Career Archives

Medium Rare

I love Medium, the product. I wish I had the opportunity to invest. When Greylock became their first institutional investor, I knew Medium would be a billion dollar exit and wrote about it here. Since then, other great investors and firms have backed up their trucks to ride the Ev train, and that’s a smart move.

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.

Shift To Consumer Investing

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.

Minimum Wage, Maximum Automation

The State of California recently unveiled a plan to increase minimum wage in the state to $15/hour by 2023. Currently, America’s national minimum wage is $7.25/hour, which hasn’t increased since 2009. The concept of minimum wage is complicated, and I don’t want this post to be focused what is fair or isn’t about such an increase. I certainly don’t condone workers having to see most of their take-home pay go to rent and most of their free time eaten up by commuting. That said, I do sense aggressive increases to minimum wages will come with deeper consequences, ones that our society will now wrestle with on a daily basis and for years to come.

Increases in minimum wages will accelerate a massive shift to automation.

I see it on a weekly basis with startup pitches. Name any manual job currently booked at around $15/hour or so, and I’d bet there’s a 50% chance that task will be automated, either with pure software, enabled hardware (in the form of a robot), or some mix of both. Automation via software has been underway for a few years, but when it’s combined with hardware, the results will be astonishing. The components needed for such robots are now readily available and getting cheaper by the year. The hardware/robots can be differentiated by software and the vertically-specific applications they are designed for. The robots become a vehicle by which new technologies and services can be delivered, and of course done so at a fraction of the cost without the additional overhead (like healthcare, etc) that can saddle a balance sheet.

I know this is coming — and fast — because I myself use products on a daily basis that replace traditional human labor with automation and learning.

The way that I describe this trend in general is to imagine your local Starbucks. Say it is about 2,000 square feet total. At a busy time, you may see 8-10 workers in the store. Why? Shouldn’t I just be able to walk up, have a beacon notice my presence, and a robot makes my drink. The machines to do this already exist. It is coming.

We can expect to see the consequences of minimum wage increases (which I acknowledge are extremely complicated) take root in automation, robots, and corresponding services. Some solutions will appear like vending machines, whereas other solutions will mimic human movements and behaviors, just in different shapes and forms. The technology and builders are already here, working on these solutions — the turbulence in the bifurcation of the economy, the force-changes driven by technology, and the slow response to build enough suitable housing and transit may combine to usher in this robot-led era with greater speed. Minimum wage, maximum automation.

Human Memory, Connected Storage, and Digital Nostalgia

I caught up on Lefsetz’s blogs from the past two weeks yesterday. A few stuck out, like always. In particular, he wrote something about his history of Springsteen concerts, which you can read here. His recounting touches on all sorts of nostalgia triggered by following The Boss over the decades, and while I’m not a huge fan of Springsteen, I hold him in high respect — I once saw him perform, without breaks, to a crowd in California for almost 3.5 hours. No stops. It was one of the most authentic musical experiences I’d ever seen. Maybe I’m more of a Springsteen-the-person fan than a fan of his music.

Re-reading Lefsetz’s journal entry, I remembered I had myself written about the concept of nostalgia intersecting with technology. I don’t know why I write about nostalgia, or why I’ve got a few tabs open for an unplanned afternoon of where I should be stack-ranking investment opportunities and focusing on work. It may be that nostalgia, for me, is even more powerful force that interrupts my ability to (attempt to) think rationally.

Back in 2012, I wrote on my blog here about Timehop, a fun app which sends you back in time based on photos and check-ins. The first time writing about Timehop, I mentioned:

“…while you can scroll down your Facebook Timeline and travel back in time, a service like Timehop could present older pictures to users in a way that strikes upon a deep emotional chord. It is this element of nostalgia that interests me. It is a product I’d want. I can imagine Timehop simply running in the background on my iPhone, sending me a gentle notification…”

Later in 2012, it occurred to me sharing photos to the right people at the right time can, in fact, trigger nostalgia. In the next post, I invoked the now famous scene from Mad Men, “Carousel,” where Don Draper, tasked with coming up with a pitch for a slide carousel, paints a picture of moving back and forth through time by pictures. This nostalgia, he says, has the power to create a close bond with the consumer. While Timehop can’t compete with Facebook, and while what Timehop pioneered might become a feature of how we all use Facebook in the future, it is fun to look back on how it presents us with nostalgia:

“…it simply gives people what they want in a new form — the place where you can keep your memories. The carousel of old slides, the cigar box of warped pictures, and the Instagrams you’ve taken, now in your pocket, delivered to you in just the right way.”

Nostalgia even led me to join a startup company, Swell. A few years ago, as someone who grew up as a radio and audio junkie, I got swept up by the old memories of listening to transistor radios and studied how radio and radio imagery influenced the brands, lyrics, and sounds of some of my favorite musicians. In writing about Swell’s product:

Radio fills the dead time in my life, when I am free to be more at ease, more relaxed, and as a result, my brain seems to expand a bit more to let in more information. Yes, we are visual and textual creatures, and images are central to how we process information, but audio is equally important for me, and when it comes to knowledge, the ambient awareness provided by radio is perhaps the most powerful.

And, so, all of this brings me to the original Lefsetz post about Springsteen. Check out this passage, edited for length:

And all of this went through my mind watching the Boss at the Sports Arena. My life slid by. People my age are thinking of retirement… But once upon a time we were the youth, we were the cutting edge, there were no social networks, cell phones were a “Star Trek” fantasy, we had to leave the house to connect, to feel alive, and where I felt the most comfortable was at the show… It was completely different. No one stood, except for maybe the encores. There were seats. You didn’t go to be seen, you went to communicate with the music, bond with the gods. And it was like that Thursday night. And it won’t ever be that way again. It can’t be. Mystery is history. You can see it all online. And scarcity is a thing of the past.

=====

To connect, to feel alive, and places where we feel most comfortable — I’ve been thinking about that passage in particular. Today, Oculus Rift virtual reality headsets are shipping. eSports, where fans worldwide watch other people play video games. Legions of EDM or Taylor Swift concert-goers are recording their experiences through Snapchat Stories. The web and mobile devices are empowering people who may have once felt lonely now connect with likeminded people across social classes, political borders, and beyond.

And now that everything is recorded and documented in real-time, accessible by search, searchable on billions of devices worldwide, it is both empowering and unsettling from the point of view of nostalgia. Growing up in the 80s, most of my memories are locked in a few videos, many still photographs (that haven’t been put online), and in my mind — but what about my daughter, who is almost three years old, who is the adoring subject of thousands of photos? She will be able to see so much of her younger self in digital form, but where will her nostalgia reside? In digital form? In the corners of her mind?

I’m not sure I have a great conclusion here. Perhaps there isn’t one. I’ll end with one of Andy Weissman‘s old posts, back from 2013, where he writes this passage about the idea of putting old videos from his youth on YouTube:

When I tell people this story, they mostly have the same reaction. “You need to put the shows on Youtube!” The video tapes – cartons of them – are spread out. Maybe in California. Maybe at my mom’s place. Some in Woodstock. Maybe they are gone. These requests usually set off a flurry of internal emails amongst ourselves: should we do this? Have you watched them? Which one should we digitize? This year we will really get around to it, yes this year we will, right And then when I think about it, I realize we probably shouldn’t, and most likely won’t, digitize them and put them on Youtube or Vimeo or wherever. It would ruin the memories.

Picking, Riding, And Investing In The Next Great Technology Wave

The last big wave which helped generate huge returns for technology investors was largely driven by phones. Building apps and services on top of phone sensors, connected to the network, gave us new media apps like Instagram and Snapchat, new communication tools like Whatsapp and Messenger, and new ways to travel like Airbnb and Uber (thank you GPS sensor and Google Maps API!). The mobile wave was/is big enough to create opportunities for others, as well, though these are the biggest outcomes.

In early-stage investing today, a bunch of friends and peers who invest at seed always wonder — what’s next?

Lately, when I’ve been asked this question, here’s the analogy I use to the answer the question:

Imagine we are all surfers in a surf competition. During the day, we each are allowed to pick a set number of waves to ride and are scored on them. There are lots of surfers doggy-paddling in the open ocean, and the goal is to identify, pick, and line up to catch the biggest wave of the day. The problem, of course, is that in the moment, from your vantage point with your head bobbing on the surface of the water, it’s hard to identify and commit to the wave at the right time. If you move to soon, you may pick the wrong wave; ff you wait too long for the wave to take shape, you may not have enough time to catch it properly.

The goal, of course, is to pick the right wave and time it perfectly. Picking the right wave will be scored well and rewarded by the judges, will give the surfer an unforgettable ride, and will pack enough kinetic, nautical energy that will propel the surfer to reach new speeds. That is the goal.

In reality, right now in the early stage, everyone’s wading in the open ocean, surveying the horizon for promising waves to form. There are waves we anticipate in tech but we don’t know when those waves will reach a point where we can ride them — waves around Artificial Intelligence and Machine Learning; or vertical marketplaces; or SaaS network; or Virtual and/or Augmented Reality; or bots and agents; or autonomous robotics; or…name any other big category. We all just don’t know what that wave will be, where it will come from, and what it will look like.

In the face of this uncertainty, some elect to follow their peers who are known to have a good nose for spotting big waves. Some have studied up on how to pick out a big wave looking at data or other physical properties. Some are happy to pick out a portfolio of a few waves and hedge their bets (that’s what I’m trying to do). Every strategy comes with its benefits and risks. Entrepreneurs, of course, see these waves before most investors do, but both founder and investor can pick the wrong wave or move too late when the big wave is forming. It will be just a matter of time before this next wave emerges — because no one knows when it’s coming — and it will be exciting to see what it looks like and where it comes from.

Twitter: While You Were Away, Episode 3

Third installment of our new podcast, “While You Were Away,” a sort of Rap Genius for tech Twitter conversations. Joel Andren (who hosts this podcast) does a terrific job stalking Twitter to see conversations unfold and learning from them.

1/ Startup in SF – Worth It?, relating early adopters in the Bay Area and challenges in finding and retaining gig labor. Conversation includes Adora Chung, Keith Rabois, Adam Besvinick. (Twitter thread)

2/ Complaining About Twitter, relating to how startups should prepare for the 2016 fundraising environment. Kicked off by Danielle Morrill, joined by many others. (Twitter thread)

3/ How To Become A Pro VC, where we break down the great conversation started by Kanyi Maquela, including tweets from Keith Rabois, Josh Elman, and many others. (Twitter thread)

Investing Notes From The Upfront Summit (2016)

At the start of 2015, I was lucky to head down to LA for The Upfront Summit. It was a blast, so I was excited for this year’s event, and 2016 was even better. I just got back to The Valley last night after two days in Hollywood, and I wanted to share my big, key takeaways from the event from an investing POV (note, there’s tons of stuff which happened which won’t be listed here — also, as the videos of these interviews get posted, I’ll update them here):

The LP Mood
One of the things which makes Upfront Summit unique is the community of institutional LPs who come to LA for the event. There are a bunch I already know, and then always a chance to meet new ones. They’re all very nice and likely much more open in this setting, and of course, hounded by GPs eager to update or pitch. While I cannot reveal any specifics some of the LPs mentioned on stage at the event (those sessions were off-the-record), I will try to synthesize the larger themes from all of these discussions:

1/ LPs seem to remain very committed to VC category
2/ LPs are currently active in re-upping in existing funds and finding new fund opportunities, though many have remarked to me they want to see Q1 unfold to get a better sense of how the year may look
3/ LPs view microVC (sub $100m) as a morass and many expect consolidation (firms buying firms, or withering)
4/ LPs concerned about generational transition at the established funds

So, while VCs may slow down (and that’s probably a good thing), the folks who back VCs are playing a longer game and see opportunity in the market and with new funds.

The Troy Carter Interview

I have read many pieces on Carter and certainly heard a lot about him and his career (he’s a legend), but I’ve never seen him interviewed 1:1 and talking about his career and how he broke into investing. It was personally the highlight for me. I can’t wait to watch the interview again. He’s a fantastic storyteller and is so clear and forceful when he speaks. It’s really a story of how he was able to identify, align with, coach, and promote talent, and along the way, it turns out he’s pretty damn talented himself. No wasted words. No wavering. No ego. (Perhaps I’ll update this more once the video is up, my write-up won’t do it justice but also it’s also best enjoyed as a primary source.)

UPDATE: I just listened to the video again and would highlight one thing about what Troy said — he and his firm are focused as investors (consumer products, networks, technologies) and thematically view the world as a place which is undergoing massive demographic shifts, which can be seen in shifts in political ideologies around the world and which can manifest themselves in new behaviors and products, whether from the U.S. or from overseas. Often when I hear an investor talking about a theme, he or she can only go so deep — when you hear Carter talk about this theme, you can almost sense he feels it in a way that most people simply won’t be able to until it’s too late.

The Fred Wilson Interview

As a venture nerd and someone who reads both Dan Primack’s Term Sheet and Fred Wilson’s AVC blog every single day, this interview was the highlight for me. Dan is simply the single best person to interview a pro VC. And, I’ve probably watched or read every single interview Fred has given over the last eight years. I have never seen one like this. You have to watch the interview (when it’s up), and there were many things covered, but what was unusual about this interview is Fred said some things that VCs often say privately amongst each other but never in public, and that’s what makes it so good. Here are my big takeaways:

1/ On Dearth Of IPOs: Many VCs have been public about wanting CEOs to go for IPO sooner and not clog up private markets. Fred came right out shouting “Man up! Woman up!” You don’t often hear this kind of candor as for years many VCs have been cautious about been seen as pushy. The last few years has felt like VC is a helicopter parent for portfolios, swooping in to rescue teams in times of duress but never willing to publicly shine a light when things have gone too far out of control.

2/ On VCs Taking Money Off The Table: If a VC has a chance to take money off the table (and many do), it’s not often reported because the larger VC doesn’t want to disrupt the vibe at the company and among other investors. Fred just readily admitted that being creative about liquidity opportunities is part of USV’s philosophy. He also cited the reality that despite what LPs or the public thinks, VCs have very little control over when liquidity opportunities come their way — so when they do, they should be taken seriously.

3/ On Generational Change At VC Firms: Fred admitted USV is thinking about this issue, and remarked on other firms he felt did a good job of this and some he didn’t. The main message he sent was that many of the larger funds should make sure the older guard steps back from the carry a bit to attract new investing blood. That’s one of many strong reasons why so many people are spinning out, raising separate funds, or not going down traditional VC path at all. For firms that get generational change right, the networks and brand can persist and create opportunity for new types of GPs to get added to the fold.

4/ On Founder Responsibility: This is the part where Fred jumped out of his seat. Primack asked a question about something, and Fred turned to him yelling “If you take money from me, you have a responsibility to return that money. You can’t just say ‘Fuck you.’” Whoa. OK. The issue here is that there’s been so much money in venture and such a hype cycle, many VCs are afraid to have more confrontational debates like this with their founders because they’d be concerned their reputation and deal flow would get hit. (I’ve written about that particular interplay between governance and deal flow, see here.) Fred may have been involved in a situation where a company he’s backed doesn’t want to exit. That’s happening more and more, and after a while, some people aren’t going to like it.

Challenges And Opportunities For Seed Funds (2016 version)

A while back, I wrote a post here on the “5 Challenges Facing The MicroVC Model.” Since then, I’ve added more and more, and now we’re up to nine. Some LPs I talk to frequently have joked “if there are so many challenges, why do it?” It’s a fair question, and you can read through to post toward the end to hear why.

Now, in 2016, I think the market overall has slowed down to a point where I am personally sensing material changes in how I operate my seed fund. What I’m writing below is, more or less, what I’ve communicated to my LPs in the interest of open communication and transparency, and there may be implications for early-stage founders, as well.

The Challenges For Seed Funds (like me)…
-Slower Pace: I’m expecting the flow of money through the system to slow down overall. This could impact funds as they raise, or commitments to follow-through on capital calls given seed funds don’t have traditional LPs bases. As a result, funds may be more cautious with speed to adjust for this risk.
-Playing With Check Size: Additionally, reducing initial check size is a way to maintain pace but adjust for a fund’s runway. With many seed funds putting in a few hundred thousand here or there, playing the fraction game to keep the deal flow going is another move we can expect to see more often. I don’t see this as a bad thing as round sizes in total may come down. Some rounds frankly don’t need to be as large as they are.
-More To Track: Most seed funds have 1-2 managers to track lots of companies. If pace slows, then those folks would spend more time with the existing portfolio, even dating
-Increased Mortality Rate: The larger seed rounds which started in 2012 and continued through last year are going to start seeing churn. There won’t even be seed extensions for many of these companies, and we are all hoping the acquisition market picks up even for nominal transactions, just so the transitions are smoother.
-End Of Quick Markups: This is the key killer change for seed funds. When I started three years ago, I was lucky that a bunch of investments were seriously marked up by big VCs (what all seed funds hope for) within a 12-month period. Shifting to 2016, I am telling LPs that it may be at least 12 months before we could see the nice 2x to 3-4x markups from the seed rounds, as larger VCs are smartly being more selective, more patient, and also focusing more on larger, future bets and newer companies. ** Hunter Walk tweeted a reply which I hadn’t thought of, which is slower pace of markups (assuming they happen) give earlier investors more time and data to choose which investments to continue on with.

I don’t want this post to be all a downer. I think there are also some important plusses here for seed funds.

The Silver Lining For Seed Funds
-Costs Are Still Low: The cost of starting up is still falling in the early-stage. Two people who are talented and have a prototype going and want to keep rolling in customers don’t need more than a $300-500k round to keep afloat, have an office, maybe hire one person, and get their bearings. I’ve done lots of these rounds and love them, especially because it forces folks to not raise too much capital early.
-Modest Promises: Seed funds don’t have to return billions of dollars just to return LP principal.
-Tough Times Produce Tougher Players: I see higher percentage of grittier founders coming across my desk, and I love it. It’s easy to quickly pass over teams who lament things like dilution or other trivial matters. The slowdown is making it a bit easier to test for something that’s been elusive for a while: “Why are you doing this?” The folks who do the $3-4m valuation rounds with product and revenue are often pursuing something greater than headlines, and many seed fund managers are dying to meet more with those qualities.
-Lower Valuations: Let’s face it — the prices have dropped, and now small seed funds can actually get 5%+ ownership in a company (on notes!) with a small check. Things have mostly corrected here, yet are still great for founders. Now going from $4m cap at seed to a $8-10m priced at A, and then talking to bigger for VCs for the B round of about $30M give or take all makes sense and leaves options for everyone on the cap table to be made whole.

So, why do it at all? Why stick with seed given all the challenges?

It’s the best place to build a network for the long-term. It’s the time when founders really need you. It’s where all the action is. It’s because having a line to the top of the funnel will ensure deal flow to come for years. It’s because many of the folks at seed either were at larger funds or could have the option to, but they miss the part of working with people early and seeing new and exciting concepts from the beginning. And, seed is the training ground for the next generations of startup investors to cut their teeth. Some will stay at seed and perfect the lifestyle. Some will graduate up to Sand Hill Road and join an existing platform, and come in with a killer network and deal flow engine. Some will ramp up and start their own new Series A funds, which is already under way. Some will join forces and do one of the above. This will be what the next five years is about from the early-stage financing side, and it’s exciting just to be a part of it.

Navigating The Gap Between Seed And Series A (2016 Version)

I try to help anyone coming through the network gear up for financings. Lately, the famous “gap” between seed and larger VCs for Series A has been exposed again. This “gap” has been written about ad nauseam, so I won’t do that here. Instead, let’s discuss how a founder can properly prepare for this gap, save time, and leverage the market:

How Much, How Long, And What? I’ll often look through a deck for a gap round and rarely see the amount the folks are raising, how long it will last them, and what the key milestones are? This is a sign of foolishness. The point of this gap existing is that the team isn’t ready for Series A, so to get to Series A in a credible fashion, an investor in this round would really need to see and understand an operational plan, the cost of that operational plan, the timeline associated with it, and identification of the key milestones to be reached. If you’re stuck in the gap and don’t know the answers to this, it’s a bad signal.

What About Price? I advise 90% of all extensions I see to raise “flat” to the last price or cap. This is hard because from the founder POV, they see all the progress they’ve made; from the investor POV, they’re looking for real growth. Usually in a gap round scenario, the new investors have to take on some serious market risk. An well known LP in microfunds once told me he cringes when his GPs do these extensions because he feels the data shows that most of these fail anyway. So, keep things flat and simple, because the party of the seed is over. A gap round, should one be so lucky to get one, might seem like a seed but it really feels like an institutional burden. It ain’t no party.

Where’s The Risk? Startups can face tech risk, market risk, or product-market risk. In a gap round, be honest and upfront about what risks are out there. In the angel and seed rounds, most of these are fueled by a hopeful vision of the future. By the time you get to this gap zone, you’ve already spent $1m — what risks have been eliminated, what risks still lurk, and how are they going to be mitigated? An ounce of intellectual honesty goes a long way here.

Insider Support? One easy way to show you’ve got some backing for the gap round is to see if your earlier investors want to invest more in you. Some do this as a policy, whereas some are not set up for follow-ons. It’s a good signal because if you’ve kept your earlier supporters up to date and they actually grow to believe in you move and see your progress, they can cobble together $500k of your $2m gap round and that gives a strong signal of momentum, even if small. It tells a future investor, “hey, his/her earliest supporters really like this.”

Speed Kills. Have a decent deal on the table? Close it. Shopping it is dangerous, if not done carefully. Yes, you will meet investors who may view the opportunity as predatory, or bargain shopping, but the last 5-6 years of valuations have been tremendous, so it’s still better than before 2008-09, relatively speaking. The reason I’m writing this is I do believe there are a class of great founders and companies which simply didn’t raise enough money to get prepared for Series A (and likely weren’t actively coached to get there, either), and there are founders out there who aren’t obsessed with the optics of a down or flat round or recap, and for them, I’m hoping this post helps them seal the deal faster and get back to work building the future.

Investment Criteria, Focus, and Process For Haystack Fund 3

Investment Criteria For Haystack #3

For my third fund, Haystack III, which is still a small fund (but larger relative to my previous funds), I wanted to share a simple and straightforward guidepost for founders, seed syndicate partners, angels, and larger VC firms as to what I’m looking for, what my process is, and what to expect from me if I get the chance to work with a specific startup. (I will continue to update this list based on feedback, so please consider it a work-in-progress and feedback is welcomed.):

Sector Focus

For Fund #3, I will invest in pre-seed, seed-stage, and select Series A rounds. I am investing only in the Bay Area and in three (3) sectors, listed below (old post on why Bay Area only, see point #1). In each sector, I have some specific things I’m looking for, as written below. Please note these sectors are set for Fund #3, but I will likely change them a bit in Fund #4:

SaaS (Enterprise & SMB)

Elements that I’d like to in place see are:

- presentation of an offering which leverages proprietary data and/or brings machine intelligence to the market on top of specialized data; or creates a new category entirely
- demonstrating mastery of — or a genuine interest to learn and master — classic SaaS metrics, such as MRR or ARR, ASP, ACV, Churn, and more (link)
- should have at least have either prototype in beta or product in market
- should have a detailed customer pipeline plan (doesn’t need to be complete) that demonstrates capability of prospecting and prioritizing

Heavy Industry (Software & IoT)

Elements that I’d like to in place see are:

- for software and applications, should be focused on some element of surveillance (drones), design and support (3D printing software, industrial AR)
- for IoT, should be focused on (relatively) cheap, low-power distributed sensor networks paired with corresponding software services; these often run on HaaS (hardware-as-a-service) business models and therefore should be thought of as a variant of SaaS
- should have at least have either prototype in beta or product in market
- should have a detailed customer pipeline plan (doesn’t need to be complete) that demonstrates capability of prospecting and prioritizing
- demonstrating mastery of — or a genuine interest to learn and master — classic SaaS metrics, such as MRR or ARR, ASP, ACV, Churn, and more (link)

Direct-to-Consumer Technologies

Elements that I’d like to in place see are:

- prefer to be able to test and try out product
- specific interest in digital health and wellness
- specific interest in new mobile communications tools
- am curious about VR but will admit more attracted to infrastructure and content generation
- am curious about Apple TV as a platform; would love to learn more
- prefer to see either technology brought to market or potential marketplace/network advantage
- In general, with respect to Consumer, I’m more open-minded and have preferences over criteria; I expect the founders to see the future, not me.

Process

Seeds Is A Process: each process is different because each seed round is different; sometimes, it can take a few days, other times, I’ve gotten to know a founder over the course of months.
Introductions: I don’t mind cold emails (first.last@gmail) so long as people are economical with their communications and have taken a few minutes to determine if they meet the criteria listed above; email is the best and only way I prefer to be contacted. Formal introductions to me aren’t necessary; my job is to meet new people and get to know them.
Diligence: At times, I can tend to ask lots of questions; my hope, in those cases, is that the founders like the questions and enjoy answering them and the ensuing dialog it creates. On the B2B side, I’ll often bring a customer or two to the founder in the process if I’m interested to see how the interactions go and learn more about the product and problem. I prefer conversations stretched across days and mediums versus pitches and quick decisions; I also like to learn more about a person’s background, things they’ve overcome in their lives, and examples where folks have shown great drive and/or resiliency.
Email Ain’t Perfect: I get over 200 work-related emails a day and now have three kids at home; i sometimes will miss an email, so while I can’t guarantee a response, I am pretty good at replying, and i’m hoping the clarification of what I’m looking for will help both sides.
Investment Size: typically invest $100k to $250k as a range, and usually it’s $100k; currently, do not seek or ask for pro-rata rights; that said, I do have reserves in my model and my hope and intention is to provide enough value along the way such that the founder will want me to come along for the ride from Series A and beyond.

Post-Check Interaction

Getting To Series A: In the process above, I try and make sure the founder(s) and I are on the same page about the path to Series A. The main value I add is to help founders develop a framework for what will be needed for a larger, institutional raise, and this cuts across many product and company functions. I spend a lot of time with larger, institutional VCs and, when the time is right, take great care in finding appropriate matches between founders and VCs. I view this as a deeply personal endeavor and one that is hard to match using software and/or spreadsheets of target lists. [see here for more resources on getting to Series A]
Customer Development: On the B2B side, I work with founders closely on sales pipelines and often bring customers to them.
Executive Recruiting: Additionally, I help close senior or executive candidates who are considering joining the startup, but cannot really be effective at helping a founder recruit overall — my intention is to fund entrepreneurs who are themselves recruiting machines and have a pipeline plan to execute against.
On The Personal Side: Finally, I’m available all the time to chat: text, email, phone, or beer and whiskey when necessary. I’d also ask folks not to take a “no” personally. I’ve had to say “no” to friends and that is the worst. I have and will continue to make mistakes as an investor. Lucky for all, there are 3,000+ early-stage investors in the market, so a “no” from me should just be no more than a slight bump along the road.

Things I Won’t Do

- Introduce you to investors if I am not involved
- Consider an investment if main HQ is outside the Bay Area
- Consider uncapped notes or valuation caps that are way ahead of today’s realities
- Participate in unnecessarily huge round sizes relative to operational plans

** I will continue to update this list based on feedback, so please consider it a work-in-progress and feedback is welcomed – https://twitter.com/semil/status/683056120882171904

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2016 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus