bad. I was like, this is too rich for where we’re at. I brought it back down to $12 million again. I recapped the people who were at $14 million. I went back and I said, you know what, I just want to keep the valuation under control. Would you mind if I give you more equity? They’re like, no, that’s fine. Thank you for being big about this.

David: It’s the ultimate long gameplay there.

Rahul: Exactly. I always believe in [...] in investors.

Ben: It’s such a small amount of capital there that the percentage of your company that you’re giving up goes up from pretty tiny to just regular small. You just didn’t raise that much capital. That’s the key to making that work. This doesn’t work if you’re raising at a six or eight cap and you’re taking in a million, then you want to take it to another million, and then you want to take it to another million. By the time you go raise a price round, that’s all going to catch up to you in a big way.

Rahul: Oh, absolutely. For folks listening to this thinking, we can apply this at 6–8. That’s definitely not the case. 12–14 is a very different kind of game. Of course, it depends on the size of the check. That’s the other variable. These weren’t particularly big checks, these were very early-stage VCs for whom the average investment size may be $200,000 or $300,000. One of these folks was Dave McClure, it was 500 startups. He invested $14 million. I wanted it to be fair across all of our seed investors. I said you know what Dave, I just want to recap this and make it as if it were 12.

Ben: When did you raise that price round? Were that all converted?

Rahul: This took a very long time. I started raising what would be now called the pre-seed round in Q4 of 2014. I raised $2.5 million in this fashion. Very casually, very slowly, over the course of the next year and a half, almost a year and three quarters. I believe it was the summer of 2015 when we actually did the priced round with the first round of capital. It was a very casual fundraise up until that time. Mostly people who had backed me previously—people who might have made money at Rapportive—then, of course, you play the standard trick.

If a founder listening hasn’t done this when they raise, one of the easiest ways to get more leads is as soon as an angel or a VC commits, just say, great. Can you please name three other people that we should speak to who you think would be interested in this deal? Now, they’re incentivized to help you find those people. Once this graph starts building itself, it actually ends up taking on a life of its own. This is why most rounds end up oversubscribed because, towards the end of a round, you typically have enough people around the table that have friends who’ve made enough money that they’re just trying to pile in.

David: To my mind, I think this flips at some point along the fundraising journey, but the value of a syndicate—let’s say Dave had been instead like, hey, I’ll write you a $2 million check and you’re just done. How should a founder think about that? Is that good? Obviously, the plus is you’re done. You don’t have to waste time anymore on this. The downside then is you haven’t started to build up that graph in the same way.

Rahul: I would be wary of doing that at the pre-seed or the seed stage. With the exception of when you’ve already built up that base of people around the table. This was actually advised to me by a lot of my friends in the business. We didn’t finish the early Andreesen Horowitz story. Just to wrap that up and then I’ll tie it into this anecdote. 

Balaji and I walked down the aisle quite a bit of the way and we actually didn’t make it. The reason why we didn’t make it is we had a personal disagreement around how I was going to spend the next few months after LinkedIn. I said to him, I was like, listen, Balaji, I am completely burned out. I feel haggard. I don’t want to wake up in the mornings, it’s very difficult for me to work. I’m having this conversation with you because you invited me and I respect you. 

I’m definitely willing to bat this around and see where we end up. But I am not actually planning to start working on this until November, whatever it is. I’m going to take a certain amount of time off to recover. I don’t think the market’s going to run away. This is an insane idea.

David: Nobody else is this crazy.

Rahul: I think he personally could get behind that because he has also experienced burnout many times. I understand this now looking back. I felt rather annoyed that he pulled out of the deal. But looking back, I get it. As a relatively new GP, weird and wacky deals like Superhuman and going to the partnership and saying, hey, the founder wasn’t actually going to do anything for six months, it’s not the best—

Ben: It’s not the best way to start an IRR clock ticking on deployed capital.

Rahul: We talked about that. And I was like, I don’t even need the money for six months. It wasn’t really that.

Ben: Interesting. Your proposal was you just make the commitment now and then let’s actually do the deal in six months when I’m back?

Rahul: I was like, let’s sign the term sheet now, and let’s do the wiring in six months from now. We can even sign the term sheet now for an investment made in the future. That is a way to delay the IRR clock ticking. But it’s just weird.

Ben: A lot can happen in six months. One side or the other may decide they want to change things.

Rahul: In any case, the deal ended up not happening. It’s funny looking back and Balaji and I were laughing about this, Ben Horowitz was laughing about this when we signed the Series B deal. The post-money on the Series B deal was late, so I’m not spreading anything, but it was north of $260 million and they invested $33 million-plus. At the time, Balaji and I were talking about an $8 million valuation. It ended up being significantly more expensive for Andreesen Horowitz not to make the investment.

Ben: Do you want to come in at single-digit millions or do you want to come in at a quarter billion?

Rahul: Right. It was kind of funny.

David: The reality is they don’t care, but that’s another LP episode.

Rahul: They don’t care. They’re very, very good at running a venture firm. I just thought that the numbers were funny. In any case, it didn’t work with Andreesen Horowitz. So, what I then did was at that time go and talk to some other friendly firms. I talked to Matrix, I talked to Greylock. Greylock I was super friendly with because of the whole LinkedIn mafia situation. 

Going through LinkedIn, my boss’s boss was Adam Nash who ran products at LinkedIn for some time, became an EIR at Greylock, became the CEO of [...], became the head of products at Dropbox. The LinkedIn Greylock DNA goes very, very deep.

When I left LinkedIn, Reid pinged John Lilly, before this was the CEO of Mozilla and then became a GP at Greylock. Just hey, go hang out with Rahul. Just see if there’s any way that we can help him, what he’s doing next? Let’s just help him with his next thing. 

Lilly and I ended up having this conversation where he was like, hey, would you like to join Greylock. We can potentially get you on the fast track to be the GP. We all respect your insight and your product thinking, you’re a deep thinker. I actually did think very hard about it, but I ended up saying to him, I think I got one more company in me and it’s Superhuman, and here’s what it does. Would you like to invest?

This is where Lilly said one of the biggest and best things he could’ve said, which is yes, but you shouldn’t take my money. I don’t think it’s good for the company because we have the seed program, I’m only going to be able to invest a few hundred thousand dollars—that’s the way the seed program works. It’s not a real commitment, it’s not going to be a board seat. It’s essentially an option check. 

The stronger move is not to raise from an institution in your seed, if you can possibly avoid it. Instead, raise millions of dollars from angels and funds that are dedicated to this stage of the company. We didn’t use the term pre-seed because it wasn’t the term back then. But he was essentially saying, go and raise some pre-seed funds and angels. We’re going to invest in this company basically at every stage. We love you as a founder and we love the space. Just come back when it’s the right thing for the company.

I’m so glad that he gave me that advice because it was so on the nail and so spot on. That’s the advice that I ended up following.

David: And that allowed you to build that table of people.

Rahul: Exactly. I raised that $2.5 million from angels, from micro VCs, from pre-seed funds, and that’s when First Round Capital came in with a priced round for another $1.6 million. The way that I had done it had forced them to break all of their rules because their normal check size is $750,000 or $800,000 at that time. They have to buy a certain percentage of ownership. They had to more than double their check size in order to get to the level of ownership that made sense for them.

In total, that took us to about $4.1 million raised across the pre-seed and the seed.

David: And then there you go, that’s your five years of runway right there.

Rahul: Exactly, and there you have it. Actually, at that point given our burn, it actually took us to eight or nine years of runway. In any case, you then have the time to be able to raise funding on your own terms.

Ben: This is such a good point, generally speaking, which is whenever you’re engaging with an investor. Frankly, we can extrapolate this beyond just investors. But the thing you want to do with them is the thing that is their bread and butter. Don’t go raise a Series A and then pull in some public market investors. Don’t go raise a pre-seed and pull in some seed investors who aren’t used to writing $100,000 checks and they don’t have a way to think about that in their portfolio. 

The best thing to always do and feel free to disagree with this, is for the round that you are raising, go and find the people who care a lot about investing in that exact type of way for this round, for this type of company.

Rahul: I’m going to say yes and sometimes you can find alternative strategies that maybe work even better than the markets that are dedicated to your stage. Here’s the problem with the markets that are dedicated to your stage. Those investors are all competing against each other, and they probably all see the same set of deals. They might not want your deal as much as maybe an investor who doesn’t quite fit the shape.

In our case, that was true for our Series A. For our Series A, which was a preempted 10 on 51 posts when we had all but 10 customers. So $300 of revenue a month and a prototype that barely worked was actually a very well known family office. That was an LP in about 3 of the seed funds that had invested in our seed rounds. 

This guy, Kevin, for anyone who’s raised a fund of any size, they’ll know Kevin, they’ll know Norwood Advisory—they are a mega LP. He approached me directly. And he said, so my fund managers tell me you’re about to go out and potentially consider raising a Series A. I’d like to participate.

I remember this conversation vividly because it was a good example of reading the tea leaves for what they are. Sometimes you have to go deeper than what people are saying. He and I were sitting at the high tabletop in MKT Bar in Four Seasons, San Francisco—in case anyone’s been there. Because I didn’t have an office, that’s just where I would work constantly. 

I said to him, "How much money would you like to invest?" He said, "Well, how about $250,000, or how about $500,000?" I said, “Well, this is going to be really tough." At the time, we’ve just done an interstitial round at $25 million, which I can’t talk about because I realized I just threw out that jargon. We’ve just done an interstitial round. But in any case, I said to him, "I don’t think we have room to take on that check size at this point. It might have to be $100,000 or $150,000." He said okay.

Ben: We’re going to talk about this interstitial round, but because the valuation of the most recent financing you had done was $25 million. You felt it would be too dilutive at this point to take a check size of $250,000 or $500,000 at $25 million.

Rahul: I think it had just been a week prior where I’d raised $25 million. I wanted to respect those investors and not double the valuation on them overnight as well as the new investor. I said, "Look, I can’t take this capital. By the way, what is your normal check size?" I asked this knowing at the back of my mind that he manages billions of dollars. 

He said, "Well, normally for a deal like this, I’d like to deploy $5 million, $7 million, kind of roundabout there." I said, “Well, I’d love to be able to take on that kind of capital, but I can’t do it at $25 million. Would it be okay with you if I have to think about it, figure out an evaluation that works, and then get back and we’ll figure this thing out?" He said, yes.

Ben: That’s so great.

Rahul: Over the course of the next two weeks, we had this negotiation, it was a very easy negotiation, from my perspective. He tried hard to make it easy. I flew to New York, we went out, we had dinner and drinks, it was me, it was Kevin, it was Ed Sim who’s the Fund Manager at BOLDstart who has Kevin as one of his anchor limited partners. Between the three of us, we just agreed to this deal. Ed, by the way, was one of the investors who had invested at $25 million just a week or two before. We agreed that we’d do $10 million on a 41 pre-51 post, no increase to the option pool.

It was essentially a sweetheart deal that you couldn’t have imagined a better deal as a founder. We even wrote a side letter because I was worried about the key principle risk here. Kevin has an investment shop of about 20 plus people, but he’s like a solo GP. It’s not the case where if something unfortunate were to happen to him, there’d be a whole venture firm with a reputation and other general partners to rely on.

David: The other folks there are not doing early-stage ventures?

Rahul: They are not. Kevin is a genius investor. He is extremely sophisticated. He led Lyft Series C. He was able to see all these things at a time when no one else was able to see them. What I asked him to sign was a side letter such that if something unfortunate were to happen to him, then the voting right associated with his shares would revert back to the company. Just a few little things like this to shore up my reticence and hesitation about raising a Series A from a completely nontraditional investor.

David: From an LP essentially.

Ben: The point here to make, it’s important to be explicit about people who do venture deals all the time, VCs have a pretty founder-friendly, very far looking future lens on the set of terms that they put in that they know not to mess up the company in any specific way. 

When you’re dealing with a strategic or someone who’s not used to doing venture deals, it’s just very easy for them to behave in a different way than a traditional venture investor would behave on your cap table or with all the governance rights they have. Because there are easy ways to say, oh, I want to make this decision to capture value right now, but every VC knows and every founder knows you’re playing a ridiculously long game and you have to be super future looking to make sure that you don’t mess up anything for all the value that needs to be created in the future.

Rahul: Couldn’t agree more. If a founder is dealing with a nontraditional investor for that stage, my best advice is you should be the one to furnish the term sheets. You should go to your council and say, hey, I want a founder-friendly, but also a market for my stage of the company, give me all the bells and whistles. And then take that to the strategic investor, in this case, the late-stage investor who’s trying to capture value early. They’ll be thankful. They’ll be like, great because my council doesn’t want to prosecute this so it’s good that your council does. Of course, double-check everything and we’ll talk to our fund managers to make sure that this is the market.

But really, what they’re trying to do is capture value early. I asked Kevin once the deal was done, why he was so excited to do it. What he said to me is, mark my words, this is the cheapest your company will ever be. He just had that level of belief and [...] in what we were doing. I think he was right. It turned out to be absolutely right. 

Now, he looks like a genius. He is through the fund managers that he has invested in, through the SPVs that he’s done, and the side investments that he’s done. Because he’s also [...] to every single point in Superhuman—through the Series A, through the Series B. He is the single largest shareholder—other than me—in Superhuman. Even more than Andreessen Horowitz. This is an LP.

This is how he makes money for his family, not just in being very savvy as a public market investor and as a real estate investor. He’s out buying oil fields in the UAE. Getting into early-stage deals and building a position over time, I learned from that as an angel investor and as a small-time fund manager. We now also have that strategy at the Todd and Rahul Angel Fund where sometimes you can get the allocation that you want. That’s okay because, in many companies, we’d been able to build a good position over time.

Ben: Last thing first because I definitely want to get to this, but I do want to hear what is an interstitial round? Because I think it’s a thing that you do that’s totally nontraditional, maybe becoming a little bit more popular. I’m trying to follow the story along and I’m a listener right now. I heard that you raised a million and then I heard that you raised $2.5 million. Of course, you raised this $10 million Series A from a family office, but I heard you say somewhere in there that there was a $25 million valuation on something. What is that something?

Rahul: We did two interstitial rounds. I’ll just run through the chronology again. We did around $2.5 million of high-resolution financing—call that a pre-seed. Then, $1.6 million of seed financing from First Round Capital. The post-money on all of that was about $16 million. I say this because of course, it was high resolution. Then, we did about $500,000 on $25 million. 

I did this because I knew we needed more money. This was an early board meeting I had with Bill Trenchard in the first round. He’s a phenomenal investor, by the way. I went to him and I said, hey, Bill, I have learned, I now have the conviction that we’re not going to be successful as a company unless we have mobile email clients. He was like, well, go and build one then.

I said, well, here’s the problem. We only have enough money to build a desktop email client. If we wait until building it, it’s not going to work because I know that it’s going to take about two years to get a decent iOS app to market. He said, well then, we need to raise more money. I said, okay, that’s what I’m going to go and do. 

I didn’t know what valuation to raise money at, but what I did know was that in Series A, I wanted it to be about $10 million. Therefore a good valuation felt like about $50 million post-money. It felt like anything beyond that would be ridiculous. The market then isn’t what it is today. This is about 2015.

Today, $50 million for a serial founder who’s building in my space, you could probably raise that just on the concept right now. That’s how frothy the markets are today. Back then, it wasn’t quite like that. I did what I always do, which is I just cut the halfway point. And I said, well, I want the Series A to be at a $50 million post. I know that we’re at a $16 million post right now. $25 million is a nice round number at about halfway there. That’s when I’m going to go and raise money.

I went back to my first check into the company, BOLDstart Ventures, Ed Sim, showed him the markups and the design that I had for the mobile app. He essentially committed on the spot. He said we’re in. At which point I don’t think he was expecting me to do this. I pulled the safe out of my backpack and I was like, cool, here’s the safe. Glad that you’re in because I am ready. Let’s go do this thing. He put in $250,000 of the $500,000. 

The other $250,000—this is another niche trick that founders can do—came actually from the agency that we worked with, Fueled, they’re an amazing mobile agency in New York that we worked with to build the prototype of the mobile app.

Once again, I knew that we had to get the momentum going before we had any mobile engineers. How do we do that? It worked really well with the design firm just starting to get things moving. We did it again with the mobile app. Now, we ended up throwing the code away. That’s fairly normal when you work with an agency. You do this to learn how it should work, how it should feel, and critically, to signal to the markets of mobile engineering leadership that this train is leaving. That one way or another, this app is going to get built. And such to create some kind of urgency around hiring the right person.

They were quoting me a very, very high rate. A rate that I didn’t think we could afford. I forget what it was. Something like $250 or $300 per hour of mobile engineering time. I was racking my brain. I was like, how can we do this more cost-effectively? We ended up negotiating this agreement whereupon Fueled dramatically slash that hourly rate, but they also got to invest in the $25 million round that was happening then. 

One of only three investors who got to invest in this round was Ed, who wrote the first check, who said yes on the spot and that was where I pulled out the safe. Fueled, who were our design and coding partner for the mobile app in the early days. In return for investing, they also got me an hourly rate at cost essentially. And Kevin, who as an inducement from leading the Series A, I let him dollar cost average slightly by also putting some money into the $25 million round in addition to the $51 million round.

That is interstitial. That shows that playing out in three different ways. In one way, as a thank you to the first angel check that came into the company and said thank you for believing me so early. You now get to invest in this when no one else does. As an inducement to the firm that we wanted to do agency work with in order to give us a cost rate as they’re now equity owners in the company. Also, as an inducement to the incoming investor, out of respect, because across the $25 million round, it just happened last week. Who is to say the company is worth twice as much the week after? Of course, you can put in a little bit of capital at that price point as well.

We then did the Series A post-money $51 million. We then did another interstitial round, similar mechanics at 80. Kevin, of course, doubled down again, he’s doubled down every single time. And then the next round after that was 260 plus.

Ben: Do you create that safe, you’re like great, we just closed in $51 million. Anyone who wants to invest at this point forward? It’s nice we’ve got this $80 million safe open. I’d created it immediately.

Rahul: No. That seems a little too cheeky, even for me. That doesn’t sit right. I always wait until something meaningful has happened with the company. For the $25 million round, the meaningful thing was look, we’ve made all of this progress on desktop and we have this kickass principle animation. It was an interactive animation that you could tap through. It worked on the phone. It looked and felt awesome. They have the contact bar for the first time you have that Rapportive-like functionality on iOS, which was a big deal. We had that prototype. That was the thing that we were able to take back to investors. 

For the $80 million round, we just had this cool event that we’d done with Product Hunt. We were a launch partner for their ship functionality. Which if you haven’t come across this, this lets you launch on Product Hunt without actually launching on Product Hunt. You just get a landing page, you can collect email addresses, you can collect sign-ups. We were launch partners for that, and we were by far away from the biggest partner launch they had on the platform even going up against other big brands. 

In the course of two weeks, we had about 17,000 people signed up for Superhuman. That very quickly grew to tens of thousands of people. This caught the attention of the media. We ended up having a TechCrunch piece. I ended up on chatter.tv, live from the New York Stock Exchange. Lots of really cool pieces of media. 

I packaged all of this up. The traction from Product Hunt, The New York Times Stock Exchange piece, TechCrunch coverage, which also then ended up in the piece with Wired. I took that back to Kevin and to our early-stage investors and said, hey, it feels like we have something here. I’m therefore opening up a new round at $80 million. Would you be interested in participating? 

They did. That’s when [...] Capital got involved as well. Obviously, he was able to see the traction from his connections at Product. He knew how big of a thing this was going to be. It was just a good opportunity for people who could see what was happening at the time to get involved. We still had very little traction. Probably on the order of just hundreds of customers paying us at that time.

David: Millions of dollars have been late in the ARR sitting there on the waiting list. You raised a good point there that obviously now informs a lot of your strategy with the fund, but I think it’s important. A lot of companies and founders can tend to think—as we were talking about earlier—too much along the lines of I have this set of investors for this stage of my company, I have that set of investors for that stage. 

Yes, they’re great that you want them on board, you want those brand names, you want the best at what they do. But sometimes the early-stage investors in your company too can be great. They already bought in, they have more information than anybody else, they can be great investors to either kickstart a process, or to, in some cases, lead a process of a later stage round. Which I think—if I’m reading the tea leaves right—feeds right into what your [...] strategy is now with your funds.

Rahul: Kind of, yeah. Our thesis is pretty simple. We think that founders these days want to raise from other founders and other operators in the early stages. In particular, the savviest founders are leaning towards doing that rather than raising from a big institution in those early stages.

David: [...] done this, plenty others.

Rahul: Exactly. It goes back to the advice that John Lilly gave me at Greylock. He said the bigger, bolder move is not to raise from us. The best founder is now nervous.

David: How did you and Todd decide, great, we should start doing this in a more—I hate to say institutional way because the whole point is you’re not an institution, right?

Rahul: We’re definitely not an institution. It’s just two of us. It started off with our angel investing. I started angel investing in 2012 with tiny personal checks. That year I had sold my last company, Rapportive, to LinkedIn. I was mostly doing it as a way to meet interesting and ambitious founders. I felt like it was a good way to stay connected to the startup ecosystem while I was at LinkedIn. 

When Superhuman started to take off, I started to see significantly more deals. But I also had increasingly less time to actually deal with them. Unfortunately, it was causing me to miss deals. You mentioned Notion, I had every opportunity to invest super early in Notion. First Round Capital is also an investor in Notion. I had brunch with Ivan very early. Their valuation was only $14 million. I said, hey, I want to invest. He said, yes, I will let you in. But simply due to being a busy founder, I did not actually see that one over the line.

David: Oh no.

Rahul: It’s okay. You win some and you lose some.

David: Yeah, you’ll be fine.

Rahul: I think I learned an important lesson, which is it’s really, really hard to be an active founder and a hobbyist angel. In fact, to do angel investing well, it’s almost an entirely different skillset. You need to be opportunistic and you need to be able to turn on a dime at any moment. That’s not conducive to also being a good CEO. 

To be a good CEO, you need to be focused on your company and not get distracted. Now, at roughly the same time, Todd Goldberg—with whom I’ve been co-investing for some time—pitched me about an LP into his fund. He was like, hey, I want to start an angel investing fund, I think you’d be a really great LP. Would you be willing to back me?

For the first time, I looked at angel investing, not only as a way of meeting cool people but as a way of looking at money. I looked back at my own angel investing track record, which was never something I had actually paid any attention to. I was shocked at what I found. I had two deals—Clearbit and EasyPost—where my $10,000 in each were together worth nearly a million dollars on paper. Both of these companies are still doing really great. 

For the first time, it began to feel real and palpable. Up until that time, I literally thought I was throwing money away. But it was also kind of entertaining and I was meeting all of these cool people. I felt like I was giving back and helping the next generation. The reason was not to make money. But Todd’s request forced me to look at it through that lens. 

That’s when it occurred to me that Todd and I were bringing very different things to the table. Todd was bringing his ethics, his hustle. He runs the fund like he is a founder. He is a founder. He was founder-y things that happen on the side, side hustles that he’s also running. What I brought was the ability to see these deals from across Superhuman and also be an active operator-founder who can help in moments of crisis, in moments of difficulty, or on specific things like how do you get a press release out? How do you get into a publication? How do you get onto a podcast, speaking at podcasts? How do you design a go-to-market strategy?

Ben: You just have the host email you and say, hey, can you come on?

Rahul: Thank you so much for emailing me. But how do you get to that point where it is the case that hosts actually are emailing you and people are interested in hearing what you’re saying. Of course, there are answers to all of these things, which I won’t go into now. But this is one of the reasons why folks were interested in raising money for me.

Ben: This begs the natural question. You have an 80-hour a week job being the founder of a quarter-billion-dollar fast-growing high demand startup, and you have a whole team there. How on earth do you do both, and what’s a reasonable promise that you can make to founders that you back when you talk about things like being there in moments of crisis. There’s, unfortunately, a finite amount of time.

Rahul: Todd and I agreed that we would split responsibilities. In coming together, I believe that we would easily be able to raise more than twice as much. He was originally targeting around $3, $3.5 million. We ended up closing, for fund one, around $7.3, $7.4 million, and that we would use our combined platforms to get great LPs and into the very best deals.

What we say to founders is that we’re able to bring very different levels of time to the fund. Todd is running this thing like he’s a founder. He, no joke, works 12–14 hours as an angel investor for the companies that we’ve invested in. He is the hardest working angel investor I’ve ever met. That was one of the reasons why of all the people that I could potentially have co-founded a fund with, it was Todd. It was because I knew that he would treat running a fund like being an active founder. For me, I measure the amount of time that I put into things very carefully.

Ben: I’m shocked.

Rahul: Customers of Superhuman will have read that newsletter I sent out about the switch log and how I measure my time fairly precisely. The amount of time that goes into the fund is in the region of 1–2 hours per week. It’s a strategy call that I have with Todd every Saturday morning and then usually a session with one of the portfolio companies. What we say to the companies is if shit is hitting the fan and you need to get in touch with us, this is Todd’s number, this is also my number. Text him, call him, he’ll reply at any time of the day.

He’ll then either deal with it or escalate it to the both of us. If it’s an area of expertise where I can get involved, he’ll immediately punt it my way. This could be something like I mentioned, press, go-to-market distribution, product virality, PR. We had crisis situations. It could be that there’s a PR scandal brewing. How do you handle that? I’ve been through two big PR history events.

David: One right after our last episode.

Rahul: I know how to handle those things. It could be that a lead investor has just bailed. We had a particularly crazy one. I’m not going to mention names. One of our companies, the general partner who had invested in that company, has left the firm. The remaining general partners we’re like, we don’t even like this deal. We want to wash our hands. As you know, what happened is so, so bad. It is the worst thing that can happen to the company. Crisis situation. This is where a very well network founder with very strong relationships with most of the GPs across the Valley can actually help.

I put out the bat signal, essentially, and we found another tier one investor to come in and buy those shares and to take that board seat.

David: That is the best solution to situations like that. It’s just like if you can do that, get them out, get somebody who cares.

Rahul: This new investor is honestly better than the previous investors. The founder is so, so happy that we were able to figure out the switch.

Ben: That’s great. That’s such a high leverage use of you being an investor in that company.

David: It sounds like most of your investments in the core fund are relatively early. You’ve said you will do later stages too and come in and participate in those rounds. But you just raised the following rolling fund. Tell us about that.

Rahul: Sure. One of the things that we noticed with our early-stage fund, which I haven’t really explained. I’ll do a quick description of that. It's a pretty wide set of investments across B2B and consumer viral SaaS, especially productivity like Superhuman. We love business infrastructures like Clearbit and EasyPost. We love health, fitness, and wellness companies and creator tools, audio companies like Descript. We typically do $100,000–$200,000 checks at pre-seed all the way through Series A. 

What we saw is that from that fund and from our general network that we were seeing a pretty significant number of follow on opportunities. We were seeing a growing number of breakout companies from our networks, and we were increasingly being invited to participate in these rounds.

These rounds were either due to our LP agreement, we couldn’t invest from the early fund because the valuation was too high or it just didn’t make sense to invest from that vehicle. We created a follow-on fund specifically to invest in breakout companies from the early-stage fund and in later stage opportunities from our network.

One point of construction I didn’t talk about with the early-stage fund is—and this is somewhat unusual, but I think it’s becoming more common—we didn’t hold any of the funds of the reserve. The idea for follow on from the early-stage fund was that it would always happen via SPV and it would go to the LPs pro-rata by the amount they had contributed to the early-stage funds.

David: There are pros and cons to both. Speaking from experience, you guys have a very small early-stage fund. It’s just so hard to model out reserves and deal with all that when you’re dealing with a small amount of capital in the first place.

Rahul: I agree. Although interestingly enough, as we’re thinking towards the next fund, we will probably be changing that strategy. For fund two—which isn’t actually the rolling fund, it’ll be the next version of the early-stage fund—we probably will actually set aside a small amount. We’re thinking about 20% of the fund to be able to opportunistically jump on these amazing deals as and when they come up.

David: Or maybe some interstitial rounds.

Rahul: Exactly. interstitial rounds happen all the time. I can give an example of a company called Haus. Haus is an incredible company. If folks aren’t familiar, they do low alcohol by volume aperitive because the alcohol—the drink, is made out of grapes, they are actually able to direct consumer companies in the beverage business. They’ve essentially found almost a loophole where they can mail you alcohol. In these COVID times where up until recently, people aren’t even able to go to a bar, there’s just been such a demand for their products. They’ve just been doing phenomenally well.

This was a good example where we made an initial early investment. It wasn’t as big as we would’ve liked. Our typical check size is $100,000–$200,000, but we love the founder, Helena, we developed a relationship, and we were able to—whenever they raise money—deploy more capital over time. We’ve been able to actually build up into a position, which cash on cash should actually be able to generate decent returns over time.

We were one of the very early rolling fund partners. One of the reasons we love rolling funds is you can essentially raise widely from the market. You are actually able to market the rolling fund without falling foul of general solicitation.

Ben: Right, it’s not public. It’s also bringing that thing that you know very well—high-resolution fundraising—up to one level of abstraction in the capital stack.

Rahul: Yes, it is. You’re able to go to these people who possibly have never actually invested in a venture fund before, but maybe they have some spare capital. As well as due to the high-resolution version of fundraising over time. There isn’t really a valuation (so to speak) with a venture fund but you are able to slice it by time. But that is its pro and its con.

For folks who don’t know how rolling venture funds work, there is this requirement to deploy capital. If you don’t deploy it inside of the three quarters, it rolls back to the investor who can roll it back into your next fund if you’re doing another fund. But there is this clock sitting on the fund and it’s an unusually small amount of time, just a number of courses. 

For something more like a traditional fund, you do have the deployment window, which could be years—depending on whenever you’ve said to your investors—to actually deploy the capital. That is probably more what makes sense for the kind of investments that we’re doing. 

The rolling fund is a really good experiment. We may well do another one because it gives us an opportunity to get to meet new LPs who we otherwise wouldn’t meet. It gives new LPs an opportunity to invest in and the Todd and Rahul deal flow, which is massively oversubscribed over the core fund side and potentially a way to maybe invest in the core funds down the line. It’s just a good kind of get to know you for every party in the ecosystem. The core fund itself is able to wait for an opportunity in a way that a rolling fund might not be able to.

David: I hadn’t realized that downside too, the rolling funds. I did know that under the hood, they’re basically just a series of separate funds every quarter, six months, or nine months, or however, you structure it. You have these deployment windows that are very narrow.

Rahul: Exactly. The other way you can do this is via SPVs. But then, of course, you have to raise the SPV every time you want to do a follow on investment.

Ben: Why is it that you can publicly market them?

Rahul: I’m not too familiar with the legislation. I believe it’s something to do with Section 506C, which means the kind of fund it allows you to talk about it. Essentially, the way that it works is the level of accreditation that is required. The form of accreditation that is required for investors is greater. You can’t self accredit. You actually have to be certified accredited.

Ben: Rahul, before we bring this LP episode to a close, on the main show, you kindly told folks that they could get to the front of the line, design it for Superhuman. As a plug for this one, who should come talk to you about either fund. But if they’re an entrepreneur, who should come to you and talk to you about the Todd and Rahul fund?

Rahul: Great. This applies both to early-stage and also late-stage investments. We are late-stage investors recently in Pitch and ClassDojo.

Ben: I’m a big Pitch user. Great product.

Rahul: Oh, fantastic. I am super excited about that product. We have about 30 plus early-stage investments, which you can see at toddandrahulangelfund.com. We’re very imaginative with our naming. The kinds of companies we love to see, essentially the ones with…

Ben: Cheaper domain than Superhuman.

Rahul: It was significantly cheaper. Essentially the ones with fantastic founders. If you think that you are a founder with the magic combination of you know how to make something that people want, you know how to help people realize they want it, and you’re working towards the possibility of a billion-dollar outcome, we’d love to talk. We’re fairly sector agnostic. We invest across B2B, B2C, and SaaS. We even have one biotech company that we’re incredibly passionate about. If you have an interesting company, please drop us a line, we’d love to take a look.

Ben: Awesome. I’m excited, I’ve got a couple of Pioneer Square Labs companies I’m going to send your way.

Rahul: Fantastic.

Ben: Listeners, thanks again for joining us. Rahul, can’t thank you enough. This is the first time I’ve heard a fair bit of the insights and stories that you shared about Superhuman’s fundraising journey and your thoughts on the topic, and of course on your fund. Hopefully, we’ll get a third ep here with you on Acquired in the future. Maybe when some meaningful change has happened and we can justify a different valuation for the episode. 

Rahul: Sounds good.

Ben: Until that time, listeners, we’ll see you next time.

David: We’ll see you next time.