How XYZ Venture Capital evaluates early stage founders

Ross Fubini is the Founder and Managing Partner of XYZ Venture Capital, an early-stage venture fund with a fintech and enterprise-focused portfolio that includes investments in companies like Anduril, Hex, Bravado, Switchboard, Stir, and Sardine.

Since 2017, their portfolio has generated over $11 billion in aggregate value. We sat down with Ross to uncover his 10+ years of domain expertise and tactical insights, diving into topics like: 

1. How founders can gauge compatibility with an investor
2. Three ways the venture capital landscape has (and hasn’t) evolved after a decade
3. What founders can expect from seed-stage investors

“In 13 years, the VC landscape has shifted immensely in terms of angel investing and deal velocity. But you’re still just trying to build amazing things with people.” 

How the investment landscape has evolved and why it matters for founders

After first cutting his teeth as an engineer and exited founder, Ross dove into venture capital about 13 years ago and hasn’t looked back since. 

He outlines two fundamental ways early-stage investing has been turned on its head during that decade — as well as one way his job as a venture investor has remained exactly the same. 

1. Angel investing is the norm

One of Ross’ earliest forays into VC was a gig at Kapor Capital, the firm founded by Mitch Kapor, the founder of Lotus and a game changer in the 1980s software industry.

At the time, Mitch was independently investing in many early-stage startups. Today, we’d call him an angel investor. But, in the late 2000s, there was no name or norm for this kind of work. 

In time, people would start to cut smaller and smaller checks, and companies would grow less and less likely to make a beeline to Sand Hill Road as their sole chance at funding. 

Nowadays, those old rituals of access to capital have almost completely collapsed. 

How does technology affect investment? Founders don’t need broker-style relationships anymore to get in the room. Instead, you’re likely to find startup founders running to meet potential investors online via a Zoom chat at all hours. 

As our definition of what an investor looks and functions like expands, so does the funded startup pool itself. In Ross’ words: 

“VCs are just teeming to find great people, whether that means two founders and a dog, a later-stage company, etc. That is a tremendous shift for us.” 

2. Deal velocity has accelerated dramatically

With the mentioned shift toward decentralized investment landscape, the general velocity of the market has accelerated accordingly. 

Roughly a year ago, companies were raising money at frequencies ranging from every five months to every two weeks. Naturally, the investment pace has slowed with the market conditions of 2022.

In terms of what this has meant for investors, we won’t mince words: 

You’ll need to know your sector and come fully prepared when you meet companies. That means understanding what you’re looking for in that business and being able to assess rapidly. 

If you don’t, they’ll simply move on and tie up the round without you — whether that takes days or (more realistically in current times) a few weeks. 

This has also led to more specialization in the industry. Beyond technical expertise, that can mean understanding which VCs thrive in certain networks or can nail GTM strategies. 

XYZ VC, for example, has a deep understanding and strong networks to help companies in fintech, enterprise, insurance, and the public sector succeed.

3. Investor’s roles and responsibilities haven’t shifted at all

Despite these immense shifts to the space around them, primary responsibilities of an investor haven't evolved much at all. After reading The Power Law, Ross noted that: 

1. Every incredible company continues to struggle to get made
2. Ventures continue to go through the same cycles of evaluation from investors
3. Ultimately, investors still exist to provide connections and unique industry guidance

Of course, there are more factors to contend with these days: the introduction of angels to the party, a larger presence from smaller venture firms, weathering a few recessions, etc. 

Yet, as Ross puts it, “I’m still just helping people who are trying to build great things.” 

Identifying the right investors

For the founder navigating increasingly rapid rounds and attempting to filter through various investors for a perfect investor match, Ross recommends the rubric of people, firms, and terms — in that order – at the earlier stages of investing. 

The people at play are far more important than the broader firm as they will be the ones you are engaging with on a regular basis. 

Even the specific terms aren’t as meaningful as the direct relationships, he explains, because terms generally tend to collapse in every set of market conditions. 

To ensure founder-investor fit, your best bet is evaluating the individual you’ll be connecting with, not unlike a hiring scenario. Some questions to ask to size them up include: 

Who’s the investor? How’s the dynamic? 

Across the investment selection process, focusing on the investor in front of you will, in Ross’ words, make fundraising more efficient and less emotionally exhausting. 

Whether you’re on day one or pre-IPO, it’s draining to pour your heart into pitch after pitch, only to be brushed off. When they genuinely get what you’re doing, it can feel like a godsend. 

All in all, to find the right investor match, consider your basic personal connection and chemistry with your potential investors. 

Connect with investors you want to talk to, work with, and learn from — on both good and bad days of dealing with boards, standard growing pains, hair-on-fire emergencies, etc. 

What questions do investors ask startups? 

It doesn’t matter if you’re pre-seed or on your Series B. Founders in fundraising mode are bound to waste time talking to the wrong people. Maybe they don't meet your startup growth needs or get your sector in the ways you require. 

Regardless, Ross affirms that you can effectively gauge a venture capitalist’s or investor’s expertise through the quality of the questions they ask founders in the room and the due diligence they conduct. 

Again, it’s like a sales or hiring flow: The best candidates ask the smartest questions. 

For instance, as an investor in Newfront Insurance, he’s helped scale this insurance venture into one of the nation’s highest-growth brokerages with a $2.2 billion valuation. 

If he were to sit down with an insurtech startup today, one of the deeper-cut questions (for a VC, at least) he would ask the founder would be: “How much of this business are you BORing?” 

When the founder inevitably asks, “How do you even know what that term means?”, Ross can assure them that he’s already lived in that particular market. 

Investors will obviously never know more about a business than its founders do, but bringing that baseline expertise from the get-go is a strong green flag. 

Overall, if an investor demonstrates these two characteristics — a promising interpersonal dynamic and knowledge of how you startup (should) operate — they may be the right angel investors or VC firms for you. 

“Personal affinity between a founder and their investor goes a long, long way. And you can feel that kind of mutual understanding in the pitch room.” 

What is a seed investor's role and what should founders expect?

In today’s industry, Ross affirms that every seed-stage investor should, at the very minimum, be making hiring intros with immense growth potential. He explains this as: 

“Every startup needs great engineers, marketers, etc., so you’re always connecting people. That’s table stakes. You’re just doing your job. That doesn’t present transformative value.” 

Instead, your actual game-changing value as an investor lies in helping your founders secure their next round of funding.

As mentioned, you'll never know an investment as well as the folks who've built it up from day zero. However, you've easily been navigating the VC landscape far longer than they have. 

So, as their goals evolve, one of your greatest value-adds is simply providing guidance on when to raise, which potential investors in their category are active or not, and so on. 

Mediate current risk, map out next steps

Typically, after investing in a company, Ross and the XYZ team will meet with them every two weeks. At every stage and phase of growth, he’ll kick off with two questions to ask founders: 

1. What immediate or potential risks can we mitigate to streamline your growth trajectory? 
2. What do we need to do to unlock the next phase of your business and raise your next round of funding? 

This might lead to directives like: 

• “You have the reach and the product-market fit. But you need to show growth, because people will worry that the market’s too small.” 
• “We need to get ahead of product because you’re a great CEO — but you’re doing too many things and we need to show we can scale this business.” 

With multiple compression in the public markets, a recurring priority is demonstrating revenue efficiency and a path to profit over time. 

It’s been an interesting challenge, says Ross, namely because the vast majority of XYZ’s portfolio companies (as solid businesses) have a lot of capital right now. 

The question then becomes: How can he advise founders to spend that capital to show they’ve built a durable, compelling, and immense business in a skeptical market? 

“I’m here to leverage my unique knowledge of venture to help the 87 companies in our portfolio raise their next rounds of funding. Period. That’s my job.”