Last weekend, a number of people shared the first-person account of millennial “side-hustling” that was published in Quartz. You can read the article here. It’s not that great of a piece, nothing new or earth-shattering is revealed, but I’d wager it was shared so widely because people have experienced a dose of this themselves, whether they like to admit it or not.
In the article, the author talks about “side hustles” as a lifeline for many professionals in the economy under 35, coming up at a time after the 2008 financial crisis, after sharing economy networks arose and 1099s took the place of full-time work. Eventually, the author contends, the side hustles run out and folks will be forced to grow up, focus, and take on responsibility.
The article also reminded me I’ve been “side hustling” since high school. If I think through the phases of my life:
8-15: If my work was “school” at the time, there was mowing lawns, shoveling driveways, etc. 16-22: School got more serious and into college, was working in various kitchens (where I developed a passion for cooking). 22-28: This is when the side hustling really started, working nights as a bartender in NYC or working as a bartender for private parties in the Bay Area. 29-33: To defer some grad school costs, I worked as a researcher for various professors across the university and research departments. I would hustle to find pockets of scholarships and hunt them down, a few thousand bucks here, a few thousand bucks there. I finished grad school in June 2008. 34-present: Little did I know The Side-Hustle Muscle would not only help me here in the Valley, it was a critical lifeline for me to survive, stabilize, and get my bearings. It wasn’t paid, but I became a regular contributor to TechCrunch for a weekly column and TV show I started; and I started consulting with a handful of VC firms on Sand Hill Road as a way to learn the business and meet more people. I was lucky that, while I was working at companies, my colleagues not only supported this — they encouraged it.
And, here we are, over 20 years later, and the side hustling mentality isn’t coming to a stop — it’s just now more focused in a particular area (that I really enjoy). Rather than being dispersed, now the hustle remains but is channeled into the pieces of building a managing a small fund — how to find LPs, how to report, how to sift through deal flow, how to work with companies and founders, how to work with new investment partners, and the list goes on and on. The hustle continues, but finally got streamlined.
All this said, I wouldn’t sit here and say “this path led me here!” or recommend it to other people, because there are many downsides to taking this path, too. I wanted to cut in directly, but that option wasn’t on the table. It’s risky and I’m still paying for it in a way. It was never by design — I was always gunning for a regular full-time job but they never arrived. The side hustle is not one I would openly advocate for, as well. I’m lucky I have a chance to cut into a field I truly enjoy — and I am grateful that hustle provided enough fuel to get this far.
About a year ago, my friend in NYC Joel pinged me about a company he had invested in. It was a short description, but I took the intro and met Jeff, the CEO of Tempo Automation, for coffee. We had a great discussion, and he had the right background in hardware, automation, and systems. My shortcoming at the time was that I didn’t totally understand his market, so I kind of asked to just leave the conversation. Jeff pressed me over email and now, looking back, was incredibly gracious and thoughtful in making time for me.
In those subsequent conversations, I saw Jeff’s measured aggressiveness emerge (I mean this in a good way) and he took the time to teach me about his world. I am looking over the email threads right now as I’m writing this, and it’s embarrassing that he put up with my questions. Nevertheless, through his relentless and thorough answers, I finally said “OK.”
Today, Tempo Automation, one of my companies in Haystack Fund #2 announced their Series A led by Lux Capital, where I am close with the partnership. The round was actually done way back in 2015. The news about their announcement reminds me what an unorthodox and lucky story it was in terms of how I got involved with the company.
That turned out to be a good decision on my part. What I didn’t realize at the time was (1) the company sits at a very dynamic point in the ecosystem for manufacturing and (2) Jeff, the CEO, is an absolute machine. As software has invaded the industrial manufacturing process (like 3D printing — which I’ll write more about soon), Tempo Automation’s factory harnesses software to make the business of hardware move faster. Tempo started by automating the most cumbersome piece of the process (logistics) and will expand into other production processes as they grow, driving time and cost savings to hardware developers. This frees engineers designing hardware to focus on what they know best and not have to become logistics experts, as well.
Other investors noticed as well. Tempo ended up going to from “seed to Series A” faster than any other company I’ve been fortunate enough to seed, and I’ve been around some fast ones. Part of that is because investors are starting to recognize the scope of the opportunity in the industrial space, and part of that is because the team’s leadership focus in pursuit of building the company. Now with a team of 25 and growing, it is humbling to look back on all my questions I peppered Jeff with. It is my job to ask questions and listen, but it’s also my job to lean in without perfect information and try to help out. I’m thankful they gave me a few chances to do so.
Disclaimers:This isn’t a doom and gloom speech. There’s tons of opportunity out there. And, this is mainly focused on consumer markets. Also, this post is a little long in the tooth. Please forgive me. I haven’t had time to write with all the little kids running around my house, but I’m devoted to changing that this summer. More soon.
It is fashionable to hold a contrarian position. If everyone believes in X, believing that things will unfold in a different direction than X — if chosen wisely — can be the key to public acclaim, riches, and legacy. Of course, there are many who subscribe to a contrarian script and are wrong — only a very select few end up being right.
In terms of startups and investing in them, it is fashionable to say, even in times of uncertainty or financial restraint, that “great companies can be built at anytime.” It is a contrarian position, in opposition to combinatory external forces — in today’s case, geopolitical risk abroad and at home, financial risk in the form of monetary policy and liquidity crunches, pricing risk as seen in the dislocation between public and private markets for technology stocks.
So, we must ask of the contrarians, are they right today? Is this, indeed, a good time to start a new technology startup? Of course it is. Time doesn’t matter. There will always be new technologies to bring to market, new teams forming that can drive value and change the world. In this narrative, many often cite companies like Airbnb, Uber, Whatsapp, and other companies started around the financial crisis of 2008 as examples that, in fact, it’s possible to start great companies during dire times.
What’s missing from that storied contrarian stump speech, however, is the fact that, at some point early in the lives of these companies — they found a growth vector. They may have spent some money acquiring customers, but they didn’t rely on paid acquisition entirely. Since 2011, when these three companies began to take off and caught the eye of some of the best venture firms in the Valley, the timing coincided with (1) a rush of cheap capital flooding into the technology startup sector and (2) a restructuring of the global economy toward technology and networks.
The result was that, in an effort to chase the growth curves of the companies cited above, investors started investing even earlier in the life of a company, sometimes just in the people themselves. Traditional venture capital firms grew in size and morphed their DNA to go beyond active board management, building batteries of portfolio services in the same vein that a private equity shop would bring with it to a portfolio company. There’s nothing wrong this shift, and many companies and LPs believe it was the right way to get the inside track on an investment (a competitive arms race) and the right way to help manage an investment beyond the limited scale of a single general partner in a fund model.
One issue, however, is that era of larger institutions making multi-millionaire investments before looking at data (including growth curves) is coming to a halt. We thought, back in January and February of 2016, that the time had arrived, but not just quite yet. At seed, companies are still being funded left and right, and even some Series As occur, but most of them are closed on the back of some type of demonstrable growth vector. It’s pretty clear for the past few months that while there’s enough to seed most people who want it, the next round requires bringing some meat to the table. Most don’t have it. They’re just chasing growth. It’s a noble pursuit, but the lifelines to support these experiments has shortened.
Put another way, there’s a slight decrease in the number of experiments being funded (it’s still huge on an absolute basis), and the amount of time allotted to those experiments will shorten. As a result, I believe the following will be ripple effects:
1/ Fewer Seeds: We’re going to have fewer quality seed deals, relative to before. Most investors downstream won’t notice this because they will only see the quality that bubbles up. People those who play in the very early stages already have been living it.
2/ Slower Rounds: As a result, the rounds will take longer to unfold. The only triggers that make a round move ultra-fast are when one of the very few credible leads makes a move and those who syndicate fawn over them, and/or when the founder knows how to play the fundraising game. The rest are much slower.
3/ Extending Runway: As most teams will spend more time fundraising and have read enough about market conditions on blogs like this (sorry), I suspect founders will be more careful about burn rate, especially as it relates to vendor burn, office rent, and most critically, headcount.
4/ Financing Extensions: These are harder to get done. They actually require real relationships with the earlier investors. I’ve participated in a few of these recently, and I’ve let many just go. The ones that work are involving investors and demonstrating progress in an authentic way. These also take a long time to get done because some people get hung up on price.
5/ Point Break: After a startup gets through 1-3 (or 1-4), it’s judgment time. Is there a Series A with a lead investor who joins the Board? Is it time to look for a strategic acquirer? Or is it time to call it a day?
And, this is where things in the future will get much clearer. One could argue it already has. There are still Series As happening, but definitely not as much. Nowhere near levels from 4-5 years ago. More founders are open to the idea of landing the company for acquisition, but even though we read about the good stories in the press, most won’t find soft landings like this. I spent all of the first quarter this year meeting with corp dev departments and M&A teams at all the big consumer and enterprise companies. They have mandates to buy companies, but probably not at the rate you’re thinking of.
To underscore, this is not doom and gloom. This is all very healthy for the ecosystem. I am still investing and excited by new stuff. But about 18 months ago, I started investing in entirely new stuff — I am excited to write more about those companies this summer as I catch up on my writing and on life. I started to invest in more frontier technologies applied to industrial and commercial settings — sensor networks, software for 3D printing machines, commercial drones, and technologies that could play a part in helping people deal with climate change, rare diseases, or even large regulated industries like insurance.
As we slip into summer and investors slow down a bit (yes, despite what they say — they do!), I suspect the fall — like every fall — will be a frenzy fundraising pitches, and that after a summer break, the investors downstream will be looking for simple evidence: Is there demonstrable momentum? Or, is this is a hot team in a big market? Or, is this on the frontier of what could happen in the next decade? If you’re a founder or early investor in a company preparing for Fall 2016, it would be wise to ask these questions and, depending on the answers, to plan accordingly.
The first notification which caught my bleary eyes Monday morning — Microsoft to acquire LinkedIn for $26 billion. Much has been written about why this may make sense for Microsoft.
What’s less clear is: What motivated LinkedIn to take this path? I’ll attempt to answer this at the end.
In my short time in they Valley, most M&A shockwaves include a large incumbent (like Microsoft) buying a small or scaling private startup (like LinkedIn buying Slideshare, or GM buying Cruise, or Google acquiring Nest, or Facebook buying Instagram or Whatsapp). In the time I’ve been here, the size of these and other outlier exits have been huge. Yuge! Unprecedented, even, and all driven by different motivations — incumbents scrambling for talent, quelling threats, or chasing the innovation frontier.
No matter the motive, the flood of liquidity unleashed by these seismic events helps keep the Valley’s startup engine humming, especially in an era when public market offerings are (for whatever reason) less desirable. We have been taught that “going the distance” in entrepreneurship is what the journey is about, to keep going as long as possible, up to the very end — to never give up. In the context of money, however, “going the distance” can often be code for “go public and let’s drive a big exit.” There’s nothing wrong with that, but the mentality changes a bit once a company graduates from startup to scaling giant to public company. Does a startup still need to keep going the distance once it’s public?
LinkedIn was one of the first in its era to go public and pave the way for its brethren Facebook, Twitter, and others to take on Wall Street road shows. Since then, as we all know, the company would, from time to time, report good quarterly earnings, but everyone in the Valley understood the product evolution and experience for LinkedIn not only didn’t improve, it devolved. There was little to no product innovation. There were Facebook-like misses on the transition to mobile, but no Facebook-like turnaround to get things right. As it went public with a bit over 100M members in the LinkedIn network, the company’s room to grow in the developed and developing world was potentially huge. It was the ultimate “data moat” company. We may not have liked the UI, but we all needed an online resume.
So, in steps the new Microsoft. Satya Nadella has proven himself in a few years at CEO to be forward-thinking, to push his company toward the dominant mobile platform (iOS), to snatch up good mobile product startups to help modernize the office suite (Accompli, Sunrise, Wunderlist, etc.), and to creep into the frontier with moves like the $2 billion purchase of Minecraft. With so much cash on hand and a mandate for change, Nadella is playing his own game of chess to help bring Microsoft into the 21st Century, to inject it with new talent, to fortify their position in mobile, and — with this latest move — to build an outpost right in Silicon Vally and get into the professional/work graph.
But, why did LinkedIn go for the sale? Why not continue to go the distance, in Valley parlance?
We may hear press release tidbits like the company is going to operate independently in Mountain View, or that the hooks into Outlook and LinkedIn will be good for users and customers, etc.
I have a slightly different view:
1/ Talent Drain: Outside of a huge acquisition, could LinkedIn have reinvigorated its ranks with new product talent to tackle head on all the product debt accumulated over the years? Talented operators want to work at Uber, Slack, and so on. It’s not clear they had the right horsepower to handle the road ahead — let alone deep linking on mobile.
2/ Product Stasis: As a result, the product became brittle and stale. Attempts to infuse it with a newsfeed or expert content didn’t produce fruit.
3/ Fragmentation of Professional Identity: The next generations of talent, in various industries, are building their reputations in non-traditional ways, through varied experiences, and don’t (yet) feel they need to go to LinkedIn or give it all of their data.
4/ Company Leadership: Much has been written and studied about founder-controlled/led companies versus those run by a professional CEO. In this case, the CEO at the time of acquisition was a professional brought in to lead the company through IPO, and while a founder was still the Chairman, one has to wonder if he weighed the choices of going back to CEO versus selling the company. It likely means the CEO, Chair, and BoD didn’t have the desire to keep going. It’s worth noting this given the cultural history above. Things end and that’s OK.
5/ Private Equity vs Acquisition: As a technical footnote, one also has to wonder if the company considered private equity as an option, though this would be a large transaction and would still result in a loss of control. By going for M&A, all cash, LinkedIn realized they’d stay around a $15-20B public company so engineering this offer would be the best they could get from any route. (Additionally, thanks to Dirk de Kok on Twitter, some outlets reporting LinkedIn had been issuing stock-based compensation at a rate that was too fast given the company’s overall slowing growth. This may have created an extra liability for the company that would’ve depressed the valuation further as accounting rules caught up with them.)
Meaningful exits of any kind in startups are rare. They often get reported when they occur, and there are so many startups and news sites to cover them, so it appears to be more common than they really are. And, while I believe LinkedIn’s move here was to package this up for another exit and stop the current journey, engineering this outcome to be so quiet and all cash was a masterstroke of strategic genius. It’s hard to imagine a $15B LinkedIn scaling again, or capturing the imagination of the next generation or even folks in the Valley.
[Quick Aside:LinkedIn is a very successful company for many constituents and shareholders. Yes, it didn’t realize it’s full potential (yet?), but by all economic measures and odds, it is an outlier. And, despite that, they opted to sell the company and give up the fight as a public entity. This may be a harbinger of sorts for other private tech companies which are valiantly trying to go the distance and become public. As we know already in 2016, it’s set up to be the lowest number of IPOs in any year. For a while, public markets valued LinkedIn almost at $50B, then slashed them to around $15B in Q1 ’16, and the private M&A market valued them at a 47% premium to the public market. If LinkedIn couldn’t draw and keep the leadership and talent needed, what shall we expect from other companies which will never even reach the $10B market cap zone? Will public markets really care about owning stocks in any companies that aren’t FANGAM or licking their chops for forthcoming outliers like Uber, Airbnb, Snapchat, and Slack? Right now, it seems doubtful, and the reality of this dislocation between public prices and private M&A will likely be the last hope for exit for many companies.]
Instead of trying to right the ship on its own, LinkedIn taking $26B cash to give up all control is a great deal for the company, shareholders, and employees. I would go so far as to say it is a fantastic display of stewardship for the company’s shareholders in working this deal to maximize a return and put an end to their current struggle. LinkedIn is lucky because the road ahead would’ve likely been boring or even bumpier than they experienced this past January.
It is also symbolic, in a way, that we mark and acknowledge the reality that the mantra “going the distance” isn’t always supposed to be a never-ending path — there are very, very few companies which can thrive for decades, and even some of the greatest economic outcomes (like LinkedIn) ride off into the sunset. Or, as Neil Young might have sang, “It’s better to cash out — than to fade away.”
(Disclaimer:Before a writer rips me apart or tweets this post without reading it fully, I used to be a long-time columnist for TechCrunch (the most frequent contributor they’ve ever had, over 100 posts and nearly 100 videos over a three period. I’m also a small, early-stage investor in Silicon Valley.)
A few days later, and the lava flowing from this week’s media eruption at Mount Gawker is still red hot. As I’m sure we all know by now, it was revealed that a multibillionaire founder, operator, investor, and board member of Facebook — the largest publisher in the world — secretly financed a citizen’s legal bills against an online tabloid magazine which outed the financier a decade ago and, more recently, took a very intimate video of the plaintiff in this case and published it to the web. Since then, a jury in Florida awarded the plaintiff over a $100M settlement and essentially rendered the online tabloid bankrupt, out of business.
Twitter has been aflame, where journalists spend lots of time tweeting before this eruption, with writers’ expressing concerns and fears over (1) the ability of one person to finance litigation against anyone, including media companies; (2) the potential threat to the future of free speech; and (3) a defensive backlash against claims from others that the online media model shouldn’t reckless chase page views. Targeting journalists as a victim can inflame an issue. This is a tactic disruptors used right after September 11, when different media outlets received packages laced with anthrax. The news this week was interpreted by many as if it were like digital anthrax.
As someone who is both pro-technology and invests in its future, but also as someone who has spent considerable time publishing online, here are my quick reactions to the furor, which I hope add a perspective and move the conversation forward:
1/ People Hate The Financier And Company He Represents: Imagine the plaintiff bankrolled his case by leveraging crowdfunding. He still would’ve won the summary judgment of over $100M. Some are saying the financier should’ve disclosed his backing, but that may have also affected the jury’s ability to assess the case on the merits. The plaintiff had a legal right to sue for damages. What’s clear now is the hatred for the financier and the growing fears of Facebook felt by the publishing world. We would be having a very different conversation if a big political backer financed this litigation.
2/ Protecting Privacy Trumps Freedom Of Reckless Speech: It’s almost like everyone forgot why this case went to the courts. Someone had private videos of them in compromised positions published to the Internet. Think about that. Someone could hack into your Dropcam feed at home and publish that to the web. There has to be a line of what people can publish without recourse and what is punishable by jail or fines. People also forget the courts will always uphold freedom of speech so long as the speech in question is of material public benefit. This case doesn’t threaten free speech, but it sure does make people think twice of posting immaterial, private personal information and trying to ruin someone’s personal life.
3/ Publishing Power Is Real: For over three years, I could post anything I wanted to TechCrunch, just hit publish and go. TechCrunch has huge distribution and many of those articles are syndicated around the world. I was never under oversight. I could hit publish without recourse. As a result, I was always hyper-careful to never make public information which was shared with me confidentially or in private. I’m not saying I was a “real journalist” as I was working in the industry at the time, but even then I would still get nastigrams for three out of every four posts I’d write because someone didn’t like it, but it always felt utterly reckless to cross the line of going after someone. There are some tech blogs that have done that (in addition to the defendant) and in the cases where it is material information (say, someone did something illegal), I’ve never seen anyone get mad at the respected tech and finance journalists. In fact, many of them are respected for bringing this information to the public record.
Finally, a personal thought:
4/ Writing As A Career Is Scary: I am not someone with marketable skills. I always enjoyed writing for fun, and for years, people would always say, “Why don’t you just write?” But I knew what that would entail. This case exposes deeper fears and anxieties many who have been stuck inside the journalism establishment feel deep down inside but rarely confront head-on. Many journalists work for media brands whose influence wanes in a digital world and/or are themselves bankrolled by a successful tycoon or family. Many of them (not all!) cling to a belief they’re independent or that freedom of press and speech need to be protected to the point where they can write about someone else without sticking the facts, without going to the videotape.
Writing online for a living is sort of like the taxi industry — an industry already under attack and waiting to be further disrupted by a Swiss Army knife of changes in the digital landscape: Facebook’s newsfeed, hosting, and algorithms; ad-blockers in iOS; social network products delivering information to users rather than media brands; and so on. Yes, some people will make it work, but aside from those who have the brand and digital-formula to carry through, it will be hard to carve out a career here, and as the courts have declared — it’s probably not a good idea to publish someone’s very private information unless it’s truly material to the public record. A tech investor who embezzles or a tech CEO who falsifies medical tests should be pilloried by the press, but publishing videos of them engaging in infidelity isn’t germane to the higher task at hand.
Despite what many people say online, there’s definitely a place for a Valleywag-style or new publication to act as a smart check against the tech and startup ecosystem at large, to take the other side on the merits and bring the hype down to the earth — it just so happened that this particular case was the fault line that was tested, but it was bound to happen at some point. The proper way to extrapolate from this event is to assume the lawsuit was self-financed or financed from the crowd — what then? I’d bet the conversation would be very different.
People will sometimes stop and ask me, “How did you become an investor?” To which I usually reply, “I’m not a real investor — I just play one online.” It’s partly a joke, but there’s some truth to it — it’s easy to write a few small checks into a company, it’s much harder to compete for larger allocations, to lead rounds, and to win, to have founders pick YOU when you are telling them you want to commit to them. I believe only a small handful of investors truly lead deals, as in they take their role in deal leadership seriously and can do it repeatedly. One of those few firms is Homebrew. Even though I am close with them, keep a desk there, and have been friends for years, I will say that from the founder community all the way to LPs who have audited firms and conducted brand reviews, in a very short time Homebrew has created a brand. That is really hard to do, and it’s not an accident.
One of the ways they’re able to do it is by writing publicly and sharing insights that are typically not measured or distributed. Recently, one of their GPs, Satya Patel, wrote a post about their annual meeting and a review of their 2015 activity. To post this, it’s my idea, and emailed Satya to ask permission because I think he writes some things that would be useful for (future) founders to understand, in part because Satya is a straight-shooter and some of this stuff isn’t discuss more broadly because people are afraid of sounding politically incorrect.
1/ Raising a round does and should take time. So often people treat the interactions as a sales process executed from a Google Spreadsheet, but consider firms that lead, like Homebrew, may make up to 10 core investments per year. With two GPs, that’s only five per year, or a bit over one a quarter. Patel writes: “Our approach is to be the investor of record in the round. To us that means being the lead or co-lead investor (writing one of the larger checks, from $500k to ~$1m) for only 8-10 companies each year, typically taking a board seat and then working closely with the founders to help them build the company that they envision.” When they make a move, they not only see opportunity (in the person, space, or both), but they’re also making a commitment to spend time with them. It’s common logic that they’d likely prefer someone who takes care in how they present themselves and communicate. It’s a pretty intense relationship, but in a culture of so much money around like ATMs, it’s easy to just move on. Turn out, relationships matter in fundraising, and they compound over time.
2/ It’s not a bad strategy to be so good that investors contact you. There’s a hunting element driving some investors, and while they sniff out a goose chase quickly, being difficult to find and having mojo on your side is noticed. Patel writes: “We do spend a lot of time thinking about markets or trends we liked to invest in. We then take those interest areas and try to identify and contact companies or entrepreneurs doing innovative work in line with our theses. Not coincidentally, 3 of the investments we made in 2015 were the result of outbound efforts.” There’s something to be said for doing your thing and letting the investors find you based on their interests, or even at a time when you’re not fundraising.
3/ Cold hands with a warm touch. Very few investors will publicly admit to ignoring cold or bad emails, because no one wants to say that. Behind closed doors, we all know the truth — people want filtered information, references, recommendations, especially in a noisier world. Patel offers some tactical advice for cold communications: “We get a lot of cold inbound emails from founders asking us to invest. The form emails that are clearly being sent to a large number of investors get rejected quickly. But on occasion, a truly thoughtful, personalized email appears in our inboxes and grabs our attention. The sender has clearly done his or her homework on our investment approach and areas of interest. And the email contains data or a demo that tells a compelling story.” Building off the point that relationships matter, most relationships also begin via email, yet so many people don’t treat it as a personal communication — it’s more tactical. But, to get the attention of a lead investor, their business is personal because they’re not making many commitments. Warm touches are so rare that they stand out and they’re harder to fake.
4/ Differentiation cuts through the noise. It’s hard to stop for a minute and ask, “What differentiates me?” Oftentimes, it can paralyze a person. I know myself going through the LP fundraising process for Haystack, I got stuck on that slide forever and still am not happy with it. Patel writes on the subject: “We tend to be less interested when there is a market where a dozen companies are doing effectively the same thing. Unless we see a very clearly differentiated approach that has long lasting differentiation, we’re likely to pass.”
The thread running through Patel’s post and the parts I’ve drawn out is the importance of relationships, communications, and differentiations. Nearly ever month, I meet someone who wants to meet Homebrew or some other great lead investor but hasn’t gone past the “why” portion of the request, and I just sit there and wait. Unless I have my own reason to recommend, I know busy investors won’t just take any intros. Sure, some of them do “as a cost of doing business” to keep their deal sources humming along, but if you’re a founder and you get a meeting with a great investor who shows little to no interest, it’s because they’re taking the meeting out of obligation.
On the other hand, building up some genuine, personal communication momentum paired with building a relationship helps soften the transactional edges of raising money, as it ends up being a people-business. Marking your differentiation confidently also helps. It might be hard to get the meeting without doing these, but that’s also kind of the point, so thanks to Satya for writing it out so clearly.
There’s a lot of noise about what’s happening the private startup market. It’s easy to just say X and Y are happening and read the headlines. Today, I got an email from Industry Ventures (IV), which acts as an LP into various VC funds and invests in “special situations.” They’re not known to most founders but sophisticated in their broader knowledge of the private and public markets and how funds are moving.
I wanted to draw out a few passages that caught my eye and draw a few conclusions from it. Before you consider this another saber-rattling post, please do see the points below and feel free to disagree and draw your own conclusions:
1/ Hedge fund and mutual fund involvement in the late-stage private sector has likely increased the number of “unicorns.” I guess we all sort of sense this by now, but IV writes specifically: “We believe growing mutual and hedge fund involvement has been one of the key drivers for the rise in the number of so-called unicorns—private firms with $1 billion-plus valuations…That said, the tide has recently shifted…When mutual funds and hedge funds cough, venture capital catches a cold.” For years, it’s been written VC money is fueling this price inflation. What if, in fact, it is also HFs and MFs, who have different objectives, and the companies themselves which accept this money?
2/ HFs and MFs are scaling back, but not going away. Writes IV: “[I]t appears more a matter of [HFs and MFs] being patient rather than losing interest, especially where they have dedicated pools of capital available for this type of investment.” So, this is interesting, they won’t “run for the hills” as many claim, but are taking a break to see how things shake out. Perhaps they want to make sure to avoid the situations which arose in 1/ above. Additionally, IV cites reports for HFs in particular that redemptions are up and could increase, sucking money out of the system further.
3/ The dislocation in private price vs public market prices could mean some companies simply collapse as a result of their own weight. Again, we all kind of sense that, but IV says it in a provocative manner: “Another concern is the fact that some of those investors we spoke with who dabble in private markets said they might not buy into the public offering of pre-IPO companies in which they had invested (assuming they do come to market). Depending on how widespread this view is, it could mean that the long awaited rebound in demand for small cap technology shares and IPOs is not yet at hand, further diminishing prospects for private-sector firms seeking a public exit.” Imagine any unicorn with a big HF or MF investor who, at the IPO, doesn’t buy more shares. It would be the mother of all signaling risks.
4/ M&A also could be impacted as private prices feel wrong to acquirers, who may elect to find comfort in public prices. As valuations got so high over the past few years, VCs and founders priced their companies beyond what the acquisition market would consider for their companies, thus shutting off one of two exits paths — the other path being IPO. As a result, we see more drive for liquidity in subsequent financing rounds, causing asynchronous liquidity events which potentially redistribute risk and reward unfairly. IV suggests that large acquiring companies wait and poach “smaller public companies, potentially creating pockets of demand that could be filled by private firms coming to market. That said, until IPO returns are seen as more attractive than those that have been garnered from investing in secondary issues, institutions have little incentive to step out of the publicly-traded safe zone.” This “safe-zone” is a way for the M&A market to gain leverage on price and, in doing so, call the bluff of their counterparts.
Whenever I write about the market like this, it is for me to internalize what I see on a daily basis and share that with you all. I do feel on this topic I have to add a disclaimer that I’m very optimistic about technology overall, that I am a very active investor and even invest in things that appear to be expensive. At the same time, I am trying to learn more about ecosystem overall and how market forces shape what we do. This post by IV does a good job of helping in that.
In the world between founders and investors, both sides should always be mindful of their interpersonal behaviors — especially being aware if the origin of each relationship is outbound, inbound, or mutually developed.
In a situation where one experiences inbound interest, that person is often at an advantage and can bend the rules a bit in his or her favor. Flipped around, when going outbound to generate interest, that person often has to be extra accommodating to give themselves a chance at making a connection. When there’s lots of inbound interest, it’s easy to tilt the game in one’s favor, to get better terms, to control the ball and the clock; when one has to go outbound, usually that control and tilt shifts to the target.
Despite this common sense, I still see lots of folks who are going outbound act as if they have inbound interest.
I see this on both sides, for investors and founders. This usually becomes most apparent in the transition from angel/seed capital to the land of institutional venture capital. In seed, there’s so much money, rounds happen so fast, terms are really generous — but then all of a sudden, folks are doing well, and looking for $2M+ lead checks, often more, and they have to shift from the “abundance of inbound” in seed to the “realities of outbound” for the next round. On the investor side, I see many instances where folks just assume deals will come to them because they have money and a big office. Nope. Some funds are so far off the radar of today’s founders, they’d be shocked if someone conducted a thorough brand audit.
In short, I see inbound attitudes against the background of outbound realities.
I feel it because I live it. When I go out to raise my funds, even though they’re small, every single interaction is outbound. I have no inbound. As a result, I need to bend my schedule and attention to be outbound. It’s a big step to go from a few families and high net-worth backers to someone cutting a bigger check. It takes time. And it should. For some managers and funds that have made it, that carry huge brands, they’ll always have inbound — but the overwhelming majority, like in startups, have to generate their own outbound — not just for fundraising, but for recruiting, business partnerships, public relations, and so forth. Fundraising is talked about the most, but it’s just a proxy for how one may handle everything else. As a result of this dynamic (and, to each his/her own, of course), I always try to remind myself to not be fooled into thinking I can generate the inbound, but to rather let humility drive the outbound.
Online, it is easy to see blogs migrate, flock, gravitate to Medium. It is a phenomenal product. I can say that because I live inside WordPress, which I’ve come to learn (and like) over time. It can be frustrating, too – oh yes, very frustrating. That’s why Medium is doing so well. There’s little need now for WordPress for people who just want to write and post media and discover new content, and they needed some competition.
In terms of people migrating to Medium, I certainly see flocks of investors and tech people taking flight to Medium — or redesigning their blog/site to look like Medium’s. The advantages of going there far outweigh creating an independent blog, especially today. Some holdouts have cited the inability to get their domain, or customize their look, their investment in a commenting system, or an email list they’ve carefully built up, etc. — but Medium is chipping away at those, too. They understand what the holdouts want and are probably building it.
But, I won’t do it. While I have experimented with cross-posting and do some personal writing on Medium, I will not move this blog to Medium.
Maybe I’m holding on to an old habit. Maybe I spent too much time, over the years, designing my site to look and feel a certain way. Maybe I don’t want to feel I’m joining the ranks and just following along. Maybe it’s all of the above.
But, if I sit down and drill into why I won’t do it, it comes down to identity.
I don’t have an office for work. I don’t have staff. This site has evolved since summer 2012, like I have, and I’ve been able to slowly mold it to the things that I increasingly care about. Maybe, as droves flock to Medium, my site becomes more unique. I am sure I’m placing more weight on this than needs to be, yet I still feel as if going to Medium will feel like “changing offices,” or “acquiring a staff to manage” or, most frighteningly, will start to chip away at the little bit of individuality I hold in what is otherwise a competitive, overcrowded, monochrome investment world.
I intend to shift most (not all) of my focus back over to consumer investing in Haystack 3.
In my first fund, it was dominated by consumer. That wasn’t intentional. I was just starting out, I was a dog chasing cars. In my second fund, most of it was consumer, but I started to go a bit deeper into enterprise SaaS and industrial IoT. That exploration led me to start focusing on enterprise and industrial IoT in my third fund, which I’m currently in the middle of. In this current fund, I have focused my investing in two areas so far — enterprise SaaS, security, and infrastructure, and industrial-focused software and robotics. I’m finally able to write more about these so expect some “The Story Behind My Investment In _____…” posts over the next few weeks.
Along this way, in Haystack 3, I have been looking for consumer-focused companies but have ultimately passed on all the opportunities to date. Those were hard decisions, and I’m sure I made some mistakes. So far, in 8-9 months of investing Fund 3, I have only invested in one (1) consumer-facing seed-stage company, and it’s not yet launched and may shift its model to an indirect B2C2B model.
I would like to do more on direct consumer in this fund, and it’s been nagging at me for a while, so I finally wanted to post on it. I do not have a laundry list of categories to hunt down or chase after, and I have a small handful of ideas of where I think interesting consumer behaviors may emerge, but I’d rather see what’s out there and be surprised. Yes, I have thought about areas of consumer spending (insurance, rent/mortgage, self-improvement, health etc.) and consumer attention (VR, AppleTV, apps etc.) and I’ve written about live video and esports and bots… but I would say the pattern I’m looking for is as follows: Something I can experience/test myself or observe others doing; a company which is obsessed about creating and building a direct relationship with a consumer; a team that is obsessive about acquiring customers and users and their CAC numbers; and a team that has a vision for a future on a global scale — doesn’t need to be today, but eventually. A product vision and desired roadmap goes a long way.
I am going to focus on this now more intently and really dig into it over the summer. It’s OK if you’ve already raised a pre-seed or seed or whatever fund. And, I likely won’t make any investment decisions very quickly on this, so am looking to engage more and get to know more people before selecting a few to work with. I’d appreciate it if you could share this with people you like or find interesting in the consumer space, and thank you for reading.