As I begin Haystack III, I wanted to write down and share the reflections I’ve had on seed investing to date. However, please note (1) I’m still learning; (2) I’ll make new mistakes; and (3) these reflections are for me, and not generally applicable to others — there are 101 ways to invest effectively and different things work for different people. And, ultimately, (4) it is a privilege for me to be even just a small investor, and it’s a privilege I take seriously, and am grateful for all the investors in my fund and founders I’ve gotten to work with — they have all taken a chance on me, and that is a very humbling set of circumstances to keep in mind.
With that, here’s what I’ve been reflecting on with 100 investments now in the portfolio, three years in. I don’t have a technology or investment background, so I wanted to invest in a lot of companies quickly as a way to speed up my learning, but I know in the back of my mind, there are no shortcuts and will be more learnings in the years to come. [I want to dig into some my stats (as I’ve shared on Twitter before), but I’ll do this in another post, as here I want to focus more on what I’m taking away as I move into Fund III.] Finally, I’ve had a tough time organizing my reflections in specific categories, so this may ramble a bit. Apologies in advance.
1/ Out Of Market, Out Of Mind
I made a small handful of “out of market” seed investments, some in LA, one in Canada, a few in NYC, one in Boston, and one in Europe. While I’ve been active with them, it is hard to keep in touch and requires a lot of extra work and communication. For Fund III, I’ve elected to keep my focus to invest locally in the Bay Area. I’m sure it will be tested over the course of this fund, and lo and behold, I met an entrepreneur with operations in Israel and parts of West Africa that I would love to work with, but I am not sure about the geographic divide. At the Series A level, I can see how a VC firm would invest out of market, but at the seed stage, I believe the financing risk is too high generally. I sense some people will take offense to this stance, and I hope local seed markets flow to other geographies. I know I’ll miss out on great opportunities, but for this fund, I’m OK with it, which brings me to the next section…
2/ I Can’t See Everything, And That’s OK
At the seed stage, there’s just no way to see every good opportunity. Company creation is so pervasive, I am not sure how wide one’s coverage at seed could be. By adopting more process constraints (like focusing on local investments, etc.), I’m implicitly saying it will OK to not see a company in another market or in a hot category, etc. It’s OK.
3/ Existential Risk Rules The Day
“Only the paranoid survive.” Or, any similar phrase will do the trick. Seed-stage companies biggest risk isn’t competition or a large company — it’s surviving, and often that comes down to securing future financing venture capital. Every seed stage company, whether they admit or not, strives to “reach Series A,” but we know most don’t make it, so we have an explosion of bridge rounds, or second seed rounds, or seed extensions…whatever you want to call them. While a select few companies will have VCs chasing them or boast insane metrics, the rest have to really fight it out, and it often requires a level of risk, sacrifice, and paranoia among the team to get the deal done, which brings me to the next section….
4/ Founder-Market Fit And Startup-Founder Fit
I have learned that I like to find some connection between what a founder is working on today and what they’ve experienced in the past. It could be a loose connection, but I strive to understand what those connections are and how deep they may be. It could be how they’ve been trained, or where they’ve spent their careers, or it could be personal like where or how they grew up. Additionally, I try to evaluate through conversation and reference checks the level of dedication one has to startup life — Do they have the willingness to take real risks, even if it’s reputational risk? Are they willing to sacrifice in pursuit of their goals? Do they exude a mix of confidence about their abilities and competitiveness to fend off all the copycats that will emerge in today’s startup culture, alongside a healthy paranoia that drives them to understand the next round of financing will be an uphill battle? Speaking of uphill battles…
5/ The Seed Round Doesn’t Really Count Anymore
Receiving an offer to invest early in the life of a company generally doesn’t mean much. Yes, it’s very hard to raise money, but there are so many seed stage financings every day, why announce them or view it as some kind of validation? It is not. Securing a seed round means a team has convinced others to believe in their potential. That is something to be proud of as the recipient, yes, but perhaps more of an internal high-five to one’s self versus broadcasting it to the world. I think what really matters are: Do friends and former colleagues want to work at your new company? Do customers find you and bring business your way? Does your product or service change the behavior of your users or customers in meaningful ways? Do any or all of these exist in your company to the point where a professional investor fights to invest in your company, to join your board, and to work with you on a long-term project? Those are the things that count in the long-term.
6/ What Does “Value-Add” Mean At The Seed Stage?
I’m a very small investor on the cap table. The biggest area seed stage companies ask for help with is, unfortunately, one area I can’t really help much on: Recruiting. Now, I have certainly sent a few ex-colleagues to startups in my portfolio and try to do more when I can, but as a percentage it’s pretty small. I’ve also helped “close” many candidates who are looking to join portfolio companies, which is definitely more effective for me. After a while, one kind of glosses over the standard requests like “Hey, if you know any good iOS engineers, send ‘em our way — we are hiring!” I didn’t want to turn into a recruiter (though I think it’s a very valuable skill), and I believe the talent fragmentation in today’s SF/Valley startup scene is so pronounced that being effective at this may be a waste of effort. Instead, I choose to focus on mitigating the risk in Point #3 above, and from that lens, everything flows.
7/ Being Helpful Via Push Versus Pull
With a larger portfolio and being so early, I initially decided to be available and approachable when someone needed any kind of help or just someone to talk to. To encourage this to happen more casually, I set a calendar alert to BCC email all the founders together on the 1st of the month with a short note to tell them what I was up to, to share where I was speaking, to share generalized opportunities I came across, and to add my phone number. From those more casual emails, conversations would emerge. And as those conversations progressed, I would start to ask about burn rate and runway, and if I gathered that the founder was potentially underestimating how much runway they really had, I would offer to work together on it. Many took me up on this offer. Some didn’t. There will be a higher number of things that don’t work at seed, so I focus on (1) trying to pick well prior to selecting an investment and (2) being in a position to help if it’s welcomed, but then not pushing beyond that. It is not my company.
8/ Investing Pre-Product Or Pre-Launch
Unless I know the founders previously on a personal level or it is someone who has successfully started companies in the past, there are way too many good investment opportunities on my desk for me to consider investing in someone’s concept or dream. In fact, I’m shocked how many people waste time trying to pitch someone about their concept when there are live products in the wild for investors to play with and test. It does feel a bit like people view this very early stage investing as a newfield area to go after, but to me it looks more like grant funding — now, there’s nothing wrong with grants, assuming those grants are made on some type of asymmetric information and/or prior evidence of application of talent.
9/ Leading Rounds Versus Catalyzing Rounds
Being a small investor, I cannot lead a round by investing the most money. However, on occasion, I have been one of the earliest investor in a seed round and then worked to catalyze the round by sharing it with a network of investors who enjoy co-investing with me from time to time. In these cases, so long as the founder is OK with it, I can have a bit more influence on the overall terms (what I think the clearing price will be) before sharing it with the wider network. This has been very successful to date — for both investors and founders I work with. Keeping in line with my views on the threat of existential risk, I focus on catalyzing rounds to make sure they get done versus trying to lead them with the small, inexperienced checkbook I wield. And, as seed rounds are never really closed and therefore this is rarely true urgency around closing a seed round, it is entirely manufactured without real teeth as founders may need bridge capital later on in the company’s life.
10/ The Good And Bad With Party Rounds
I have no clue, statistically speaking, if party rounds impact the trajectory of a company. It is intuitive to think that they do, given that more investors with a smaller share won’t care as much about the company, but then you can see some companies on AngelList which have over a 100 direct investors (not through a Syndicate), and it makes you wonder. Clearly for a founder, managing more lines on the cap table can be a pain, but ultimately, if every seed stage company faces existential risk, and if there are too many investors such that no one has meaningful enough ownership to care for and fight for the company in hard times, that composition may impact how the company fares. Philosophy aside, most rounds I see are split between having 1-2 leads with a few individuals and pure party rounds where the founder just scraps to get it done. For now, I’ve decided to focus on making the sure the round can close if I have conviction versus trying to make sure there’s a lead, though some cases definitely require a lead.
11/ Seed Investors Not Updated Often
I struggled with this initially, because one assumes people will update you. But, most don’t. I’ve learned to accept it for now, and if someone contacts me later for help, I may ask them for more context and an update in order to properly help. Some of the best-performing companies rarely or ever sent an update, despite the investor feeling he/she may want one.
12/ Conflict In Seed
Big VC firms can’t really invest in more than one company in a category, but some get away with it. Incubators and accelerators definitely can, and they take advantage of it. At seed, things are so early and people change course often, a seed investor with a larger portfolio can sometimes fall into a conflict. This has happened to me. On some occasions, there is a direct conflict and I don’t engage; sometimes it’s possible, so I try to ask current founders if it’s OK for me to talk to another company; and the tricky part is that sometimes I don’t see it at all, only to find later that a founder views a company as competitive. Things are so uncertain at the seed stage, I just try to be as honest as possible, but I am going to make mistakes here and have, though I’m not sure what I can do about it given how the market is evolving. At the end of the day, everyone is in conflict with everyone else.
13/ Seed Is From Venus, Series A Is From Mars
Oftentimes, all of this activity gets lumped into “venture capital.” It is not quite accurate. The lessons I’m trying to learn don’t all apply to Series A, which is much more of a zero sum game where investors have to enforce discipline on the system, where they can’t invest in more than one company in a category. (At seed, there is a bit more room to invest in a category, as I described above.) So, I’m hoping people don’t take this post as a proxy for what large VCs do — it is not. Seed is very different and this post can’t be extrapolated to other stages of investment.
14/ On Relationships With LPs
I wrote a series about posts this past summer on StrictlyVC about my experience in meeting, getting to know, and taking investment from LPs. You can read those here. Ultimately, traditional investors in VC funds like to write bigger checks than small funds can provide room for, and increasingly, many of them are looking to make follow-on or even direct investments in the portfolio companies of their managers. This is especially true at seed, where access to companies proves to be most difficult for larger investors to stomach. I learn more about the market, about LPs, and about myself each time I go out to raise — this time around, there were two surprising things: (1) Some LPs first move in diligence was to verify that I actually had a fund and that the fund held previous investments — I had no idea they would do this, but it makes sense; and (2) that no matter how well you think you can pick them as an investor, people will always question your deal flow and judgment. People will question how repeatable your previous record is, and they’ll want to dig into how you get deal flow, which is likely the same way everyone else gets into the flow of deals. As the manager of a small fund, for better or worse, I’ve chosen to meet as many LPs as I can and go into each conversation assuming what I’m doing is too small for them and to focus on building a relationship with them. I’m hoping that over the long-term, with time, that I can build organic trust with a small group of partners.
15/ Investment Pace Matters
This is a learned skill. When I started, I was bad with this, and it got worse being a one-person shop. I got a LOT of feedback on that, and I listened to it — the main change I made is that I have found someone to manage my back-office accounting who is very strict about setting a pace and sticking to it. For Fund III, to start, I can do two wires per month, and he has to have all the docs in place before initiating the wires — then I go into the account and approve them. It’s still my decision, but that little extra process helps with the pace. At seed, the temptation is to make lots of investments because no one is sure what will happen, but from an institutional LP point of view, LPs definitely look over your track record and try to measure and predict how selective an investor can be. Pace is a big part of that equation. Still, two a month for Fund II is still pretty high, but a slow down for me relative to prior funds.
16/ Deal Flow, The Mother’s Milk
Everyone wants to know “How does one get their deal flow?” It’s all the same, everyone is connected to everyone (for the most part), and if you’re seen as a good actor and valuable in some small way, people often share their deals and/or people make introductions. When there’s lots to choose from at seed, picking the right companies becomes more of a challenge, and those who have picked well may do so out of luck, out of process, or some combination. It’s very hard to say.
17/ The Biggest Mistakes I’ve Made: Weighting Concepts Over Market Timing
The most common mistake I’ve made to date (there will be more!) is being seduced by a concept and weighting that over even little signs of momentum in the company or sector. From afar, it’s easy assume investing like this as “people who invest in the future,” but for it to be effective (e.g. to return investments), the size of the market and the market timing are critical, especially when there are hundreds to choose from at any given time. Now when I’m evaluating an investment, I’ll try to find the overlap in a venn diagram of three circles: (1) Is the market huge and evolving in dynamic ways over the next 3-5 years? (2) Is the product or service being offered in that market compelling and defensible in some way (could be based on tech and/or people)? and (3) Do the founders, either veteran or first-timers, have a combination of skill and willingness to sacrifice to make a run at building a company? If the answer is “yes” to all three, then I dig in more for references and socialize it with my close network to get feedback.
18/ Counterintuitive Advice That Backfired
This is easy. I seeded a company earlier this year that started to pick up traction, much to my surprise. The founders immediately turned around and said they wanted to raise a Big A, but summer was approaching, so I shot back with “raise from big funds in the Fall, it’s hard to get a competitive process going in the summer.” Well, that was definitely the wrong advice I gave them, and I pushed it pretty hard. They completely ignored it, and they got their round done before Labor Day, and given how the market reacted then and thereafter, they were absolutely right. Lesson learned.
19/ Reputation, Not Money, Is The Currency
It’s easy to observe the ecosystem and assume all investors have tons of money. Well, many of them do, and even those that don’t write big checks. It’s a great job, no doubt. But, if everyone has money, and all that money is the same color and has the same worth, what differentiates it? Reputation. Reputation, it turns out, is the only real currency most investors have. In a competitive environment, reputation lets an investor see a deal he/she shouldn’t have, or lets an investor convince a founder to work with him/her, or lets an investor be a little extra persuasive when trying to coach a founder. It’s easy to assume investors are conferred power by virtue of having money, but the money isn’t always there and can go away for the next fund — reputation is the real currency, one that takes years to earn and can be washed away in an instant.
I am very proud the announce the first investment of Haystack III: OneConcern.
I met the founders through another friend at a fund, he was looking at the company and knew that I liked software plays that sold to national, state, and municipal governments. Most investors don’t like those sales channels, but I do. Why? Because I believe over time the budgets for certain things (health, emergency, climate) will balloon to meet societal needs while many others will fade and erode because we simply won’t have the money in the tax base to get it done. Those essential tasks then will have to be left to technology and software, and in my investing, I’ve found that once an entrepreneur figures out how to sell into governments and builds the right stuff, it is one of the best channels out there because words spread through different networks and it’s harder for a new entrant to cut in.
Anyway, I met the CEO at the request of my other investor friend, and I was immediately captivated by his personal story and academic background. The CEO, a structural engineer from Asia who came to Stanford to study the science behind earthquakes and other natural disasters. This is a tangent, but I enjoy studying the history of earthquakes and learning about how societies have dealt with them. I troll Wikipedia to give my brain a break and read up on these things, so when I met the CEO, I was actually excited to talk about big earthquakes and data, etc. What I came to understand from that meeting, however, was even deeper.
A few years ago, during the major floods in Pakistan, Ahmad (the CEO) was home visiting his family and was caught in the floods. He escaped to the attic of his family’s house and lived on or near the roof for over a week until he was rescued by authorities. I always ask a founder about how past experiences may shape future activities, but I never expected a machine learning engineer focused on building software to help states mitigate disaster response systems say that he himself was caught in a major natural disaster.
While I always try to spend time “in diligence” and vetting a company, I realize now in retrospect I probably spent too much time doing that with OneConcern. The beauty of investing at the seed stage is that I can work with tons of other investors to support companies who start out and have ambitions to grow bigger. Yet, much of the early stages — myself included — have become professionalized, often to the point of placing unrealistic expectations on new companies, new technologies, and new founders, when in fact it should just be about the identification of earnest talent and the relentless support of that talent. I may have conducted my proper diligence, but some things don’t need diligence; a product like OneConcern and an entrepreneurial story like Ahmad’s must be supported — it must be willed into the world, and just like I am trying to do with the creation of Haystack and my own family funds, it will be willed into world no matter what. The solution must exist, and the network of other investors will support it to see it through with their own sweat and passion. That is inspiring to watch unfold and be a part of, indeed.
This past summer, I wrote some columns on StrictlyVC on the relationship between LPs and VCs, and I realized I never cross-posted them here, so here goes. I reposted them here with subheadings. This may not be of interest to the regular reader, but really intended for venture investors and those who are limited partners in VC funds. Would welcome any feedback or commentary on the notes below, thanks!
In the few years I’ve been able to meet and learn from limited partners or LPs (those who invest in VC funds), I have noticed an increasing desire to co-invest alongside their general partners. This makes perfect sense. If I was an LP, I’d want to co-invest, as well. Yet, in the process of doing this over the past few years, I’ve found myself repeating some warnings to LPs who have grown eager to do co-invest at the very early stages of seed.
Typically, I cite three key warnings:
One, oftentimes the founders want to meet all potential investors who will be on their cap table. Even though a VC can offer syndication to the founder, that founder may not welcome the introduction and prefer to control the process him/herself. LPs can certainly ask for insight into a GP’s processes, policies, and histories around creating co-investment opportunities, but they cannot be guaranteed. Furthermore, what if a GP has two or three LPs interested in co-investing but there’s room for only one or two. How is the GP supposed to decide?
Two, when there is a real co-investment opportunity for an LP, sometimes the LP doesn’t have the proper resources at hand (domain knowledge, or network, etc.) to independently vet and diligence the specific deal in a few days. If the LP is a family office, they may have enjoy the latitude to quickly stress-test their network and then make a yes/no call; if the LP is a fund of funds managing other institutions’ money, they may have an incentive to seek these types of deals out given their fund economics, regardless of engaging in proper diligence.
And, three, whenever someone is the recipient of an investment opportunity, one should ask: “Why I am so lucky?” In a competitive deal, I often have to fight just to wedge in, and I am not always successful. These are the investments LPs would love to participate in directly as a co-investor, but such opportunities rarely surface. Yes, there are companies that go unnoticed for months or years before breaking out and becoming a sensation, but those aren’t a monthly occurrence.
Again, if I was an LP, I would want to co-invest. After all, LPs are looking for outsize returns, just like the rest of us. More, if an LP doesn’t get in at seed, the bigger VC firms won’t create room for the LP down the road. Still, I’d welcome more conversation and debate around this topic, both from GPs and LPs alike, so that we can all learn more about best practices learned and minefields to avoid. Dangling the opportunity to co-invest may help ink a commitment, but in practice, all that glitters may not be gold.
Naively, one of the most profound lessons I had to learn in attempting to raise funds from limited partners is that most institutions prefer to write large checks. By “large,” I mean commitments to VC funds that are equal to at least or oftentimes two to three times more than what a typical decent startup may raise in its lifetime. It is all rational. The time, attention, diligence, legal burdens, and administrative headaches of doling out smaller checks to more funds reduces a larger institutions’ ability to concentrate and, frankly, creates a roster of more egos to manage over a long period of time.
An LP friend and mentor of mine summed it up perfectly to me: “Semil, I like you, but you gotta understand, my friends don’t get out of bed unless they’re writing a $25 million check.”
To those who haven’t raised funds or been around fund formation, it can all seem inefficient. For the rash of micro VC funds that have formed (mine included), we collectively confuse, vex, and overwhelm traditional institutions, including because of our higher pace of investing, heavily reduced levels of ownership, lack of toothy pro-rata rights, and a host of other issues.
Luckily for micro VCs, it doesn’t really take that much money to get going. My first fund was $1 million. It was really hard to raise. Some people have access to wealthy folks, family offices, or corporations, but it isn’t a slam dunk to raise a small fund. The second fund was considerably bigger (relative to the first), yet was still too small for institutions. The third fund will be even bigger — perhaps just at the size where the larger institutions like to build a relationship and track, much like a large VC firm who drops a $100,000 check into a company with the hopes of monitoring its progress.
As other non-traditional LPs (companies, high net-worths, and even funds) have stepped in, it’s created a boon for entrepreneurs. People with the right networks and halfway decent concepts can raise as little as $1 million in a month, even in a category where every early-stage investor knows there are four or five nearly identical competitors working on the same thing. Many of these attempts won’t go on to raise traditional venture capital, and the institutional LPs know that.
So, while there’s a high cost of writing so many small checks, we will have to wait a few years still to see just how costly it is. On the other hand, the cost of starting up may, in fact, decrease during any kind of correction as talent becomes less fragmented and major cost drivers (rent, salaries, benefits) decrease. Founders who are in demand and who are dilution-sensitive may want only specific people on their cap table, and they may want $100,000 to start, not $10 million or even $1 million.
We are a few years away from that, but this is where I see the trend headed — that being nimble enough to be invited to the cap table is what will define individual investors and firms. Those definitions can’t really be bought with money, and that’s what will make the next wave of micro VC investing so interesting — that is the high cost of small checks.
The growth in micro VC funds is now well-documented. While there are many reasons to explain why this trend took hold, the more interesting question to ask is: What will happen to those funds which survive?
Grow the Team
A natural desire of any entrepreneurial endeavor — including starting a fund — is to keep growing it. In the context of small funds, traditional LPs will naturally hope this new crop of managers who emerge will grow a franchise, will add people to the team, and ultimately manage more money. Eventually, some of these franchises can grow to manage quite a bit of money per fund per GP and can, in effect, become a new type of Series A firm. This is the theory. It remains to be seen if more than just a few can make this transition, as the models at seed versus Series A are obviously quite different.
Stay the Course as Lone Wolf
While it may sound traditional to turn a good micro VC fund into a more traditional venture franchise, creating a strong general partnership is not a simple, check-the-box activity. Noting the difficulty, some micro VCs have opted to stay as solo operators longer than LPs had imagined. Some, of course, continue to outperform and earn the right to manage more money per fund (if they choose to). In this instance, the LPs aren’t able to invest more and more of their funds into the GP. In the same way a large VC fund may look for opportunities to increase their ownership in a great company in their portfolio in order to make its own economics work, a large LP will often have a similar desire.
Differentiate and Evolve
Just as investors may have “app fatigue” or “food delivery service” fatigue, LPs pitched by micro VC funds have their own flavor of fatigue. As a way to cut through the noise, many of them drill into what differentiates a GP they’re considering an investment in. This can nudge micro VCs to differentiate on the basis of sector (hardware, Bitcoin, etc.), or geography (focusing in emergent areas outside the Valley especially), or stage (pre-seed vs seed, etc.), and more. And the success of Y Combinator and the potential for more steady budgets for an accelerator or incubator could encourage more to let go of the traditional fund model altogether.
I know these choices because I have been faced with them. The LPs rightly ask these questions and conduct references to determine which way the micro VC wants to go. But the truth is that, just like most at seed don’t know how well a company will do at the very early stages, most of them also don’t know what the optimal path to take is. This can lead to an awkward discussion, where LPs may want or need to hear certain things to “check the box” in their processes versus having the raw discussion about what is working and what doesn’t. The truth is that most people don’t know, and in this market, which is changing year to year, the main value in these smaller funds is that their inherent nimbleness by virtue of being small gives them the right level of flexibility to adapt to a dynamic, ever-changing environment.
My cautionary post-script for any later-stage investor (click here to read it). This applies to traditional VC funds or LPs who like to be on the cap table.
I am not an enterprise IT person, but I have made a few investments in the space and will definitely do more. As a small investor, the formation of these types of companies is quite different than what the broader startup/tech population is exposed to for SaaS and consumer-facing businesses. Often in enterprise IT and infrastructure startups, there are real barriers to starting up — the founders need to be of a certain caliber, there likely needs to be some tech breakthrough or promise of one. the dollar requirements out of the gate are much steeper, and the question of sales (distribution) can make or break the deal.
As a result, these investments form with very different characteristics. It is not uncommon for an elite team of new founders to raise $5m+ just on a slide deck, pre-product. The likelihood of returns generally in this space are much higher than consumer, but the breakouts aren’t as common or high-flying, though we are on the verge of seeing a company like Nutanix go public soon and hit valuation numbers that very few companies see.
As I started Fund II about 18 months ago, I was introduced to the founders of Datos IO by one of my LPs. In fact, this LP has sent me tons of deal flow that I wouldn’t have ever seen. That’s only half of what’s cool about this; of course, I am not qualified to evaluate these businesses on a technical level, so how do I go about getting conviction to invest in companies like Datos.io?
One of my biggest lessons — one of many, so far — is that everyone assumes “investor diligence” is done (if at all) in a somewhat similar manner. In reality, investors perform diligence and arrive at their own point of conviction through a variety of methods. Some make market maps; some call all references and customers; some hire technical savants to help them birddog the technology’s worth; some just wing it. In this case, I conducted “network diligence” by talking to three of my close friends who are all deeply thoughtful about enterprise IT and infrastructure, and I walked through this opportunity with them.
After testing my network and spending lots of time with the two founders, I was able to gain conviction in the caliber of the team and technology. And, so far, that process worked just fine as Datos IO went on to earn many term sheets from some of the world’s best technology investors, ultimately selecting Lightspeed as its Series A lead, a firm with a string of hits in infrastructure. A better understanding of the company’s offerings verifies what Datos’ investors already know: That the company, which solves recovery issues for distributed databases, is graduating pilot customers to real customers quickly, by providing a consistent view of the data across their infrastructure for recovery needs.
This example provides another reason why I feel investing is such a great fit for me personally. Being a small investor and with a network to help around the edge, I can learn much more about the enterprise IT sector in a shorter period of time. Though my knowledge in this domain will never be on par with those who focus in this area, for now I enjoy having the flexibility to explore new sectors and make investments broadly. In part, it helps me write pieces like this called “The Enterprise, In Lay Terms,” which has turned into one of the most-visited posts on my site. For 30 years, scale-up relational databases ruled the client-server world, where companies like Veritas provided data management tools. Today, distributed applications (IoT, Mobile, Social, Cloud) call for a new data-centric world where five of Top 10 databases are open-source. The stellar team of researchers and operators at Datos IO have not only built and developed this new technology and architecture, but they’ve put in the hands of large corporations who are lining up to harness their technologies. That is no small feat, and I am proud to be a very, very small part of the team’s journey.
Tomorrow is the second installment of The On Demand Conference, this one taking place in Manhattan. My co-conspirators Pascal from Checkr, Misha from Tradecraft, and the entire Tradecraft team have put together an incredible agenda, event, speaker lineup, and topic list. Sadly, I am not able to make this trip, but I can’t wait to hear about it from friends and colleagues who will be attending. If you haven’t already, check out the Line Up and all the great Agenda Topics that will be discussed.
The on-demand startup world has gone through some downs since the last conference. I’ve written about those here. In my conversations with Pascal and other investors about this, there’s no doubt that the bar goes higher and higher now for companies to earn venture investment. While the consumer demand for these services still remains, how that demand is fulfilled is now under question — and that’s a good thing.
In particular for New York City, with its own great startup scene, this is a good venue for this discussion given the competition and density. It will be interesting to see if one coast has figured out tricks the other coast can learn from, and vice versa. On a personal note, I will be sad to miss tonight’s smaller drinks event for the speakers and moderators, will miss hanging out with Shai, Steve, Matt, the Button folks, and many other friends I’d love to have seen, and I was really looking forward to opening tomorrow’s session in a fireside chat with Albert from USV, but Misha is stepping in and is also interested in many of the same issues touching the on-demand space. (In particular, make sure to read Albert’s post today about the connection between on-demand services, automation, and guaranteed basic income.)
Wishing everyone the best of luck with tonight and tomorrow’s big show, and a huge thanks to Pascal, Misha, for their support. They make this stuff happen with the greatest care and attention to detail.
A lot of people aren’t going to like this post given the timing, but the story has been forgotten, so I watched the NFL biography video on Tom Brady again yesterday. It chronicles his life from little league baseball, to picking up football when he was a high school freshmen, his hyper-competitive years in college football, his near-miss in the 2000 NFL draft, and his professional career highlights. In watching this video again, a number of themes emerge that reminded me of how entrepreneurial talent is built and evaluated, with all the smart people in the room. Those themes from the video are:
(1) The Cost Of Split-Focus: When Brady was an upperclassman at Michigan, then head coach Lloyd Carr also landed one of the highest-profile recruits from nearby Ann Arbor, two-sport star Drew Henson, who was also drafted by the New York Yankees. Henson wanted to play football and baseball for the Wolverines, and in order to develop Henson, who had more upside than Brady, Carr told both he would split their time in games to see who was performing better and then lock in the choice for the 2nd half of each game. Brady could’ve transferred to been a shoe-in starter at another school, but he opted to stay and stick it out. As it turned out, Brady would then come in to clean up the messes left by the other quarterback, building up a proficiency in bringing his team back from being down in score. While Brady fought for his role and constantly felt his job was on the line every week, Henson rested on his natural abilities and kept his options open to pursue baseball concurrently. The parallels exist today in the startup world, with startup CEOs creating investment firms and investors incubating companies, or companies who have co-CEOs, or CEOs who have multiple CEO jobs.
(2) Pro-Rata Recommendations: Despite the very nice things said about Brady by Carr in this video, one of the NFL coaches in the video who had a chance to draft Brady remarked that during the combines and when teams were evaluating him, none of the Michigan coaches pounded the table for him. A similar behavior happens in startup investing. The entrepreneur has existing investors, and a new potential investor will often press existing investors to stand up and pound the table for why the deal should happen. In pressing this way, the new potential investor can read between the lines to uncover new information and to better understand why this may be a great, non-obvious investment to make. At the same time, existing investors who want to have long-term relationships with downstream investors (or, here, NFL coaches) have an incentive to be brutally honest so their word doesn’t lose value over time. Even though Carr praised Brady’s work ethic and ability to handle pressure, in the moment, he experienced FOMO with Henson’s potential looming and opted to have both quarterbacks compete against each other to see who the best was. This, in turn, made Brady paranoid to think, “maybe nobody wants you.”
(3) The Cost Of Focusing On “The Measurables”: The process of evaluating and drafting football talent has been made into a science. One of those scientists, Mel Kiper Jr., remarked that after 32 years of evaluating almost 600 college quarterbacks, Tom Brady ranked #576 in two tests of general athleticism: vertical leap, and the 40-yard dash. The video makes sure to track all of the careers of the other five quarterbacks who were selected in the 2000 draft, and it demonstrates, after 15 years, that careers are long, that oftentimes hot draft picks with the measurables are even more likely to flame out. This happens in startups and investing, people get buried in and blinded by all the data, because they can be measured. This is why we here of stories of people struggling to get funding for so long, and why building a case for investment in the early-stages around numbers often isn’t as strong as doing so with a carefully-crafted narrative about the future.
(4) Everyone Needs A Break: Brady’s window of opportunity opened in 2001, after the starting quarterback he would replace signed a $100m contract. Brady slipped in, became the starter, and took the job from his predecessor, and because it took so long for his break to come, his paranoia has driven him since. Despite his success, he likely truly believes he is expendable, that someone who is younger, fitter, faster, and stronger coming through the ranks can go and take his job tomorrow. Paranoia built over years doesn’t just fade away with success — it may in fact get stronger. Brady went through many years of what is described in the film as a “constant struggle for recognition,” and only received it as the 2001 season developed and only because the star quarterback ahead of him was knocked out of a game. I have seen many folks in the ecosystem get their “break” only after 5+ years of doing exactly the same thing before the crowd noticed “hey, this person is actually awesome!”
(5) Flawed Evaluation Processes: This is the most powerful part of the video. It’s legend now to think 198 players were drafted ahead of Brady. In the video, they keep coming back to the notes in his player file, that he didn’t have a strong arm, that he couldn’t improvise on the field, that he couldn’t jump. Those were all measurable “metrics” other talent evaluators could focus on and benchmark against others. One needs data to stack rank. This happens to startups, too…with all the seed-funded companies and copycats out there, the data separates them, and it’s hard to blame investors for doing this. Yet, investors also have to be mindful that it is the people who make the data, and not the other way around. A huge component of investing is careful evaluation and tracking of an individual protagonist’s story, how they got here, and from where, to learn more about what drives them to do what they do. That is why stories emerge of the Airbnb founders who ate shit for two years, or how Travis founded three somewhat similar companies before emerging from his parents’ basement to jump into Uber, or why it took Pinterest so many rounds of early-stage dilutive funding to get their flywheel going. All of these deals were under most investors’ noses, but they likely were looking for more proof. Now investors lament seeing these things and passing, just like NFL coaches in this video realize how they evaluated talent back in 2000 led them to their decisions at the time.
The most interesting quote about this particular evaluation process comes from former San Francisco 49er coach Steve Mariucci:
We all knew Tom very well. He was right in our backyard. He probably always wanted to be a 49er…but we didn’t open up his chest and look at his heart, I don’t think anybody did. And what kind of spine he has, and the resiliency…all the things that are making him great right now.
The prevailing sentiment around Brady today is either he is a cheater or he was unfairly framed. Without getting into that debate here, I was reminded that in today’s media scrutiny of Brady, many folks forget just how paranoid Brady had to become to survive and keep his job, starting from high school. Earlier this week, the author of one of my favorite daily newsletters, Dave Pell, who pens Nextdraft, wrote a funny headline: “BREAKING: Shockingly Attractive Rich White Superstar Quarterback Finally Gets a Break.” Brady is successful now (and a target), everyone wants to cut down the market leader — but he wasn’t always the winner, and what’s likely to drive him is more rooted in years of failure, rejection, and a constant struggle for recognition.
A company I invested in a while back launched today. There was a bit of social media around it, and some press. When I started investing a few years ago, I would write these elaborate posts about my thesis, and why I invested, and why my decision “makes sense.”
This time around, I didn’t arrive at my investment decision in that way. It was different. I’ve known one of the founders for a long time. We are good friends. As I’ve gotten to know his work in mobile commerce and product design, and as I got to know him as a friend, a new father, and a thinker, he emerged as a rare talent, someone who could effortlessly write specs, code, plans, and about real things in life. He was interested to brainstorm and refine a slew of business ideas that were floating around his head, and so we did, many hours over a few months, just hanging out. He recruited an old friend to be his cofounder, and I got along with her right off the bat, too.
So, I just waited, and when he was ready, I texted — “First! I’m the first check.”
I helped Anand and Vivian meet a bunch of angels, seed investors, and VC funds, and navigate the process. Like any fundraise, it’s a few ups, a few downs, a few doubts, and then it all comes together. I was never worried, though. The problem these two chose to solve — how to provide a modern, flexible childcare solution for parents — is one I experience myself, and the manner in which they will build the network is also one I’ve worked on with other companies — that is, how to go city by city. We all have that work ahead of us. You can check out their launch site here.
The truth is, though, that I didn’t want to be involved only because I liked the concept or offering. Anand and Vivian could’ve chosen something else, and I would’ve been fine with it. I trusted them to refine their ideas and interests into something actionable. I trusted them to vet their ideas with friends like me, but also others who could push back on their biases or blind spots. They were aggressive, yet humble. That’s hard to do. And, they did it, and that hard work led them to a point of conviction, and that conviction was evident because after you spend some time with a small group, you can just tell by the tone of their voices that “boom” this is it.
At pre-seed and seed, one of the worst things about investing at this stage and sometimes you have to make decisions in day or two with an arbitrary deadline and you don’t get to really spend time with folks. Some people don’t mind it, but it’s hard for me at times to come to grips with. By contrast, having known the CEO here for years and building trust organically over time — a trust that also transferred to his cofounder — I hope I can add more of these types of stories to the ledger.
I got into an enlightening Twitter discussion yesterday with a few friends, and the conversation centered around the intersection of the immigrant experience and the entrepreneurial experience. It’s common topic that’s been studied, and people who live in and around the Valley recognize how critical immigrants are to the creation of new companies and becoming part of the workforce. Lately, it’s been taken up as a key policy tenet of the tech leaders who have ties with politicians and those who have political clout.
But in this discussion (click here to open it), I realized something about the intersection of immigration and entrepreneurship — we often talk about “immigrants as entrepreneurs” coming to the U.S. from another country, but that’s just one definition. My friends mentioned how the same hunger, drive, and motivation exhibited by entrepreneurial immigrants map almost in-line with other cases where the protagonist has struggled to overcome some type of disadvantage. We conceive of the origin needed to be a different nation, when in fact it could be a different socioeconomic situation; or an underrepresented race or ethnicity; or a physical, mental, or learning disability; or any other physical state or state of mind that once trapped someone from reaching their destination.
When you unpack what those destinations can mean, it can broaden your definition of what it means to “immigrate” to a place like Silicon Valley. For instance, a black friend on the thread revealed that his family originally hailed from Alabama, moved up to the northeast, and from there struggled to grab whatever he could get his hands on. We tend to connect that kind of entrepreneurial hunger with someone coming from overseas, but people can immigrate to a state of entrepreneurship just by crossing state lines. On top of the racial divide he had to deal with, there was also a socioeconomic one, and now that he’s here in the Valley and building his own thing, he is in fact drawing upon two reservoirs of immigrant-fueled entrepreneurial energy.
From the context of having the relevant skills needed to survive and thrive in Silicon Valley, I also felt like an immigrant to this land. I didn’t know what to do here. I am not a technologist and I did not have an investment background. I immigrated here from a nation where those skills didn’t exist or weren’t valued, and when I got here, I realized everyone had them, so like a stereotypical immigrant would, I had to fight through numerous assimilation attempts.
The common thread in the stories is not about skills, or education, or where one comes from — it’s what does one overcome and continue to overcome. That may be the essence of what makes those who immigrate to a new place so formidable, their constant paranoia to keep trying to overcome what is ahead of them if not for any reason that, in their own heads, they don’t have any other choice.
We will talk about this topic among others at The On Demand Conference in NYC on September 15, Register Here. We are also running our second contest for the best B2B on-demand startup, more details here!
My, how things can change. When we did the inaugural On-Demand Conference back in May 2015, everything was hot. Now, gearing up to the second installment in September in NYC, things are — shall we say — a wee bit chillier. And, rightfully so. In a few months, we’ve seen high-profile companies broadly in the sector nearly fold overnight, we have yet to see the big rollup consolidation strategies that people wish would happen, and the culture of copycat models is bringing more and more founders into red ocean markets like food delivery.
Investors are applying more scrutiny toward on-demand startups, asking flavors of the following questions: How frequent is the consumer use case? What is the payback period when opening a new geography? What do the unit economics look like, and can they modeled at scale? Does the team understand they should balance unit economics and growth by city to make sure they don’t run out of money? We haven’t seen much M&A in sector, so can this company go the distance? How can the team expand the product/service offering if the service grows? With UberEATS now in San Francisco, the backyard to many well-funded food delivery apps, could Uber crush the opportunity entirely? And, who might follow into the next round of funding should the team set out to do what they want to do?
These are MUCH harder questions than VCs were asking before. Welcome to the new world. Now, that’s not to say there won’t be some companies which continue to fetch large rounds, or that there won’t be on-demand concepts that attract funding in different parts of the world or in different product categories (like healthcare). The concept is bigger than food and transportation, though those two are clearly the consumer drivers.
Luckily for us, the purpose of these conferences isn’t to promote a sector, but rather to gather the most thoughtful minds among company builders and investors to tackle the most pressing issues of the day. So, in September in NYC, that will be no different. You can learn more about the NYC event on September 15 here, and on the VC panel in particular, friends Steve Schlafman (RRE), Kanyi Maqubela (Collaborative), Anu Duggal (Female Founders Fund), and David Tisch (BoxGroup) will debate these and other issues facing on-demand startups in the seed and Series A/B stages.
Register here for the September event in NYC. Unfortunately, I am unable to attend in September now, as I was very much looking forward to seeing everyone, meeting all the new founders with new concepts, and kicking off the day’s activities with a fireside chat with USV’s Albert Wenger, but I can’t make this trip. So, I will give away my ticket to one person who really wants to attend. What I ask for is this — tweet out a link to this event and mention me @Semil on twitter, and my co-organizers will pick one lucky winner to attend the event in my place!
I grew up working in restaurants. I have been a dishwasher, host, bartender, waiter, line cook, and regular cook. I’ve delivered food to people, and then cleaned those tables. But, that was a long time ago. Then, last week, I went to YC Demo Day, and there were food-related robots, and it got me thinking about how the last few years has seen all sorts of innovation in modernizing or entirely replacing the concept of restaurant. This is important because restaurants provide a space and service that people can use many times a day, and critically because it employs many people, both full-time and for those looking for extra income to make ends meet.
Briefly, here are some ways entrepreneurs are reimagining the restaurant experience.
Mobile, web lead-gen: Companies like DoorDash, Postmates, OrderAhead, Caviar (inside Square) and others are funneling more orders to restaurants, and fulfilling delivery either with their own staff or via 3rd party logistics (3PL) providers (more on those below). Like Grub and Seamless, using mobile for call avoidance to order and schedule with a few taps on our phones. (Oh, and now UberEATS is in the game!)
Vertically-integrated: Companies like Sprig & Munchery make and deliver their own food, bypassing the restaurant experience entirely, but getting fresh food to customers. This allows them to control their COGS and potentially have better contribution margins, though it takes longer to rollout to new cities — that’s one big tradeoff.
3PLs: Companies like Homer, Deliv, and Sidecar offered delivery services to other businesses.
Decentralized, peer to peer: Companies like Josephine Meals envisions a future where people become home-cook entrepreneurs (a la Etsy) and sell directly to people in their neighborhood…and they may even use 3PLs to power delivery.
New Disruptors: There are too many list to here, but just when you think food is saturated, companies like Tapingo, EnvoyNow, and Fooze (among many others – and please don’t ping me about them!) are finding markets to attack.
Franchise Model: Like Domino’s Pizza, a franchise network perhaps isn’t a terrible idea to get around the cost of expansion. A company in this recently YC batch (Wheely’s) wants to help others create mobile coffee shops.
Robots and Automation: Now, this is why I wrote the post. Restaurants and the food service industry employs LOTS of people. But, now, Robots are coming! TeaBot, coffee bots, sandwich robots, and other robots or automated devices (like e la Carte). KQED had a feature on Eatsa in San Francisco, an automated restaurant. Next time you’re in the coffee shop, count how many employees are there. Probably 7-10 per 500 square feet. Why? We are used to it, but it’s entirely possible for the next Blue Bottle to just be a station of iPads and robots making your stuff. Zero human interaction. The only question is — how long will it take to come? Based on what I’ve seen this year, perhaps sooner than we all think.