Career Archives

In Conversation With Brad Feld (StrictlyVC Insider Series 2017)

Earlier this month, Connie Loizos of StrictlyVC and TechCrunch gave me the opportunity to sit down with Brad Feld from Foundry Group at her latest “Insider Series” event. I love these events because everyone attending is genuinely interested in investing in startups and everyone has a genuine desire to learn from others on how to improve, how to get better. And, who better than to learn from someone like Brad? You can see a video of our chat above. I focused our talk on two categories — (1) advice for people just getting into the game of investing in startups (covering branding, stage focus, and more) and (2) drawing out lessons from Foundry’s first decade in existence. It’s hard to meet a newer investor in the ecosystem who hasn’t just met Brad, but also received direct and meaningful help from him. My favorite part of our chat is when we talked about competing for a Series A investment against firms where he has friends — and I loved his answer. More or less, he said that Foundry wants the founder to pick, and is ultimately happy for them whether they pick Foundry or a friend/rival firm. It’s a subtle, deep, zen-like approach that I still need to think and reflect on. So, thanks to Brad for making the time for all of us, and thanks to Connie for the opportunity!

Investing Notes From The Upfront Summit (2017)

How many years now — three? I had to check my back catalog, and lo and behold, I just wrapped up my third Upfront Summit. Every year, it’s an absolute blast, and each year becomes more memorable than the last. After two full days on the ground in downtown LA, hours of fascinating content, a who’s who of lobby conversations, celebrity sightings and conversations, and much more, I will now try to follow up my 2015 recap and 2016 recap with a 2017 version. A brief disclaimer — this will be written from an investor’s perspective, so will not aim to capture the entire conference and content itself, which is huge.

1/ The Four T’s Permeated Nearly Every Discussion – Tech, Trump, Trade, and Travel: The Upfront Summit is a technology conference, put on by a VC firm (thank you everyone at Upfront!), and now with three visits under my belt, it has been amazing to see how this event has grown and morphed into a national event. Last night as the Summit closed and I was having drinks with Greg from Upfront, he asked, “so, what did you think?” What I told him is that this is likely the preeminent “gateway” conference for a high concentration of influential pistons from within the technology startup world — LPs, who supply the capital; VCs, who allocate it; founders, who use it to create value; and the Press, who cover all the ups and down — to be in the same place for 48-72 hours, debate ideas, share deal flow, and hang out more naturally, especially for those who escape the Bay Area’s growing echo chamber. The Summit feels like a gateway because it isn’t just about technology, and that was evident from the carefully-selected programming, ranging from issues around mental health, failure in business, and some of the uncomfortable truths which have dominated the news for the past few months.

So, we have tech. Most everyone would talk about the new Administration and our new President, too, naturally. Not every panel, but it felt like nearly half of every conversation touched on the new world we all live in. Tech and politics seeped into the entire event. So, too, did the subjects of trade, which certainly affect many investors and startups, as well as restrictions placed on travel, and the free flow of ideas and people. Tech, Trump, Trade, and Travel, it was on everyone’s mind and permeated nearly every inch of panel conversations (not all) and off-stage, as well. The conference programmers did an outstanding job making this event much more than just tech — it was about how the tech industry interacts with society, from mental health, to fake news, to online bullying, and so forth. I’m sure more folks will be writing about this over the next few days.

2/ What’s On LPs Minds? There are only a few events where a vibrant network of LPs and GPs mingle for days, and Upfront Summit is outstanding in this regard. I don’t have years of experience under my belt here, but I do observe some of the changes year to year since attending. First, most LPs don’t seem to care about the pomp or headlines around markups in their fund’s portfolios — they go right into wanting to know the underlying details of the companies in question. Second, most LPs generally feel reluctant to add a new manager because their plates are full, and in fact, some have cut their own portfolio, even where performance was solid, in order to concentrate their portfolio more. Third, many who rushed to back spinouts over the past 5-7 years, backing Funds I and II, are now coming up on a decision for Fund III — if notable exits take longer or continue to be one-offs, it could mean things open up a bit for new managers to slot in.

And fourth, the biggest item I heard discussed, both on stage but mostly off stage, deserves it’s own section in this post….

3/ Geographic and Inflationary Stress On The Traditional Venture Model:

This is a tale of two — or many — cities. Many Bay Area investors joke during the Summit they want to move to LA, but I think quite a few mean it. I feel it every time I go down there. Maybe this is for another post, as I need to digest it more, but the variety feels even more expansive than what can find living in New York City. Again, this is for another post….

In chatting with many LPs, this was the first year where tons of them were notably curious and poking around about “how to invest in L.A.” It wasn’t a question of “Should we?” but rather, “How should we?” The region is so large, and with more people moving to the state and area, it’s not far-fetched to think there will be an explosion of LA-focused micro-funds like the Bay Area. A small fund covering the Pasadena area can’t also cover Venice, and vice versa. On the heels of a potential Snap IPO, new liquidity, more media attention, and LA becoming a multi-industry town, the ingredients seem to be in place for the next generation of creatives to make cool things. From the LP POV, looking over a 10-20 year horizon, the region feels extremely ripe and vibrant compared to every other region, including for some, the Bay Area.

Let me break it down…

As you may have noticed on this blog, I wrote almost a year ago that venture is a hyperlocal game, and that when a large chunk of the VC business model is predicated on exits, and most exits are driven by local firms, and most firms here have a history of making large acquisitions, it can be easy to think of the Bay Area as the only game in town.

Of course, that is no longer the case in the same way. Sure, the Valley exceeds on the metrics many measure, but with so much money in the ecosystem, so many new companies, rising local inflation for labor, office space, and the cost of mobility, valuations have gone up while ownership for most funds (not all) has decreased — it all puts a tremendous strain on the traditional VC model. Now, no one needs to shed a tear about that, and it’s partly why new models like Y Combinator, First Round, and AngelList have been able to thrive as innovators.

But…the money behind the money, the LPs, they care about this. They want active managers for their capital in different verticals and different geographies, and they want them to eventually have some decent level of ownership in the companies they allocate capital to. That’s their job, right? In conversation this past week, many expressed real concern about the concentration of money tied up in the Bay Area. As valuations rise, and the cost of living (which managers may need for living expenses) rises in step, it puts a big strain on the traditional model.

There are other creative solutions. There are investors in the Bay Area who have stayed disciplined and grown their funds size carefully; many will now get on a plane to find a deal at a more attractive price “out of market”; and many are more than happy to push back on price and negotiate a deal rather than just have a one-sided marketplace. These tactics will help reward the folks who execute on these types of creative solutions successfully.

In aggregate, however, we may be on a path where a new model has to emerge to make it work. It could already exist with AngelList and their infrastructure to handle fund management; it could be micro-regional funds within the Bay Area itself, which is already starting to happen as I can name a few (and I’m sure more new ones on the way). Where this all sorts out, I do not know. But, on a macro level, it is on LPs’ minds, that’s for sure, and while they will continue to keep investing in the Bay Area (no question), there’s healthy skepticism regarding just how brutally concentrated the rewards (like AppDynamics getting snatched up by Cisco in an all-cash deal) could be over the next 5-10 years. The rest of the country is wide open, though — more and more LPs seem to be open to a regional “bet” here and there, are certainly open to vertical-specific funds which have GPs with the right industry contacts. The “spillover” from the Bay Area to the rest of the country will be fascinating to see unfold — and perhaps it is also part of the solution.

Unpacking Cisco’s Last-Minute Acquisition Of AppDynamics

It’s like a trick play in sports, like a flea flicker, or fake field goal kick, or a surprise bunt and suicide squeeze — the list goes on and on, but for AppDynamics, the dramatic sports analogies are plentiful. Set to IPO this week and begin trading at or slightly below its last private valuation price, AppDynamics was just scooped up by Cisco in a $3.7B transaction. Let’s quickly unpack the key takeaways from the deal:

1/ A success 10 years in the making: The company announced its initial round of VC funding nearly nine years ago, April 2008 to be exact (link to press release). If we assume that both Greylock and Lightspeed split the round, and not factoring in any dilution or clauses, and if we assumed a $30M valuation at that time for the company on the high end, on a gross basis this would represent nearly a 123x gross multiple on that round. (In fact, according to CNBC’s Ari Levy — a darn good reporter — the VCs above each own about 21% of the company, presenting a $770M return for each, presumably.)

2/ Enterprise outcomes scaling: Many observers will comment that not only are there not many relatively new tech companies which have truly scaled like Google, Facebook, Amazon, etc., on the enterprise and B2B side, we have Oracle, LinkedIn, Workday (the last two as Greylock wins), and a few others, but not many that get into rarified air of having a multibillion dollar outcome that sustains. Given that trading for AppDynamics on the public exchange wouldn’t have been predictable, this allows investors to cash out immediately without waiting for the 6-month lockup and also juices employees’ holdings significantly.

3/ Cisco transforming before our eyes: Cisco is over 30 years old, a huge $150B company built around network architecture. Now with AppDynamics and their team, Cisco can offer its customers richer data and deeper business insights as the company transitions from a network and hardware centric company toward more software-defined (and, read: recurring SaaS and cloud) service and delivery models. Recall that just six months ago, Cisco laid off 5,500 workers (about 7% of its workforce) in an attempt to shed costs, free up cash, and reposition the company to take advantage of a software- and cloud-driven architecture.

4/ Another benchmark for SaaS founders/VCs: A hot early-stage SaaS deal can escalate in price quickly. For example, a large VC firm which invests in a hot SaaS company at a $300M post-money valuation may be hoping it turns into the 10x outcome like AppDynamics, but those are rare. Let’s now consider that according to their S-1 filing, the company boasted just under 2000 customers, many from the Fortune 500, and top line revenues of about $150M last year, so the public market might have valued them at 10-12x revenues, whereas the private market nearly doubled that implied value by being able to ingest the team, tech, and distribution advantage it has from its current market foothold. Like any big priced outcome, we should expect SaaS VCs to use this as a data point to both justify paying up for a great team and tech but also used to justify staying away from high-priced deals which don’t show a similar path.

5/ “The Art of The Deal:” This is the juiciest part of the story, to know how the deal went down. I wish I did know, but my guess would be that the execs and board members who are supremely networked at the highest levels of the Valley were able to run a dual-track process to position the company for IPO while also courting suitors (like Cisco, which boasts over $70B of cash on its balance sheet) to take a look now before it would become costlier and more of a hassle to acquire a public company. Just like LinkedIn opted to take the cash and live inside a larger web scale platform, AppDynamics made the call to take the same approach, taking what is presumably a majority-cash offer as a better deal than the pomp of ringing the NASDAQ bell later this week.

This begs the question — aside from true outliers like Airbnb, Uber, Snap, etc., will most (not all) companies that actually IPO be adversely-selected? An open question for debate as 2017 unfolds, but to the folks who built AppDynamics up over the last decade and the folks who crafted the art in this deal — well played, folks, well played.

Unpacking Atlassian’s Acquisition Of Trello

Wrapping up my first CES/Vegas retreat, I boarded the plane to check Twitter to see — lo and behold — that Trello had been acquired by Atlassian for $425M in a great, quick early-stage venture outcome. There’s quite a bit to unpack here, so I’ll just leave a few thoughts here but would love to hear more from the crowd about the implications of this move:

1/ Accidental Happenings and Side Projects: I do not mean to suggest Trello’s success and outcome is accidental, but rather that it doesn’t appear (from afar) that Trello had a normal birth or childhood. Trello was created inside Fog Creek Software, co-founded by Joel Spolsky, and then spun out in 2014 and funded by a mix of seed investors and early-stage VCs. Spolsky became CEO of Stack Exchange and was Chairman of Trello, and I believe another Fog Creek founder ran Trello. As it started to grow, someone else ran Fog Creek. This may be fodder for another post at a later date, as the genesis of this outcome seems both accidental and also a bit looser, more creative than the traditional business rigidity with which we read about in countless startup “how-to” blogs. (Fun update: Per my friend, Sean Rose: “when Trello was still part of Fog Creek, it was funded via Fog Creek employees opting to have their bonuses go to the project.”)

2/ Cross-Platform Architecture, Mobile Card Format, and Business Integrations: Slack launched cross-platform from day one, on web and mobile. I am not exactly sure of Trello’s history — it seems if they were web-first, mobile responsive, and then launched for iOS. Additionally, the interaction model of Trello featured boards (like Pinterest), which displayed nicely as cards in a mobile app. Finally, the Trello team had quietly built many storage and business process integrations into their offering, giving some of them away as a hook and charging larger teams for the privilege to stack them up. (Trello also didn’t have thousands of integrations, but enough to make customers happy — more integrations likely doesn’t mean they’re all useful.)

3/ Consumerization of Enterprise: This has been an “eye-rolling” buzzword, but we have to accept it is an apt descriptor. Following the success of prosumer designs in apps like Slack, Asana, Wunderlist, and others (more on this below), Trello’s design delivers a lightweight experience to users with enough infrastructure and power to fuel large teams across many different platforms. Trello simply feels like a consumer product, something that may have been designed inside Google or Facebook — but much better, cleander.

4/ Capital Efficiency: Assuming Crunchbase and my sources are correct, Trello is (relatively) a modern case study in capital efficiency. Having only raised about ~$10M, Trello seemed to not only grow its team (over 100) and its user base (19M+) quickly, they also marketed a three-tier freemium product that charged more to small businesses and even more for enterprise customers. In VC-math terms, Trello likely produced a 8.5x realized (mostly in cash) exit for its investor in less than three (3) years (which positively impacts IRR) and didn’t have to raise round after round of capital. Compared to some of its peer products like Asana and Wunderlist, among others, Trello has been relatively capital efficient relative to its exit value. (A reader notes that it’s spinout from Fog Creek also adds to its capital efficiency.)

5/ Enterprise SaaS consolidation: For years now, we have witnessed different varieties of M&A across enterprise SaaS, whether it’s an incumbent like Salesforce scooping up new products or private equity shops buying small-cap public companies, there’s more and more pressure in the environment for the larger companies to expand their offerings to grow, as well as financial incentives for buyouts led by managers who can profit from creatively rolling-up disparate end-point solutions. In a world where collaborative products like Slack or Facebook @ Work or Microsoft Teams are growing and/or boast infinite financial resources, other growing incumbents (like Atlassian) need to prepare for a long-term product and mindshare battle and scooping up Trello is a good step in that direction. As Fred Wilson predicted a few days ago for 2017, “The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.”

6/ “If I Can Make It There, I’ll Make It Anywhere” – Another solid exit for the NYC startup market, and there are bigger ones to come. Despite Trello being young and a SMB/enterprise product from NYC, it recently internationalized to a few non-English-speaking markets worldwide. As a bonus, while I don’t know the team, from what I hear from friends, Spolsky, Pryor, and their team are well-respected and seem to have done things the right way — their way. Congrats on building a great product.

Looking Ahead To 2017

It’s that time of year, a time to look ahead to the next year and wonder what it may bring. Earlier this week, I reflected on what I’ll remember from 2016. If this past year taught us anything, it’s that crafting precise predictions is a difficult, if not impossible, task. To that end, I view this annual post as more of a “Here’s what I’m expecting to happen that impacts my work in 2017” versus saying, outright, here are my predictions. (Re-reading my “Looking Ahead To 2016” post from last year, the part about VR was surprisingly prescient, yet not for the core reason I initially believed.)

I suspect 2017 will be like 2016, another year of things we couldn’t predict. I could tritely state, “we live in uncertain times.” But, right now, I don’t think it’s cliche or hyperbolic — we simply don’t know what will happen (normal uncertainty), but I believe that most observers are underestimating the amount of domestic and potentially international change that is floating in the air. That volatility in uncertainty will undoubtedly change how people plan or act, and that could have unforeseen ripple effects. To that effect, I’ve been thinking more about technologies, networks, products, and services which could thrive (or are already beginning to thrive, in a way) in a world of increasing uncertainty, and I’ve settled on this list, in no particular order:

Mainstream products and business processes become augmented with automation and artificial intelligence. I know the term “AI” is overused right now, but that doesn’t mean it won’t have an impact. A decade ago, Pandora’s algorithm would personalize radio stations for us, though we had to do some initial work. In today’s buzzword bingo, that could be labeled as AI by some, but what happens when our products at work will anticipate actions or act on our behalf, or when an assistant who has gotten to know me suggest topics to write about, or edits as I’m typing up a post like this, and more? There will be countless forms that fit nicely into world of increasing uncertainties, and this type of oversight and augmentation may help many users when making decisions or trying to optimize for the best solution. I suspect that we will see a significant uptick here in 2017.

The larger, incumbent VC firms have enough cash and leverage to weather uncertain markets. Many of these larger funds raised mega-funds across 2015-2016, many of them managing over one billion dollars in their latest vehicle. The investment period for those funds may grow longer, and these vehicles are set up in a way such that the LPs are contractually obligated to make their capital calls, even if a global financial crisis hits. That empowers these firms with a powerful line of credit if uncertainty rears its head and is indirectly good news for founders, too.

Startup exits will continue to flow from non-technology companies. Just as automakers and offline retailers opened their wallets to cut big M&A deals, I suspect that trend to deepen and intensify. We can expect technology to transform every industry over time, but in the immediate term, I try to think about industries which are under intense competitive pressures, perhaps even existential fear. That fear could motivate actions which make for a new kind of exit environment. I wrote a bit about this in my 2016 reflections post, which you can see here.

Digital currencies will be offered as part of a sophisticated investor’s portfolio. This goes beyond Bitcoin. With so much political uncertainty worldwide, coupled with advances in technologies like blockchain and others, the tokens/coins issues to help fund and maintain these products could generate huge returns for the early or helpful backers. People are already buying these tokens, of course, but I think it will go a step further and new types of hedge funds that have been created will allow for some indirect but high-beta exposure to a relatively new and obscure asset class. In an uncertain world, for creators and many citizens in less stable places worldwide, these new products present a vision for the future that excites many — while at the same time, it allows others to participate without permission by swapping currencies.

(Honorable Mention: Voice as a user interface. I suspect we will see much more and I need to write on it separately. I am not sure how it fits into the uncertainty theme above so maybe best for another post.)

Trying To Stay Grounded As A Writer And Investor

If you’ve read this blog over the years, you may have noticed a slight shift in topics discussed, mainly from technology products, services, and markets to eventually include my half-baked views on the financing environment for startups. I just scrolled through my archive in reverse-chronological order and noticed a ton of these posts for 2016, an increasing number in 2015, and going back to 2012-13, I was entirely writing about mobile product development, new startups, opening markets, etc.; fast-forward to 2016, most of my blog posts were about my experience as a fund manager trying to understand the market.

A personal blog hopefully should be a reflection of what the author is experiencing during that time. For me, it has shifted over a bit from just analyzing the market to investing in it. To that end, you may have scratched your head on more than one occasion, wondering why I was writing about about “LPs” (limited partners, those who fund small and large VC firms), or why I was sharing my own personal advice of building a path to Series A readiness, or why I would chronicle and interpret what some vocal LPs were saying publicly.

I didn’t notice this shift was occurring until recently, as I had someone catalog all of my posts into topics. Now with that analysis, some hindsight, and lots of wine, I realize what happened: I was writing more about the nuts and bolts of investing and the VC business as a way for me to interpret and share my own findings, but in the process, I focused less on the actual products, services, and new companies which should be the ultimate focus. In that two-year (plus) span, I met all sorts of limited partners, tried to learn about the nooks and crannies of fund management, and much more. In those moments, I needed the conversations, time, and writing to reinforce what I had learned about fund management, managing reserves, fund models, throttling, pacing, and tons of other things related to managing funds that can’t just be learned by reading online. It needed time to sink in. For someone coming from limited industry and investing experience, learning about the source of capital was eye-opening as traditionally these sources have been quiet, understated, and not public.

That has all changed now. Just like there is more competition among VCs to invest in companies, there is more competition among money sources to invest in investment funds to invest in startups and technology. As a result, we’ve seen this once-quiet part of the ecosystem get more vocal quickly. And, that created an opportunity for me to meet them faster, and learn from them more quickly. And, I wanted to document and share that learning with folks in the ecosystem, and especially for founders that I would work with — I try to always spend a few minutes as a deal is closing to share with founders how I’ve started my funds and what LPs expect of me, so that they have a chance to understand my incentives and motivations. Sometimes, founders have asked me tons of questions about this, and I’m more than happy to go into the gory details if they care to know.

Fast-forward to this week. I am on a trip with family where, for the first time in as long as I can remember, I have a good chunk of time off, I don’t have meetings for over two weeks, and I have the time and space to think about what I want to focus on in the future. One thought (of many) that’s occurred to me is that I want to spend more of my time and brain energy focusing on the actual products, services, and technology markets that I used to write about back on Quora in 2010, or back on TechCrunch from 2011-13, before I started investing. That said, I am also happy and proud that I was able to write so much about the business of VC and learning from other investors and LPs — they all enabled me to learn faster, to try and catch up to peers and elders who have notched many years of experienced.

Perhaps there’s a simpler answer: Before moving to the next level in this video game, I needed to understand the business of investing and learn some harsher lessons first-hand. It is in my nature to always try to learn, but there’s also a point in which one must one apply what he or she has learned, and that point is coming up — and as it does, I will look forward to writing and thinking about those aspects a bit less, and freeing up more of my own RAM for going back into the topics which started me on this journey, writing about how Twitter could leverage location-based data, or how Quora could reinvent search, or how Pinterest helped solve a discovery problem, or how Turntable was a fun product, and many more. I need to work hard to regain that point of view, that naivete, that excitement about exploring a new world and writing about it here. I hope 2017 will be a new chapter in this respect, and I hope you will hold me accountable to it.

Entrepreneurial Resilience And Creative Metamorphosis

Back in early 2015, mobile live-streaming hit the scene, with products Meerkat and Periscope taking different paths — Meerkat hit the market, raised a big seed followed by a Series A led by Greylock, while Periscope was scooped up by Twitter to be integrated into its platform as an answer to the forthcoming, home-brewed “live” product from Facebook.

Both Meerkat and Periscope teams built products to change the world, specifically how individuals could communicate 1:1, in groups, or as a public broadcast mechanism. Facebook, with its girth, appeared to use its distribution advantage and in-house product chops to win the space. Twitter helped out with an assist, taking far too long to properly integrate Periscope into its core clients, and not keeping up with Facebook in terms of both front- and back-end issues. And, Meerkat, built by the parent company, Life On Air, opted for the VC route, staying independent, going up against a Goliath and Twitter. As 2015 ended, there seemed to be clear winners and losers in the race to claim the mantle prize for mobile live video.

Or, so it seemed…

Raising a big round of venture capital from a notable firm for a hot consumer product will draw a lot of attention — both good attention and bad. After the hype peak, Meerkat streams just tailed off into the trough, left to doggy-paddle with its $10M+ in venture capital. A friend of mine who is very close to the company would remark to me that he wasn’t sure what would happen to Life On Air — a good team, perhaps not “great” in the eyes of a potential acquirer like Facebook. Tech blogs cast off Meerkat, and it just seemed like fact that the company would likely slowly wind down. It’s so hard to become relevant, even for a few days, and once a product loses cool, loses momentum, it’s basically impossible to regain it.

But, unless one spends a lot of time with a company, founders, and early employees, it’s hard to know what the team is made of. Now that we know Life On Air, in retiring Meerkat as a product, quietly built up a new live mobile video communications app, HouseParty. This new app builds on lessons learned from the Meerkat days alongside new features to cleverly lock-in and expand one’s social network. Nothing yet is decided, but Life On Air has done well enough to recently score a $50M investment from Sequoia.

From afar, one explanation for Life On Air surviving and finding this new space could focus on the creation and iteration on product feature development. Yes, surely the team must have terrific mobile product chops and the brass tacks to build a system that could handle. But, I like to think there’s another explanation — an explanation that’s less analytical, less quantitative, less growth-hacky. I don’t know the team or the individual players or the backstory, but I like to think these folks have special entrepreneurial gifts that enabled them to stand quiet and resilient in the face of brutal competition and the Tech-Twitterati hype vortex. (For a good, recent backstory on Life On Air, read this piece by The Verge’s Casey Newton.)

Money has been relatively easy to come by for investors and founders alike over the past few years. There is some good from this, as more people can enter the ecosystem, more founders can have a shot, and we have more product experimentation. There is also some bad, which I’ve chronicled before — and one of those bad elements is that when money is easy to raise, we can all take it for granted. More specifically, we can have investors who place bets that would break a fund model and be against their own LP interests; and we can have founders who can take money off the table before their own employees and investors, or not have an incentive to exit their company properly if they know another investor is just waiting to fund his/her next startup. Imagine the range of options before a team like Meerkat — “hey, take some money off the table!” or “Hey, just wind this down and here’s $2m for the next idea” and so on. Yet, they carried on and went forward on their quest to change the world through product development.

If there is one trait in others that makes me nearly choke up, it’s when I think about the focused resilience individuals and groups can demonstrate in keeping their energy channelled on the same project over many years. I think back to the unconventional rise of Whatsapp, or how ThredUp pivoted its way to profitability, or how Orchestra transformed to Mailbox, or how Bippy became Tophatter, or how a fund like USV was born from the ashes of Flatiron, and many more. An important distinction: An individual’s resilience across a career is rare, but even rarer is when resilience rears its head on a specific project, product, or company. It’s for that reason I felt compelled to write about Life On Air — I don’t know you, but I salute your entrepreneurial resilience and creative metamorphosis, and I will be rooting for you.

Here’s What I’ll Remember About 2016 Startups, Tech, and Investing

Q3 and Q4 of 2016 were the quietest months on my site, a true blogging drought. I apologize for that, but work and life got in the way. But, that will change soon, starting now, as I now have time and energy to get back into the swing over the holiday, and am putting together a new process to write on a more frequent basis in 2017. I hope you get something out of it, and of course, if you disagree with anything I write, please do let me know!

So, now 2016 is about to end. Good riddance? I’ll avoid the larger political storylines and stick to reflecting on what happened to startups, the VC market, and myself this year. Briefly, here’s what transpired and why I think it’s important:

Large M&A By Both Tech And Non-Tech Incumbents: While technology companies like Microsoft paid $26B for LinkedIn or Salesforce shelling out $750M for Quip, 2016 was a year in which M&A led by incumbents outside of technology world dominated headlines and surprised observers. We all understand intuitively that technology will flow, like water, to seep into every industry and reinvent it over time — what we didn’t understand was how much fear certain industries may feel, such as automotive manufacturers or traditional retailers, may have felt. To that effect, we saw Unilever shell out $1B for Dollar Shave Club and Walmart drop $3B+ for; while Ford Motors purchased Chariot and, of course, GM purchasing Cruise Automation for over $1B. There weren’t many notable exits in 2016, but these outcomes were huge and were concentrated wins for a small handful of teams and investors. And, while tech investors understand the game of selling startups to traditional technology companies, the specter of having a new buying class of non-tech incumbents presents both a challenge — most venture firms don’t have as deep network penetration into these industries as they do into tech — and a huge opportunity, one that could represent potentially even bigger outcomes than previously imagined. (Incidentally, this could in fact be accelerated with the incoming administration’s desire to ask U.S. corporations to repatriate overseas cash holdings, where the cash could be spent tax-free in buying new assets.)

Mobile Video As A Mainstream Consumer Behavior: Native SMS clients on our phones, like iMessage, or third-party communications apps like Facebook Messenger, Slack, and others satisfy many asynchronous use cases — we share our location, pictures, screenshots, emojis, and much more, and it all works without really having to use new apps. Even my parents prefer texting now over email, and they love email. But, there’s one big behavior missing from these native clients, a behavior promoted by Facebook with “Live” and Twitter with “Periscope” (though these seems to have been the 101st product feature they’ve flubbed), a behavior Snapchat brilliantly exploited with Stories, a behavior which Facebook ruthlessly copied via Instagram Stories, and a behavior Snapchat upstaged everyone with in launching Spectacles, their own custom eyewear/camera hardware. In 2016, we saw some of the biggest venture capital firms in the world plunk down some serious cash to invest in startups such as Tribe (Sequoia), Marco Polo (Benchmark), HouseParty (Greylock, Sequoia), and (Greylock, GGV), while other existing apps added group or live video capabilities, such as Kik and Facebook Messenger, among others. So, I can understand why new mobile products tuned for live video are attracting new users, and it will be interesting to see what new behaviors and networks emerge as a result of this small but interesting opening provided by traditional messaging apps. (Notable Mentions: 1/ Voice as an interface, a full year for me with Echo and Dots, and I cannot imagine going back; 2/ Pokemon Go with Niantic Labs, but that seemed to be less of a trend and more of an amazing phenomenon.)

Buzzword Bingo Alive, Well, and Actually Quite Real In Early-Stage Investing: I recently ran a Twitter poll where I asked the crowd which of the following technologies felt the most like the web felt in 1997-99 — blockchain, AR/VR (shorthand for augmented and/or virtual reality), AI/ML (potentially misleading shorthand artificial intelligence and/or machine learning), and others like voice interfaces, automation (remember bots?), and others. It’s not a statistically significant poll, but I was surprised to see each answer garnering roughly the same percentage of votes among the crowd. So, while we may hear all these buzzwords to the point of rolling our eyes, for many, these trends are real, tangible, and very close on the horizon — and in some cases, already in the market and delivering real value. Only time will tell which waves will barrel onto shore like social networking or mobile messaging or on-demand transportation and logistics did, to name a few. When these waves come, it will feel fast to us, even though we are expecting it. If you’re reading this, there’s a good chance that you already believe that you’ll dabble in buying various app coins, or that your glasses will display real-time information, or that an autonomous agent will answer your emails and learn your preferences and language behaviors, or that your young child’s first computing interface may be through voice and natural language. We know the buzzword waves will come, we just don’t know when. Those who do time them well will be rewarded handsomely.

More And More Money Flooding Into Tech And Startups: It would’ve been rational to assert that money should’ve gotten tighter and more expensive after the major stock market correction in Q1 of 2016; or at least after Brexit this past summer; or at least after one of the greatest political upsets in American history; or at least after the U.S. FED signaled the first interest rate hike (along with a few more for 2017)… but, no. The stock market keeps going up, flirting with the 20,000-mark, and more and more funds worldwide with very different motivations have a desire to invest (in)directly in the technology world, investing right into companies, backing new funds, providing private-market liquidity for fashionable stocks, and helping structure “special situations” that have arisen as a result of the hangover caused by the 2014-15 startup investing frenzy. As a result, we have more sovereign wealth in the Valley, more corporate money, more family money, which in turn create more funds, more funding rounds, and more… you get the idea. Money has been cheap for a while, and those who have it often want to park it in technology. I often wonder how lucky I was to move here in 2011, oblivious to the fact that, right around that time, the entire world economy was shifting to being driven by technological change, and that change had epicenters in Silicon Valley and across The Pacific in China. By luck, I get to live right smack in the middle of one and have indirect exposure and learning to another in my venture partner role with GGV.

In a nutshell, this is what I’ll remember about startups, tech, and investing from 2016. I know there’s a bunch of other big headlines (like Fake News — blah), but this is what I focus on and affects how I do my work. Soon, I’ll have more to share of what I went through personally and with Haystack in 2016 (maybe tomorrow night), and I will take a few days to think about what I’m preparing for in 2017. Stay tuned and Happy Holidays to you and yours!

Transcript: Chamath Palihapitiya @ Post Seed 2016

(Below is the full transcript from my fireside chat with Chamath on Dec 1, 2016 in San Francisco. Below is the full transcript, including audience questions. We covered topics related to the election, how the Bay Area may be treated by a new administration, changes in healthcare, the impact of social media and our elections, and much more. Enjoy!)

Semil: Yeah, so this is going to be a treat and Chamath, thanks for making the time to spend with us today. Happy Holidays.

Chamath: Thanks.

Semil: Until Christmas comes.

Chamath: I’m going to make myself comfortable.

Semil: Yeah, make yourself comfortable. It’s a fireside chat. I’ve had the pleasure of having a public conversation with Chamath a few times, and I try the technique every time where I… I’ll sort of feed him in advance, maybe want to talk about something, each time he’ll say, “No, let’s just go.” And so I actually created a little list of things, so I’ll let you, Chamath, pick.

Chamath: You should talk about hard things.

Semil: What we’re going to talk about first. I’ve got six topics. You choose first.

Chamath: Election date news, globalization, trade immigration, role of Silicon Valley, filter bubble, and tech news, Twitter, etc., sports and athletes. Well, I feel like one, two, four, and five are the same.

Semil: Here, I’ll start out with a more specific one.

Chamath: These are shitty topics. These are not hard.

Semil: Okay, let’s start out with… so I’ve listened to your podcast about the election. In as dispassionate view as you can, which I know is hard, is the election good or bad or neutral for Silicon Valley and tech?

Chamath: I think it’s a multi-faceted answer. I think in… well, I think broad based, I would say, it’s actually quite good. It’s probably the best thing that probably could have happened to us for the following reason, which is there’s a type of conversation that I think that’s happening now that probably wouldn’t have happened if Hillary had won. Part of it, I think, centers around this idea that we have cocooned ourselves into this nice, beautiful, little existence that’s frankly just detached from reality.

Then separately, we were never forced to really understand the scope of the problems that we should have been working on. The real implication of that is I think you’re going to see this probably in two or three years where when the capital cycles start to change. There’s just been so many really poorly constructed businesses and business models that are going to be under pressure. So I think all of those conversations can now happen because of the election.

So in many ways, I think it’s probably the most useful thing that could have happened. At a more moral and ethical level for a lot of people, I think it creates a lot of doubt and fear, and that’s unfortunate. But I think the net balances can be positive if you look at it that way.

Semil: And what do you think the new… what’s your view on the new administration’s relationship either with Silicon Valley or with the technology industry in general? Is there a role for The Valley practically to play?

Chamath: Yeah, I mean I look… I mean I think you can look at the President Elect’s tax plan. I mean it’s nothing but good news. If you actually are somebody… well, let me actually take a step back and talk about sort of the roles I see.

My big kind of like clarifying moment that’s happened sort of in the last few months along the following dimension. We do these really intensive portfolio reviews inside Social Capital where we go very deep inside of our companies, and part of that is because over the last five years we took a lot of these capabilities that we had at Facebook, which is where I and a bunch of my partners come from, and we built it into frameworks.

At first, we were worried that those only applied to Facebook. That all the things we did in machine learning, all the things we did in data science, all the things we did around data acquisition. But over time, we found that they applied to all these companies. We deployed in all those companies that we work with, companies at Slack and Intercom, companies you know, and we collect these artifacts. Now these artifacts have been building up over years, okay?

Incrementally what we did was we did..this is a long-winded answer, but I’m getting there…Incrementally what we did was we took all those capabilities and we stuck it on the Web. We built this thing called a “magic 8-ball” framework that we said, “Founders, get your shit together. Get your head out of your ass and understand your business.” So you come to our website, it’s like three or four clicks deep. But the point is, since we put these series of blog posts out, we’ve had, as of this morning, I looked, 3,400 companies run a magic 8-ball. The magic 8-ball is effectively GAAP for a startup, right, generally accepted accounting principles.

So if you’re a public company, how could you compare, for example, a public company in healthcare with a public company in oil and gas? Well, there are rules, and it’s called GAAP, and it’s how you basically report out your earnings, create balance sheets, and it allows you to make an apples-to-apples comparison across industries.

Similarly, we felt that that would be possible in startup time. What is the difference between an enterprise software company and a consumer network of that business? Well, today the easy answer is everything. They’re all different. Our perspective is actually they’re all quite similar. You just don’t know what to look at. So we tried to create this framework.

So the long story is we’ve collected this entire corpus of information. In a quarter, we’re going to actually release a benchmarking tool out to founders that will allow you to understand how you measure on these very deep nuanced metrics across thousands of companies. So how are you doing on LTV to cap? Is that important? Maybe it is. How are you doing on fixed-mount retention? Is that important? Maybe it isn’t. What about if you’re in the top 8%, 90th percentile in a certain category, and the bottom fifth in another category? To know that is really powerful because you can now start to fix your business in there.

So first thing in a portfolio review, and I’ve been thinking that something is amiss, and what I see is degrading sales efficiency in some of our enterprise SaaS businesses. This thing clicks and I go off, and I’ve been thinking about it, and I will come back to the following framework, which is there are really only three kinds of companies that get created in Silicon Valley. Two are valuable. One is a category of complete dog shit.

Category one is what I would call “bits to atoms.” So you’re building something in software that then gets translated and manifested in the real world, in physical atoms, right? So what are examples of … let’s use scaled companies, okay? Amazon is a fantastic bits to atoms company. It started off as completely virtual e-commerce, but now they build more things in the physical world. They’re buying boats and planes. They’re building robots. They’re building fulfillment centers.

Tesla. Another bits to atoms company. They have fantastic software and capability, but it manifests in batteries and engines and cars. Literally raw material comes in the front of the Gigafactory. Model X’s come out the back. Apple, for better or worse, translates really great software into a fantastic, physical product. SpaceX. And we’ve done a lot of these bits to atoms companies and what I’ll tell you about these companies is they’re fundamentally defensible because they are hard, they’re not obvious, and most founders don’t have the patience or the wherewithal, or the sources of capital caps to go build them. And so, as a result, they’re quite bleak.

Those businesses in this new administration will absolutely thrive because you’re going to have the administration that is going to be very pro-United States. They’re going to seek out companies and markets and businesses that basically promote Americans’ excellence in things. If you are building physical things… so for example, we have a company in Los Angeles that is constructing what will be the biggest, high-precision 3-D printer in the world. We’re using it to actually print the stage two rocket. So what is like a 65,000-part build will get reduced literally to two or three parts, which is preposterous, okay, but it’s happening.

But what I say is even if that works or doesn’t work, the point is we can create a renaissance in 3-D manufacturing in the United States. Airplanes, fuselages, wings, all kinds of things, propellers for windmills. You name it. To think that the current administration will not be all over that business is naïve. Of course, they would.

So the fact that technology businesses can actually create a renaissance of things that can build this stratification of job growth, right, not just $200,000 software engineers, but all the way up and down the stack, is a really powerful concept. That will win.

There’s another kind of category of business that I think is fantastic, which is what I call “sticky bits companies.” So what are those? Those are marketplaces. Those are network effects, and specifically in enterprise, those are top-down system of record sales companies, okay? So what are examples of those? Facebook is an obvious one. Snapchat is one. Slack is another one. Those are really, really interesting kinds of businesses. Why? Because they’re very hard to disrupt once they get going. There’s an inherent flywheel and momentum that creates a usability mode, or an acquisition mode, or some kind of a mode that we can’t necessarily just overcome with capital.

Then, quite honestly, there’s everything in the middle, which is everything else. What you realize is that’s a lot of companies. Some prior enterprise companies fall into that category and they haven’t realized it. I thought that they were fantastic because their revenue traction was like this, and I thought, “My gosh! This is great.”

Chamath: A million of ARR. $3 million of ARR. $5 million of ARR.

Semil: How does that change the strategy when you’re doing a portfolio review and have… do you communicate that to… how do you communicate that to the founders?

Chamath: I’ll get to that in one second.

Semil: Okay.

Chamath: So you hit a wall, and I think the reason is because those companies benefited from the fact that you could sell software with a credit card right? But it was naïve for us to think that all of a sudden somebody else could come in behind us with the same strategy to disrupt us. Before you had 10, 15 years to build a business. Now you have four or five years to build a business. That’s not enough time and you have to load your business up with sales and marketing, and HR, and PR, and product marketing and customer success. All this infrastructure that is secondary of what you really have to do, which is the fundamental core product market thing.

Those businesses, I think, are in real trouble and the reason why that’s in real trouble is, again, I think it’s somewhat related to what’s going to happen over the next five or six years. This administration has made clear, which I think is a fantastic thing, they are going to pump trillions of dollars, trillions of dollars. Literally with a T. Infrastructure spending, massive capital projects. That is going to be a renaissance of, I think, middle income job growth. But what it’s also going to do is going to inflate equities to a degree we probably haven’t seen in a while.

And so if you can get 15%, 16%, 17% IRR in the public market, why would you ever put your money into 10-year, illiquid venture capital for the same IRR? It doesn’t make sense. So I think what actually happens is the following. Bits to atoms companies thrive because there’s a manufacturing and US-first message that works. Sticky bits companies, because they’re capital light, highly sticky. The businesses in the middle must get very precise very quick because those companies will need to go and raise capital, but they will be faced with the following capital dynamic, which is that the public markets… like we have as much public market exposure as we do privates. I struggle everyday now to think about how I deploy incremental dollar into privates for the same effective return when I shouldn’t really just put it into the publics because I know the publics are going to riff. Because when President-Elect Trump forced $2 trillion of money into the public markets, I’m telling you the Dow is going to go like this. The S&P 500 is going to go like this, and it’s liquid.

So those dynamics, I think, need to be understood, and we typically don’t even think about that. We don’t technically think about what does Washington do or what could New York do to affect us? But that is what it’s going to do. It is going to change the capital cycle because it is going to change the risk reward. The last seven years have been that money is free, the public markets gyrate sideways plus or minus, and the only return – perceived return – had been in private, illiquid investing.

The public markets are quickly catching up. Debt is going to catch up because we’re going to see interest rates rise. All of these things have an effect in the real rate of return you can generate in your asset class, which, by the way, is not going up. It’s actually flat to going down, and the reason is because for the last eight years we have all this money flood in and what used to be a $5 million rate is now a $10 million rate. What do you think happens with that? It’s not as if the outcomes are also doubling. The outcomes stay the same. The prices go up, which means the return shrinks.

So these dynamics, I think, are now going to come to the fore and the next four to five years is how all of this stuff goes up. But that’s a very long-winded answer. But that’s why I think… that’s why I think Trump needs the Silicon Valley. It is a wakeup call, a sobriety check, on rational company building, thoughtful business model construction, strategic operational guidance of the business, and that is in short supply.

Semil: So… and that is a very interesting take and this topic is going to pique as interesting, but I was curious from your experience at Facebook, and in all the results and sort of, I guess you can call, controversy around Facebook, and filter bubbles, and stake views. What’s your point of view on that controversy? Is there anything Facebook shouldn’t do?

Chamath: So I don’t want to talk about Facebook, but I will talk generally about social media.

Semil: Sure.

Chamath: I owe everything to Facebook. I’m low to those guys. Let’s just call a spade a spade. They have a difficult job, almost impossible job, but let’s take a step back and not talk about that. Let’s talk about…

Semil: Let’s take it in feeds. So, Twitter, Reddit.

Chamath: Well, let’s actually talk about social media jobs.

Semil: Sure.

Chamath: It is fair to say… and I think you can always… you can actually put Google in this category as well. Social media, we’re using generated content, is modern feudalism, okay? So let’s call it that. You have 1.8 billion Internet-connected individuals all around the world that are fastidiously doing the work, doing the hard work for companies that now are tens of thousands of employees deep, not much more, to then monetize and then share that within themselves.

Okay, so for example, let’s look at Google. That’s a $517 billion market cap company. The core escape velocity was page rank, but how did page rank work? Page rank didn’t work because Google all of a sudden judged the quality of the search index. You did that work, and Google was just able to harvest that signal, right? So, you did the work. They built the $517 billion system.

Most social media UGC companies, you upload the content, you annotate it, you create great, brilliant experiences, you don’t get paid. The company that owns it gets paid. So the first thing we have to acknowledge is that there is a compact that has existed for a while that we probably didn’t anticipate. In that compact were some expectations, and now it’s all coming home to roost.

There was theoretically an expectation that us, as a consumer, was owed some amount of truthiness, quality, and SLA. That was never in the SLA. That was never in the compact. The compact was you’re going to do the work and we’re going to make the money, and that happened. All the incentive systems, and this is not a company-specific thing. This is an entire industry classification thing. That is just the truth of what happened.

When we look at what’s happening now, I think what we have to realize is those companies are in the job of making money. When you look at how products are constructed, so now let’s talk about feeds in general and let’s compare it to newspapers. So let’s take media of the past, newspapers or television.

They were time bounded or physical space bounded, right? So in the case of television, you had a 30-minute window. A show started. A show ended. There were blocks of time that were sellable. There was a message that it has to get truncated in a fixed-period of time.

Let’s take a newspaper. You sat down. You opened the paper on page one and it would end on page 10. So my point is there was scarcity in old media. So you have to now actually have an SLA around the quality of the content because it had a direct correlation to engagement, which then had a direct correlation to modernization.

We divorced ourselves from that expectation in new media because the first thing we did was we eliminated scarcity, right? There’s a reason why feeds are infinite scroll, guys. There’s a reason you can’t get to the end of YouTube, right? And the reason is because it’s directly correlated with modernization, right? There is one single economic formula that guides all of social media, which is clicks times ECPC. That’s it.

So I think we just need to be really intellectually honest about what that compact is. We should have never have been expecting truthiness. But if you do want truthiness, now I think is the time to demand it. But then the question is: What are willing to do if you don’t get it? That’s also a very… that’s a really difficult question that I don’t think we also don’t know how to answer right now.

So I think social media in general has been constructed in a model that is purely about the feudalistic modernization in capitalism. This modern form of something or other, that is just a fantastical business model of all times, right? If you add up the entire market capital of all UGC companies, a trillion, $2 trillion, right, globally. How many total employees? Less than 300,000, 400,000. That’s preposterous. Two billion people generating $2 trillion in value shared by 200,000, 300,000 people.

b>Semil: Do you think anything changes in either how any of the companies present content or how users behave or this is all just sort of…?

Chamath: So that’s what I’m saying. So now I think we have to now shift and say let’s have a more first principles conversation about what we now know is actually happening. There is a modernization formula that dominates, and we have to ask ourselves, “Are we willing to compromise usability and quality of the product as it is today in order to get some of these other things?”

So as an example, there’s a person that I think, for me, I follow a lot because he gives me the most truthiness of my network, which is Joe Lonsdale. Joe Lonsdale, to me, is my sort of like keystone of truthiness. That guy finds unbelievably clear, clean, thoughtful content and he shares it both on Facebook and on Twitter.

Does it change the usability of my product because I now don’t look at my feed as much? Instead I can just search for Lonsdale, see what he’s posted, and read that stuff. I do that. Does it mean I miss a bunch of stuff? Yes. Does it make me more detached from the people around me because they’re like, “Hey, did you see my great, awesome cat dressed as Luke Skywalker for Halloween?” I’m like, “No, motherfucker. I could care less about your cat. I was reading about whatever Slate Star Codex had to say because Joe Lonsdale thought it was important and I trust Joe Lonsdale’s filter.”

So I have changed my mental expectation of what these channels should give me. It makes me less superficially connected to the people around me. It makes me more introspective and thoughtful about my worldview. That’s not necessarily a fantastic formula for friendship. So how many people are willing to make that tradeoff? Are you going to make that tradeoff? Do you expect the services you use to make that tradeoff for you? That’s a very slippery slope.

So I have no clear-cut answers, but I do think another solution to this is that there needs to be some of these products or sites – both offline or online – that need to be more operated for public trust. I think the most simple way to get back to a model of scarcity and content value that relies on a SLA is to basically remove this primary driver, which is eCPC times number of impressions, which means if it was funded to not have to make money, now it could theoretically, theoretically at least focus on not generating clicks and views, but theoretically relaying content. There should be sources like that.

ProPublica maybe is one of those things. Slate Star Codex actually is quite good, and there’s a bunch of these things, but they’re hard to find, and they’re really super long-tail, and there’s no efficient way to share it once you do find it.

Semil: So now to get you in a more insular topic, I spent a couple days in New York after the election, and I talked to a lot of old friends and folks in the industry. They’re all reading The New York Times, and they all seemed very, very shocked. So I started to think about well, even in Silicon Valley or media, there is an echo chamber. It might be on Twitter. It might be in the various blogs. Is there something that’s analogous to what happened… on The Coast, for example, in early November, so what may happen in terms of the technology media landscape? Is our information filtered to a point where we don’t see what’s happening?

Chamath: Yeah, of course. Oh, our heads are so far up our own asses it’s unreal. Yeah I mean it’s not good, but it’s the truth. I mean, for example, let’s go back to how I started. There are three kinds of companies, right? Bits to atoms companies, sticky bits companies, and everything else. If you actually go back and if we tried to run a classifier on the last eight years, and last quarter of a trillion dollars of invested capital, what do we think we’d find quite honestly? We’d find very few of those bucket one and bucket two companies, and we’d find a tremendous amount of things in this bucket three company.

Part of what that speaks to is the fact that when things are easy, we pursue them because there’s a fast feedback loop. Part of what… why that’s happened is because we love fast feedback. It’s no longer okay to win in 10 or 15 years. For most people now, in this perverse way, that seems like the end of life as we know it, the idea that one could work for 15 years on something. It’s crazy. How could that be? It has to happen in three years.

Instead, I think to myself, “Doesn’t it seem plausible that if you can build $5 billion in value in two years?” Value, okay. “That could also just get destroyed in the same in the next two years?” Doesn’t that stand to reason? If it was that easy for you, wouldn’t it be that easy for somebody else to come in behind you? Of course.

So the thing is we’ve gotten trapped in this culture, this iterative feedback loop of now, now, now, now, now. So this is a fantastic moment in time where we can actually say, “Man, we have to divorce ourselves from this stuff.” The world needs us to help do things that are hard. But too much of our time gets unfortunately redirected into the things that are easy and obvious. The reason is because there’s an entire infrastructure of people that want to basically congratulate you and reward you for short-term, fake progress. None of it is sustainable ultimately, and especially when there is a capital cycle.

Most entrepreneurs right now, in just the volume, didn’t even go through 2007, ’08, and ’09, let alone 2000, 2001 and ’02. I’ve been through both of those cycles, and I’m telling you I don’t think we really appreciate what it’s going to take to survive when the risk premium adventure doesn’t justify the capital. I’m telling you guys we’re headed in that direction.

Semil: This is a good counterpoint to that. I’ve heard for maybe the last three years, really smart market observers and professors, saying, “The capital is starting to dry up, dry up,” and you do feel it in certain following rounds, but it seems like at the same time there’s more and more money coming in. So if that continues to happen, does that mean that what you’re predicting maybe will take longer to play?

Chamath: No, no. This is… look. I think you’re going to have probably two years of market highs in the U.S. equities. But things are lagging, right? All of… money is always a lagging indicator. With respect to revenue, it’s always a lagging indicator of value, and inflows are always a lagging indicator of risk allocation. The thing is you’re going to look back and in these next 18 months, it may be the case that that $100 billion fund that SoftBank was able to cobble together is the top. You don’t know in the moment. You only know in hindsight.

All I’m saying is this is not meant to depress you. It’s meant to clarify what you’re doing. The problem is two-fold. One is the courage and the instincts to do things that may not necessarily go like this. But, my gosh, I’m telling you. If you can compound 20% a year for 20 years, I’d take that 100 times out of 100 than this little thing. Okay, because this thing, honestly, as fast as it works, it can just die.

The other thing, though, is that then you need to find sources of capital who also understand that. At least what I’m trying to vocalize to you is that there are some places out there of people who realize that working on hard things is better than working on easy things. Working on things that are sticky that are not obvious, that may take years and years may be okay, because once they get going, they’ll get going forever. Oh, by the way, the ability for you to actually feel like you have the social capital to work on something for 15 years and it be okay is absolutely okay. And you to not live… like the filter bubble you need to break is the one in San Francisco, which is like, “Oh, everything happens in three to four years.”

Semil: Do you think that there’s more…

Chamath: By the way… I’m sorry. By the way, if you’re not quick, look at the last group of people you recruited and go and ask them how long they were there in last few jobs they were at. I bet you it’s two to four years max.

Semil: Real quick. If you have questions, just line up here. We’ll ask questions.

Chamath: The reason is because we conditioned people to think about this. It’s like, “Oh, everything has to happen in two to four years. Otherwise, I’m out. I’m going to go to the next company. Then I’m going to go to the next company. Then I’m going to go to the next company.”
This kind of mercenary approach to either being founder or raising capital, or being an employee is a destructive thing, but it also is a path for us to be completely out of touch with what really needs to happen. There’s a reason why SpaceX is going to be a $100 billion company. But, guys, it’s taken them 14 years. I mean because it’s hard.

Semil: Do you think that is a local mindset that gives an opportunity to other locations? Is that specific to this area?

Chamath: It’s a decision. It is a decision. It’s a decision to listen to what Gurley has said a lot, who, I mean he and I are quite aligned on this generally. What I’m maybe saying now, for whatever its of value, is to make hard decisions and then take the time to find the source of capital that it needs. I think that really matters. Then separately, that’s at this high level. But then practically speaking, to use metrics, to use data, to use things like our magic 8-ball to just show you the way. Then to be thoughtful about experimenting.

Here’s an experiment that we’re currently running. As an outcome of this view, what I said to the team is, “Can you please go and figure out how we could maybe abstract all the sales and marketing from all of our big-tier SaaS companies and we will stand up a company and embed it into our growth team?”

Initially I get the same feedback. “It’s not possible. Only I can sell my thing.” I’m like, “Really? I mean it seems to me Salesforce is selling 90 things better today than they did 10 years ago when they were selling one thing.” IBM sells 150 things.

Chamath: Microsoft sells 9,000 things, and they just seem to be getting bigger and bigger and bigger and bigger. “So you are fucking bullshitting.” So what if we could actually just take all of the sales motions and generalize them and abstract them so that now a company can be even more leveraged and focused on their voting market. Now we can have best-in-class people and we can actually staff those people all over the country. They can be in Ohio. They can be in Michigan. They can be in the Central Valley.

You can’t staff a sales organization here, guys. 200,000 fully-loaded OTE for a startup trying to sell a product for a few thousand-dollar ACV. That dog doesn’t hunt, okay? You don’t need to be a magician of Excel to figure that out. So these are basic unit economic-level discussions are not happening in upscale.

So what happens? You get some ARR growth and you raise more money, and then you unprofitably acquire more customers, generate more ARR growth, raise more money. That’s not sustainable.
I think the thing we have to realize is there has to be different, more creative, thoughtful ways of company building. There needs to be more practical, quantitative incentives, and you have to break this relationship with this theoretical, romanticized notion of how success works in terms of time. It doesn’t take four years. It may take eight and it probably takes 12, so buckle in. Capital. Doing more with less is always the better way. Sobriety around all of the things that matter versus the things that don’t. I mean, this is the last time we talked about it. kind bars and exposed brick walls walls don’t matter. It will not be correlated to your success.

Then, working on hard things. Because the fast feedback loop, while it feels good, because there’s a dopamine rush initially, you must internalize that it creates equal and offsetting risk that somebody else can compete with you to do the same thing, but their motivation will be to do it cheaper, faster, and better because that was your motivation to beat the incumbent that first allowed you to get that momentum in the first place, right?

Semil: Great. So we… we’re going to take some questions. If you have a question, just step up to one of the mics, introduce yourself, and a brief question, please.

Audience Member: Hi, Chamath. Victor from You talked a lot about looking at hard problems, Trump as well. I’m just curious what your views are on healthcare given all that’s happening.

Chamath: There’s been a couple of things that have been really negative tailwinds. Sorry, negative… there were some massive tailwinds in healthcare that have now become massive headwinds, and I’ll explain a couple of them. One is at a state level and one is at a federal level.
So at the state level, there were a lot of businesses that theoretically could have existed, but we’ve had California enact two things that are actually constructively quite negative. I’m not here to debate whether you agree with them or not. I’m just temporarily relating some facts.
Number one is around licensure of certain parties and business models that are in the periphery of healthcare. Not the hospitals themselves, but whether it’s a school nursing facility, whether it’s like the at-home care, there’s a whole bunch of downstream things that are involved in the healthcare lifecycle and keeping people well that are now more regulated than they were.

Secondly, there’s been also some very specific rules around compensation, minimum wage increases, and the way they do account for overtime and overtime payment. What that’s done, unfortunately, is a practical matter in California is there’s a bunch of healthcare businesses that frankly now cannot exist. As a result, what’s happened is a bunch of black market activity on Craigslist.

Second is I think the… I think not knowing what the President is going to do around Obamacare and the ACA has slowed down and caused Medicare and CMS, things that are related to it, whether they’re insurance kinds of businesses, whether they’re reimbursement-related businesses, I think are also now in deep, deep trouble.

Now let’s talk about some tailwinds. But there are still some structural tailwinds that exist. Number one, theoretically people are actually going to have more money in their pocket. There’s a direct correlation with chronic disease and people having more money. So whether we… obviously, we don’t like this, but the reality is as we have more money through the tax cuts and everything else, diabetes will go up. Cancer will go up. Asthma will go up. Obesity will go up. So those diseases will still, unfortunately, continue to compound its deleterious effects on society.

Number two, there are just these massive personnel shortages that exist within the healthcare system that are not well serviced today. Nursing being probably the most important one. So that’s my kind of like short-term view is that we’re quite nervous about what the impacts to reversing some of the Obamacare policies are, but the good news is we actually had very little exposure to the Medicare and Medicaid type of businesses, and we still are in businesses that have some reasonably good tailwinds, particularly around chronic disease, that we still think has tremendous value, no matter what.

Audience Member: Love your insights get me super fired up as an entrepreneur, so I appreciate it. So I’m a San Diego company and we raised… we just raised a round of capital, and one of the things that helped us closed is we really communicated to our investors that we want to build a sustainable business. We reached cash positive this summer. We’re now trying to shoot for a series A or shoot for these crazy evaluations. Are you seeing companies here in The Valley just holding chase to valuations versus companies outside in markets that kind of get lots of attention?

Chamath: Yeah, I mean I think that what’s happening is that there has been this culture where people… like look, you know how they say there’s this… one goes this phrase like history is written by winners. But the real thing is there’s a narrative fallacy, which is bullshit version of history, which is history is written by [losers?]. The thing is if you’re going to write a story in hindsight, obviously, you’re going to project yourself as this strapping, muscular winner, good-looking, I can dance, I can dunk, I did everything right, right? You romanticize it. You bullshit. The problem is the end plus, first person that hears that thinks, “Oh, my gosh! They must be telling the truth.”

So the effect of all of this is that you have had people chasing valuation because they think, “Oh, valuation means something.” It means nothing. There’s a fantastic investor who told me, which I love this idea. Haven’t you ever wanted your company value at billions of dollars ever? He’s like, “I want it valued at zero until the last possible moment before we get liquid.”

He’s right. Why? Your employees make more money. You make more money. You take my solution. You’re more sober in your application. All of those things are good things.

So to your point, yes, I do think we’ve kind of been chasing these wrong value metrics. We use to chase registered users. Then we realized it was now. Then we realized it was down now. We’ve been chasing valuation, and we chased the post and we think it means something.

Guys, there’s been less liquidity in the last five years than ever. None of these valuations mean a goddamn thing. They mean nothing, and we take them so seriously, and we pat ourselves on the back and we think something real is happening. It’s the blind leads the blind until these things get out, and the way to get out is to get profitable. There is no way to get out. So, yeah. Get to profitability. That’s just awesome. I wish you the best of luck.

Audience Member: Okay, so it seems that what you’re attacking or being contrarian about is, in fact, all the people in this room and the start an ecosystem that is attempting to scale entrepreneurism. The thing about pursuing things that are hard is that that many less people are going to be able to do that. That most of these ideas about these little schmati, stupid ideas and y-combinator loves that shit.

Chamath: Well, wait a second. Hold on. I think that that’s not fair and I’ll say this. So I saw Sam yesterday. That’s not true. Those guys… for example, like this space printing company was out of YC. The reason we’re involved and the reason why… he actually will tell you. He had to create a separate path for those companies because it is so hard for them to get any attention. It just… all I’m saying is it takes a different capital cycle. What I’m telling you is there are actually more profits in those hard businesses than in these businesses.

So what we need is actually a reframe of how we think about value. If you did that, there isn’t… it doesn’t take a $100 million to print this robotic arm business. The 3-D printing business we’re in was at a $7 million check. It’s no different than any enterprise Series A company.

We just did this fleet of autonomous drones in Alameda. Those drones that are in the water circumnavigating all the oceans, measuring fish stocks, oil spills, climate change, was an $8 million A. My point is their go-to markets are different. The way they construct the business is different and it takes a different kind of investing lens, and I think it is possible to have, and we just have to create incentives that celebrate those people so that, to use your language, it’s not just the shamatzy stuff that we pump up and we say is what… because the person far away that’s not here, when TechCrunch gives 50,000 page views to the schmutz and one page view to the drone company, guess what they’re going to have? More schmutz.

That same person can probably build the next fleet of drones or cure cancer, and there are capital sources that can fund it. I’ve got… we have a lot of money that we can deploy of hardship.

Audience Member: All right. Typically might need expertise and experience, and I don’t have to tell you the people who are over 35 probably can’t even get in the front door. That there’s…

Chamath: Yeah, that’s so true. Totally, dude. I totally agree with you. Look. Listen, my whole thing is for every person that drops out, which is fine and good, there is so much value in working at a company. I worked at AOL. I worked at Facebook before I started my startup, and I felt way more prepared. I was a 36-year-old founder/CEO. I’m glad I waited till I was 36. I had so much more knowledge because I learned from the side gig. I learned from people that were better than me. I also learned from people that were not as good as me about all the things that I shouldn’t be doing.

So to your point, I agree with you. This is what I’m saying. We need to divorce ourselves from this romanticized narrative… like fallacy that we’ve created that is this two dudes, 22 years old, dropped out of school, coded some schmatzy thing. That’s not what success is about necessarily. There are some great examples of that where they’re creating real value, but there’s all of these other things. There’s 40 year olds. There’s 50 year olds. There’s 35 year olds. There’s men and women. There’s people doing all kinds of things that are not easy, and we have to find a way of telling the world that this also exists, and this stuff is worthwhile because I suspect that the long-term solution for us being less tone deaf and for us to actually be a constructive part of the solution is to celebrate with these people.

Audience Member: Right, and so my own life, my own experience has been that software, the purpose of software is to actually change the world, and if you can make some money along the way, great. Unfortunately, in this world, you’re only as good as your last IPO and how much money you made, and a lot more money was made off my company than I made. A lot of people made a lot of money, but in fact, we wouldn’t have multimedia if I hadn’t started that company.

So at the end of the day, software is… it shouldn’t be about waking up in the morning saying, “How much money can I make?” It should be these hard issues that I’m trying to solve, and yeah, I’ll make some money along the way. That’s kind of been my philosophy.

Chamath: Fair point. Absolutely, absolutely.

Semil: Last question here.

Audience Member: Hey, Chamath. Josh Venga Airspace Systems. So you talked about solving our problems, hardware, software, high-speed physics. This drone is in very high speed.

Chamath: Bits to atoms.

Audience Member: Yeah, you got it. So one of our challenges is it’s all about talent, right? My #1 job is to see if the best of the best talent we can get on board. Having a lot of challenges in that because you’re fighting the Teslas of the world, the Facebooks of the world, the Googles of the world, and we’re going to Canada. We had a lot of great talent from Waterloo. You’ve been talking about it.

And so the problem is that we’re worried about the immigration. A lot of these engineers and professors that we’re grabbing from Canada are worried about this new administration, all the talk about yanking green cards, and things like that, and what are you hearing about struggling Visas and…?

Chamath: To be honest, I haven’t really… I haven’t heard anything yet, but I think what’s fair to say is I think that there’s a view of the American exceptionalism, which I think is actually quite constructive, and at the end of the day, it seems… I could be wrong, that Donald Trump is quite pragmatic and wants to winner.

I’ll just use a sports analogy like… if we want to talk about sports for a sec… When sports teams win is when they recruit the best. What’s amazing is I can get these people in. They come from all different backgrounds, and you get them organized. You get them running on the same strategy and they win championships. If they’re really good, they win multiple championships.

At some very basic level, our America has the ability to be unlike any other country in the world. It’s the literally sharing with the best of the best. I think that’ll be a decision that the government will probably make constructively because I think if you take American exceptionalism to be extreme, why wouldn’t we want to be the best? If that includes people who want to legitimately be here, contribute their intellectual capital and monetary capital, we should find a mechanism and a way to do that. So I suspect that he’s going to be pragmatic about that stuff.

Semil: Well, as predicted, that was great. Thank you very much, Chamath. Thanks, everyone, for watching and we’ll do it again some time.

Chamath: Happy Holidays!

Myriad Money Motivations

If you still follow me on Twitter (sorry if you still do), you may have noticed that I’ve been working out some thoughts related to the impact of how much money is not only in the Bay Area today, but how much more may come in. Yes, I know that global interest rates are low and that some unforeseen event could make people pull back, but the scale of money looking for direct and indirect investment is so large, it may take a few huge events to rattle those markets to the point of clawback.

If there’s a lot of money here, then, what are the various motivations of those money sources? And, how do those motivations potentially affect and/or alter the scope of what startup companies and early-stage investors have traditionally done?

Financial Motivations: When the investor, like traditional VC firms, are looking purely to maximize the financial return. At the end of the day, VC firms are judged some standardized fund metrics like IRR, distributed cash, and so on. As a variant, we also have investors with “Direct Motivations:” Some folks who traditionally didn’t have access directly to companies would use VC firms to help gain access, to help them attract deals and pick good deals, and then manage those investments to exit. Over the past few years, many of these investors who were once indirect are becoming increasingly more direct, bypassing the fees and gating structures of VC firms to invest right on the cap table of a startup. These are still financially-motivated investors.

Strategic Motivations: Some investors, like corporations with cash on their balance sheets, are looking for earlier access to cool companies, teams, and technologies — I have seen them starting to co-invest as early as the Series A (alongside a VC firm they know or recognize) and even in some cases leading what has traditionally been a Series A round, in terms of size. Usually in these cases, the financially-motivated investors (above) have passed on the opportunity, as these rounds can at times contractually restrict the startup in some way.

Deal Access Motivations: As I mentioned those with “Direct Motivations” above, some of those money sources are investing in new, smaller funds to pick off deal flow before it gets to the traditional financially-motivated VC firms, many of which have grown over time to the point where they need larger outcomes. Some of these smaller funds (under $50M) have investors (LPs) which prioritize “turning over lots of cards” in order to discover deals earlier in the company lifecycle and potentially pick off the next winner.

Educational Motivations: Like those investors who are strategically-motivated, some are interested simply in learning more about a certain industry (perhaps focusing on a vertical fund in a certain industry) or a specific geography — for instance, an LP from overseas who wants to learn more about the Seattle startup ecosystem, or the space startup ecosystem, or maybe the space startup ecosystem in Seattle.

Diversification Motivations: Outside the U.S., other countries with growing or shifting economies may have an incentive to seek out diversification (such as currency diversification), where that local money is looking for alpha outside its own borders.

These myriad motivations add up to help create an environment in the Bay Area that’s different from the past. Not all money sources are motivated by pure financial return — depending on the source, they’re looking for a different kind of alpha, for deal flow, for earlier access, for talent, for companies to acquire (but not at VC prices), to learn more an industry or ecosystem, or to diversify their cash positions. And these myriad motivations of the money sources may change what their managers elect to invest in, how often they invest, and so forth. I need to think more on this topic and its ramifications, but wanted to share in case others had an opinion. I’d be interested to hear your take. Thank you.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

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