I asked Michael Wooten a question I have been chewing on for months, and he answered a better one.
My question was about telling versus showing. I keep meeting emerging managers who are excellent at telling, and whose response to a hard fundraise is to tell more. I keep meeting others who are quieter, who have something real, and who cannot get it across a table. I wanted to know how a manager shows differentiation when it is not obvious, not early, and not loud.
Michael did not take the communication framing. “Sometimes people want you to be differentiated, but they want you to be on the edge of the box,” he said. “If you’re too differentiated, then that’s probably going to be tough for the investment committee.”
I had been treating differentiation as a storytelling problem. He handed it back to me as an underwriting problem.
In basketball (yes another basketball anology) the corner three is the best shot on the floor and the tightest one. Twenty two feet instead of twenty three point nine, worth the same three points. That foot and a half is the entire edge. It is also the spot where the sideline crowds your heels. The efficiency and the out of bounds line sit on the same piece of floor. You do not get one without standing next to the other.
That is the edge of the box. It is where the return lives and it is where a committee stops being able to price you.
Three things I took from the hour.
Differentiation has to be legible, not just real. Michael’s point was not that managers should sand down their edges. It was that an LP has to be able to write you up. Storytelling is necessary and it is not sufficient. He was direct that execution has to back it, and that at the earliest stage you are selling the sizzle because the steak does not exist yet. By growth you have the steak and you had better lead with it. The failure I see most often is not the manager who is too plain. It is the manager who is genuinely differentiated in a way that has no comparable, and who reads a committee’s inability to underwrite them as a lack of conviction.
Sourcing is the product, and the product is for founders. Michael walked through why SignalFire stood out to him. They built proprietary data early, used it internally for sourcing, then turned the same thing around and gave it to their founders. That second move is the one that mattered. It stopped being a sourcing edge and became a winning edge. He said they took him through the track record and showed where they beat tier one firms already on the cap table, and ended up with more ownership than they had rights to. Underneath it is a claim I now think is just true. Of capital, he said, “that’s not going to be enough because that’s a commodity.” Founders want three things from an investor, in his telling. Introductions to customers, capital, and help recruiting. Two of the three are not money.
The thesis push may be eating the thing it was meant to prove. This was his hot take and it is the part I am still turning over. He thinks sector theses work at growth and do not make sense early. “I think your thesis should be to find great founders who are trying to tackle hard problems.” Then he closed the loop. LPs want managers in a box. Managers reverse engineer a thesis to get into the box. “you’ve crowded out that market and now you’re no longer differentiated because everybody else is doing that.” The differentiation requirement manufactures sameness. That is a mechanism, not a complaint.
Where I am not settled. I let that one sit in the room without pushing on it. I have watched sector focus do real work at pre seed, but the work it does is access, not picking. A narrow lane gets you into founder networks a generalist never sees. Michael would probably say fine, that is a sourcing edge, call it what it is and stop calling it a thesis. He may be right. I have not landed.
One more thing worth saying plainly. When I asked what he actually watches in diligence, none of it was the deck. He watches how a manager treats waitstaff. He hands them a question thirty minutes early, teach me something, anything, and then watches whether they can carry a conversation while it sits in the back of their head. He built that from hiring people at a former job and thinks manager selection is not that different. And his pet peeve was not a bad quarter. It was silence. The manager who stops responding after the money is in.
I wrote in The Songwriting Credit that sourcing is the part of this business people credit last and depend on most. Michael got there from the other side of the table and landed in the same place. That is usually a sign the thing is true.
Listen to the full conversation with Michael Wooten here.
With gratitude,
earn