Career Archives

Transparency Is Coming To Venture

Today is a big media day at Haystack Fund! Just kidding, but for some reason, previous discussions I’ve had with reporters and media all seemed to surface online today. As I was reading through them and figuring out how to share them, I noticed a theme running through the conversations.

Why all at the same time?

If I had to pick a reason, it would revolve around the idea of transparency in venture. Now, I don’t mean transparency for transparency’s sake, as many people leverage it for their own branding or marketing — and there’s no harm in that. For me, I am thinking about the future of how private companies are discovered and get financed. Part of that future, I believe, will be operating in an environment with more regulatory oversight over how reporting is conducted in the private sector. That means, how do companies report to their venture investors, and how do venture investors report to their investors, the limited partners? And, as more information is shared, how do all parties ensure the information isn’t shared more broadly without a record of who has keys? These are all pertinent yet thorny questions, and with political change in the air, I see these coming.

That theme comes out in the conversations I’ve had below:

1/ Katie Benner of The New York Times: Katie is a friend and a darn-good reporter. She has written before for Fortune, The Information, Bloomberg, and now The Times. She also wrote a great piece on how employee options work at Good Technologies, shining on a light on a topic that affect so many in the ecosystem. Recently, I spoke with her and am quoted in her article today, titled “Making Startups’ Financial Data Free And Open,” which appeared in the July 25, 2016 Times.

2/ Guesting for StrictlyVC: Each summer, I get the pleasure of writing for StrictlyVC while my friend Connie takes a much-deserved break and searches the shores of coastal Maine for rare sea glass. Last Friday, for my column, I wanted to share more details about what I’ve learned in raising three small funds. You can read the FAQ on StrictlyVC here. For some reason, I get a lot of questions about it, and I’ve committed to sharing the lessons I’ve learned (with a grain of salt) here in an open way. The angle of transparency I’m going for here is that it’s really hard to get the funds up and running. Just this weekend, I talked to a friend who has been a founder and had a huge, notable exit as an investor, and is still having trouble raising a small fund. More on this below.

3/ Interviewed by Harry Stebbings on The Twenty-Minute VC: You have probably heard one of Harry’s podcasts. This guy is a machine when it comes to creating, editing, and distributing podcasts. And, he really prepared for our conversation. In the discussion, we chat about topics such as: defining “founder-friendly;” branding in VC, experiences in raising a fund, and more. I want to stress again that Harry did a great job editing this down to 20 minutes and you can listen to my soothing voice, but not when you’re driving, please — you may fall asleep at the wheel! (Link to Apple Podcast here.)

Venture Capital as a Hyperlocal Game

A few weeks ago, Chris Mims of The Wall Street Journal wrote a great piece on the struggle between entrepreneurial energy spreading across the country while the dollars allocated by LPs in venture capital funds increases in concentration in the Bay Area. Specifically, Mims reports that while the share of U.S. VC dollars allocated to startups in L.A., NYC, and Boston roughly amounts to 20% overall over the past two decades, the share going to Bay Area startups has ballooned from around 30% two cycles ago to over 50% in 2016, when we saw many large funds scoop up massive LP dollars.

This is a touchy subject, because for a variety of reasons, the Bay Area isn’t the most welcoming place considering the costs and cultural corners, yet as the country emerges from the Great Recession stronger in aggregate, the “cap table” of that rebuilding has shifted dramatically to the coasts (and a few coastal cities in particular), and especially, to the Bay Area. Additionally, before I begin this post, I want to disarm the chorus in advance — I know that companies can be built anywhere, and that there are plenty of examples of VCs in the Bay Area investing outside their market, as well as great VC firms which are headquartered outside the Bay Area. There’s an advantage to being local, and those who breakthrough outside this chamber deserve extra credit, for the odds are more difficult.

The point of this post, however, is to share some observations on how location — either via proximity or distance — drives so much dealmaking, and then to share some ways to overcome geography. I’m reminded of the lyrics of a Tina Turner classic: “What’s love got to do, got to do with it? What’s love but a second hand emotion?” Just replace “love” with “location,” and the answer is: A lot.

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Why is location so important to LPs, those who invest in VC firms, and the VCs themselves?

1/ Only way for VC firm to exit is IPO or exit (or selling shares in future rounds). IPOs are rare, and becoming tougher given the startup narrative to stay private as long as possible. Exits are also rare, and most of those big exits (per CB Insights) occur in California. If location drives M&A, location will also then impact where a VC allocates dollars. (Location also helps drive a closer bond between VC and founder, which helps in cases like special liquidity events for an early investor to sell shares, among other techniques.)

2/ Proximity affords VCs more time to track a founder or investment. Whereas the seed world moves on quick decisions, I’ve seen many VCs track potential investments for about a year, either waiting for the timing to be right and/or to gain a better picture of the company and team. Here, proximity drives familiarity and eases the fears of an investor who may not otherwise have enough time to get comfortable with the risk presented to them.

3/ LPs want their GPs to be active managers of their investments. It’s possible yet still hard to be an active VC or Board Member when the company is a 6-hour flight with a connection away, but yes — I know — many do it. But, that right has to be earned. If you look at the folks who do this well, they are considered rainmakers by LPs. And, there aren’t tons of them.

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Ok, if this generally the reality, then what? Here’s how I briefly breakdown what startups at various stages should consider about Bay Area capital:

Seed – If you’re outside the Bay Area, raising seed capital in the Bay Area is hard. Seed capital is mostly institutionalized now, meaning those investors are investing other peoples’ money, and in order for them to get a return, they need to see a large potential multiple on what is a smaller check, and one where their stake will get smaller with success via dilution. For founders in ecosystems like LA, Boston, NYC, Seattle, Chicago, seed ecosystems have emerged thankfully to pick up the slack. Those funds can theoretically be more “active’ with their investments by being local, and theoretically help prepare those seedlings for future rounds, where the Bay Area may come into play. For those who are pre-seed or in the seed stage without much traction, it is really hard to raise a seed round in the Bay Area because local investors here have so many options to invest locally.

Series A and Series B “Classic VC Rounds” – Because of the economic incentives of traditional VC funds (firms managing $150m to $1 billion or so), those GPs have to allocate their dollars to the best economic opportunities they see, regardless of location. It is already quite difficult for a Bay Area company to get a Series A done, so imagine how that risk increases for something out-of-market. That said, and no one will say this publicly to you, but the bar is exceptionally higher for a Bay Area VC to make an out-of-market investment. Yes, they will miss good companies (as I wrote last night about Dollar Shave Club). Luckily for founders, non-Bay Area VCs will invest out of their own market, as we saw with Dollar Shave as well, or with east coast firms that invest in Europe, and so forth. For those founders who are outside the Bay Area and seeking a classic Bay Area Series A or B round, the formula to score one is to (a) demonstrate exceptional growth, where you will be offered multiple term sheets, or (b) invest in a long-term relationship that eases the fear of location in the eyes of your target VC.

Growth VC, Pre-IPO or Pre-Exit Rounds – At this point, more people want to give you money than you have room to take, and regardless of your location. So if you make it here, location doesn’t matter.

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This is a tough subject to write about. I know it’s unfair, especially as so much of the rebuilding from the Great Recession is seen through the opportunity of building a business. Everyone wants to be Zuckerberg or be on Shark Tank. Everyone wants to be CEO or an investor. And while it is possible, location drives a lot of it, and that particular location isn’t an easy one to physically crack into.

I myself have flirted with the idea of not living in the Bay Area given the increased traffic, congestion, and cost of living, but then I see the power of the local network effect and get nervous. So much of what I do is a local game. Hyper-local, in fact. I’m in awe of those who do it outside the physical network because it means they are even stronger. We moved back to the Bay Area in 2011, and I wonder how hard it would’ve been even if that was pushed back a year. As I’ve shared with you all here, I’ve had a very hard time finding a space in the ecosystem and generally believe my proximity to the epicenter helped me increase my “surface area of luck.”

I wanted to write this post because this issue has come up a bunch with founders I interact with outside the Bay Area, and I know reporters or larger VCs won’t write about it because most reporters don’t understand the nuance to the financial issues like Mims detailed out and the investors don’t want to cut off any potential flow of deals.

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There is a silver lining, however: With billions more people coming online worldwide over the next decade, with new geographies emerging with their own capital bases, with traditionally underrepresented minority groups begin growing into the dominant majority, and as larger Bay Area firms grow even larger fund sizes, the types of opportunities created over the next two decades may look different than what occurred over the last two decades. And, thankfully, there are plenty of LPs and VCs (even in the Bay Area) who see the opportunity and are positioned to take advantage of it — or have been taking advantage of it for quite some time (more on this in a future post). You’ll hear about those returns over the next few years.

The Story Behind My Investment In Myra Labs

This is going to be a fun story to write about Myra Labs.

About a year ago, my good friend Nakul told me I should meet this guy spinning out of Bloomreach — Viksit. I happen to know one of the founders of Bloomreach, who quickly pinged back to endorse Viksit as one of his top engineers. We met up last summer, and at the time, he was developing a bot for chatting inside Whatsapp. We met for coffee in Palo Alto. A few weeks passed, and we met again, and during that time, Viksit had single-handedly built integrations into other chat apps, made friends with folks who were working for Telegram, and had somehow smiled his way into developing some relationships with more closed mobile messaging platforms.

We met a few times and while I initially didn’t think it would work at scale, Viksit always had a non-obvious and insightful rebuttal to any areas of doubt. He is relentless in this way — and I will come back to this trait. As the summer ended, I hadn’t gained enough confidence in the specific application (going directly to consumers with these bots), but I had gained confidence in Viksit. This was right around the time I started my Fund III and was writing what would be larger checks (for me, relatively). I committed to Viksit that I would invest and also open my entire syndication network to him. I gave him a strong recommendation and made a ton of intros. I was searching my email for the exact date and text: August 31, 2015. In the email, I wrote:

MYRA

Round: $300-350k open on $5m cap, 20% discount; Small round, just me, a Waze co-founder, and early Whatsapp eng, and the two founders of Bloomreach, where he was previously (this may be best-suited to individuals).
Background: Myra is an intelligent assistant tied to a phone number and virtual machine for each user. Viksit himself has already built integrations with Whatsapp, FB Messenger, regular SMS, and Slack.
Risk and Fine Print: I know what you’re thinking – “uh, another bot. Won’t the clients just own this like Moneypenny and FB?” So, I dragged my feet on this for the same reason for weeks, but Viksit handled every strategic question I pummeled him with for weeks. He is a very deep systems thinker and strategist, in addition to being an incredibly productive engineer. I know his former boss (Bloomreach CTO) very well and he also is investing and remarked on his drive and intellect. He’s been obsessed with all the messaging platforms, and that’s essentially why I am investing — the sheer size of all the world’s messaging clients and their restrictive power and influence over how those billions of people will use the web is super interesting to me.

Then the round started to break down. Viksit and I had a number of hard chats. I don’t mean to imply that I could save everything as I have a very small fund and rely on the broader network to syndicate and co-invest. As I replay those conversations, I know Viksit was nervous and there wasn’t much I could do except give harder advice on how to keep going, raise less, lower the cap, etc. To his credit, Viksit stayed with it. He eventually caught the eye of one of the best seed VCs out there (as well as this little, new enterprise tech company called “Slack”), and after a month of deliberation, got a larger seed round with a fantastic investor. It took much longer to happen, but it happened.

That’s the relentlessness I referenced earlier in the post. During those difficult investor meetings, Viksit slowly digested the feedback from the community — mainly that the opportunity to go direct to consumers inside siloed native messaging clients would require too much permission and, therefore, too much friction. Viksit shifted course and moved Myra away from direct-to-consumer and, instead, focused on empowering developers, big or small, to build conversational interfaces in a platform-agnostic way. In this manner, when messaging clients break out, or when new interfaces (like voice) emerge, Myra is flexible and extensible enough to handle the terrain. Additionally, their architecture can recognize similar users across applications, so that you (as a user) don’t have to worry about resubmitting your preferences within each silo each time. The machines actually learn who you are within the context of your interaction. (You can read more about Myra and link to their site here.)

In the time that we’ve gotten to work, I would say that Viksit and I have the most “tough conversations” I have with any startup. It’s partly because we are comfortable with each other and I have now known him for a year, partly because we are both prone to debate and argue in a mild yet relentless manner, and at times, it has led to one of us getting frustrated. I am sure he’s frustrated with me right now in reading this! But, ultimately, we are friends and have built up trust, as well, and he can really create a rich product and evangelize his vision to a degree that’s rare to find. I’m lucky to be a small part of it all.

Since that initial email above, the attention toward bots has exploded, this past April 2016 to be exact. I wrote about the craze here. As I surveyed the market, I was lucky in retrospect to pick Myra early because it is in the #2 category I outlined (“picks and shovels”) and, so long as they can woo developers to build with them and help them scale, the company can grow as the more activity goes inside messaging clients and interfaces, and/or becomes more conversational in nature. Ultimately, no matter what does happen, I know the Myra team will always bob and weave their way to the best opportunity — and I want to publicly congratulate Viksit on not only putting up with me, but also staying the course during a challenging market for fundraising. It all paid off for you.

The Story Behind My Investment In ScopeAR

Back around the holidays in 2015, one of my LPs (who is also a friend) sent me a note about a YC company from the most recent batch, S15. I had been at YC and saw the company, but hadn’t been thinking about the “AR” space. I know they’re unrelated, but previous to this, I had made one small investment in a VR infrastructure company, but it isn’t a space I would claim to know well. As a few months passed, however, I had picked up interest in industrial software and robotics, so learning about ScopeAR again proved out to be excellent timing.

Discovering and investing in a company like ScopeAR is yet another case of where the founders guide me (the investor) to learn about their technology and market in real-time. Within a few email exchanges and conversations, it was apparent to me that Scott (the CEO), David, and Graham would be easy to work with as co-founders. On top of this, I liked their enterprise and/or industrial focus (which fits within my themes), and it was immediately clear how their solution would save companies money from Day 1.

Luckily for me, by the time I had invested, ScopeAR had already won the business of companies such as Boeing, Lockheed Martin, and Honeywell, among many others. ScopeAR boasts two products to date — WorkLink (a platform to create smart instructions), and Remote AR (powering remote collaboration via AR) — which help their customers increase savings from industrial hazards, operator errors, and operational inefficiencies.

When I invested, the main interfaces were largely considered to be iOS or Android platform devices. In a serendipitous turn, I was invited by friends at SVB to a small drinks reception and conversation with Satya Nadella, who during that chat specifically called out Hololens as a major core focus area for the company in enterprise settings, and that in such settings, AR might be the first technology to be adopted on the platform. Once I heard this, I ambushed him (in a friendly way), called up the ScopeAR site on my phone and he deftly introduced me to his SF-based Corporate Development Team — I was able to follow-up and got the team in touch with Microsoft on this initiative.

That’s about all I’ve done so far, and as I write out this story, I realize just how fortunate I am that my friend tipped me off to the deal, that enough time had passed for me to develop an interest in the space, and the founders were extra nice, kept the same terms from their round, and let me slide into the deal. They did me a huge favor, and for that I am grateful and want to work extra hard for the team. I recounted this story last week at an industrial hardware meetup I co-hosted with Lemnos, and we joked that the deal was sort of like a “booty call” at the end of the round. As they say, a seed round is never closed — and thank heavens for that.

It is crazy that within a year of ScopeAR’s time in YC to now, AR has gone from a concept to something millions of consumers interaction casually on their phones, either through Snapchat or Pokemon Go, among others. In a work context, it is easy to envision how processes can be improved by using connected cameras with information overlaid on top. Given the way the winds are shifting, I look back on this investment decision with a smile. It’s easy to imagine a world in which ScopeAR’s current customers use new platforms and go deeper into various industries. And, lucky me, as I was able to hop on the train just as it was leaving the station.

By Bits And Pieces, Giving Back And Paying Forward

Over the past few months, a number of people I know well but maybe haven’t seen in a long while have resurfaced in life. It is great, and I can’t explain the timing. Maybe it’s summer. Maybe I have more time and am not traveling. Whatever the reason, it’s a nice change of pace. And, this wave has had a consistent theme — many people are thinking about what they should do next.

It feels a bit funny that old friends are coming to me in their quest for their next stop. For years, I was on the other side of that conversation — hundreds of those conversations. And, people here gave me tons of their time and ears. It would take me a year of just focusing on helping others to pay back that debt. So, even in a small way, it feels nice to be part of another’s counsel. By bits and pieces, I get to give back (to those who have been immensely helpful to me) and to some new folks.

Just a few years ago, I may have tried to come up tons of “solutions” when I got these kind of questions. But, now, I try to listen to what my old friends and new acquaintances are saying, both verbally and their non-verbal queues. I ask lots of questions and then I try to actively listen. Yet, I end up giving the same bland feedback, which goes something like this: “I am sure you’ll do great at whatever you pick. The challenging part of this — it seems — is what to pick to focus on. At least with me, I’ve found that over the last three years, as kids have entered the equation, and more companies are in the portfolio, and inbound emails compound, I’ve found that with each passing day, time becomes more expensive. That feeling also compounds. And, if I wasn’t energized by what I do for work, it would be a disaster. What energizes you?

It’s a tough question. For years, people would ask me that, I had nothing to say. Yes, it is a luxury to be able to pose that question to yourself, but focusing on it and cracking the nuts makes life more interesting, and that is something to strive for. The derivative question, then, is: In the absence of knowing what energizes you, how does one figure it out? The best answer I came up with is: “Pay attention to play.” It’s easy to network all day or surf job boards or all day, but that is a linear endeavor. What if, instead, one just tries to do what they want to do, and takes the time to pay attention to what captures their attention? It does take some time, but for those surfing across different entrepreneurial experiences, sometimes we get a break in between and we can ask ourselves this question.

To make this work, one has to be open to ideas that challenge one’s identity or preconceived notions. It also requires a level of intellectual honesty to say, for instance, “Yes, I want to do ____,” which has no direct connection to what you have done in your past. People may judge your choice, or talk about it with their friends after congratulating online for it. But in the end, the energy which comes from self-direction and self-motivation helps protect against general boredom, which is its own prison. Given that framing, it seems like a wise question to pose to ourselves every now and then, if for anything, as a reality check for how we spend precious time.

Notes From The Field: Summarizing Dozens Of Meetings With M&A Teams

Last December, I got into a longer conversation at a social event with someone who had lots of corporate M&A experience in tech. She said something to me that lodged into my brain: “Generally speaking, we have no interest in VC prices.” As that quote snaked its way around my brain, it dawned on me how, when considering the VC “business model,” M&A is one of the two traditional exit routes and critical to making the VC model work. Of course, this should be obvious, but replaying this quote in my head made me think, perhaps, it was forgotten during a generational transition. And, as companies stayed private longer before IPO, and as valuations rose beyond what many companies were willing to pay, I thought to myself: “I need to more people who have done this work.”

So, I spent the first quarter of 2016 trying to meet and learn from as many corporate development and M&A groups at various consumer tech and enterprise tech companies in the Valley. People were very gracious with me, making time to meet face to face or at least by phone, and being quite candid in their responses. Of course, I would never share the details of any conversation and/or tie them to a specific company, as strategies differ quite a bit between companies.

As I’ve reflected on those conversations, I’ve tried to find parallels among different companies and distilled the key takeaways as follows:

1/ Core, Adjacent, or Irrelevant: Acquiring companies are mostly interested in acquiring small teams (not taking on huge CapEx) where those team members will easily integrate into a core area for the company (say, for Facebook, live video) or an adjacent area that could be emerging over time (say, for Google, open source software). Companies view small acquisitions of talent here as an accelerant to traditional recruiting done 1 by 1.

2/ Types of Landings: Larger, material acquisitions over $100m (that need to be reported by public standards) are a different matter, which I’ll address below. For those under $100m, most of them are for specialized talent (say, cloud infrastructure experts who land at Amazon), but the smaller acquisitions of, say $20-30m, are not as common anymore. The landings are a bit harsher, say $1M or so for the key staff at a startup — i.e., not everyone on staff. Often these offers are below what the startup has raised on a theoretical “cap” in a series of seed rounds and extensions. (Some companies mentioned to me that they wanted to meet small teams who were just raising seed rounds to offer them a buyout right away — I actually referred one company to an enterprise buyer after passing on the round and they were scooped up by the company despite having trouble raising their round!)

3/ Pulling the Strings: Who makes the larger acquisitions happen? Either strong product execs from these companies, or the executive leadership itself. Benioff famously told his M&A team that he wanted RelatedIQ, and the team executed to fulfill that desire. Catching the eye of a CEO can move the needle in a very different way; for the product teams, it usually requires a bit more strategy and time, which I’ll address in #5 below…

4/ Anchored Prices Are Irrelevant: I mentioned earlier that many soft landings offers come in below what the seed stage company has mentally anchored around re: their price or value. This can continue and magnify once a startup has taken on Series A funding and beyond, especially over the last 4-5 years. In short, M&A departments have essentially zero regard for these prices, but the psychological anchoring around these prices from companies and their investors — not to mention a board’s ability to block an offer — can put the company on a path to nowhere.

5/ Relationships Matter: In #3 where I mentioned product leaders at companies holding court in M&A direction, those discussions usually start off with a relationship between the high-level execs and the particular product team. That requires a relationship. It could be a BD deal, or an API integration, or simply a cultural fit. The marketplace approach many companies have used to raise their rounds to date won’t really work here. This was an interesting finding because so much of the startup narrative is to avoid partnering with companies — and while there’s no doubt truth and limits to this, it also can grease the wheels for a better landing down the road.

“Having The Hard Conversation”

Earlier this summer, I was catching up a friend who’s at an early-stage fund. He said something which has stuck with me, paraphrased: “We try to tell ourselves all the time — we need to be the folks willing to have the hard conversation — with everyone.”

My wife is counseling psychologist and, I remember when she was in graduate school, she brought home a book called “Difficult Conversations: How To Discuss What Matters Most.” She wanted me read it, and of course, I resisted, but I did sneak in some passages. Of course, she was right — I should’ve read it, but the point was delivered: The ability to start and maintain a difficult conversation is essential in life as it is in business.

Now with some time logged on the investor-side of things in startupland, it is remarkable how many conversations I engage in as an early-stage investors. I am constantly communicating with people of all stripes — new founders, current founders, company executives, business executives while conducting diligence, other investors in my syndicate or downstream, members of the press, people who ping me cold, and so forth. The number of conversations I have on a weekly basis make it so that on the weekend, I go into a shell and hide to recharge.

Out of all of these business conversations, the most intimate chats involve founders that I’ve made an investment in. In the limited time I’ve been here, the culture has been to treat all interactions and communications as “founder-friendly.” That seems like the right thing to do, not just with founders but with everyone (right?), and also makes business sense — an investor’s reputation is his/her most important asset, and treating people directly or indirectly disrespectfully is difficult to hide from. People will find out.

Despite this common sense, the cult of “founder-friendly” may have also morphed into something beyond the realms of respect, honor, and civility — there has also been a loud, consistent narrative over the past few years that most investors aren’t helpful, that most can be a neutral or net-negative contributor to the ecosystem. Surely, not everyone is an angel. This has snowballed in many cases to the point where “founder-friendly” has transformed into a mantra of the “founder can do no wrong,” to the point where others in the ecosystem walk on eggshells. The risks are real — for instance, as I’ve written about before — sometimes investors don’t have an incentive to participate in difficult corporate governance conversations out of risk of contaminating their deal flow or creating de-positioning fodder for their competitors in the next competitive deal.

I was interviewed for some podcast you’ll never hear about this topic, where the host described me as a “founder-friendly” investor. I interrupted the host and said, “I am a company-friendly investor.” Of course, I am investing IN the founders to build the future they envision, but part of that commitment (I hope) is to build a company that takes care of its responsibilities beyond founder equity and terms — to be a steward of its customers, its employees, and people that matter to their ecosystem, however small.

When I started investing, I was lucky in that most everything began to work out of the gate fast. That’s not been the case over the last year. As I’ve been in conversations with founders, if I felt like something should be examined, or challenged, or questioned — I’ve done it. I have grown more comfortable with reaching out and broaching a more difficult subject. It can’t be done right away — it has to flow as part of a natural conversation, and that often requires more frequent communications. Of course, it’s done with as much respect as possible , but some topics are impossible to bring up without being unfriendly in some way. Thankfully, all of the conversations have been productive, even if they’re hard, and I’m glad that I’ve mostly picked people who are open to and willing to have difficult conversations.

To be clear, this is and should be bidirectional. I want founders to give me homework, or tell me to go hunt down something for them. I enjoy that work and wish more would take me up on it. If I’m not living up to a promise in their eyes, I want them to tell me. And, that goes for other people I work with, co-invest with, and so on. Feel free to have the hard conversation with me.

I wanted to write this post after reading a post by Rebekah Cox titled “Higher Standards.” I always follow Cox’s writings, and while I don’t agree with everything she writes, her incisiveness and keen insight into startupland is incredible. She not only addresses topics others are often too afraid to touch, she tackles them in her own style and uses a few well-placed words to do. In this particular post, Cox challenges everyone in the ecosystem to challenge everything. She writes:

VC is incapable of raising the bar and enforcing higher standards. It’s up to founders and startup employees to insist on pushing themselves even harder. To craft and execute against wildly ambitious visions for the future. To fall ass backwards into potentially revolutionary discoveries. To tinker and play…Push back on everything, even—especially—yourself. Every drop of common knowledge you fail to question. Every time you find yourself reading from the script of approved answers because you know doing so will not cause any trouble. Look with suspicion upon every comfortable moment. Find your own vision for the world and test it. Then, test it again and again. The world pushes against you? So what? Push back with your full force even if it’s only to see what will happen. No one has the right to be an amateur in the matter of mental training. It is a shame for a person to grow old without seeing the beauty and strength of which the mind is capable.

I love this passage so much. It is so true on many levels. Investors cannot build the future and can certainly not police the ecosystem, but everyone should be willing to push others we work with to be better, to have harder conversations, to help out and move forward. Cox’s rally cry at the end is not to just founders — it’s a challenge to everyone in the ecosystem to foster this kind of atmosphere by having hard conversations with those we work with and ourselves. Sure, some feelings may get hurt along the way, but we’re all adults here. It’s something I’ve been thinking on in my role and an area I want to get stronger in.  Thanks to my friend for the quote and to Cox for her powerful writing.

 

The Side-Hustle Into Venture

Last weekend, a number of people shared the first-person account of millennial “side-hustling” that was published in Quartz. You can read the article here. It’s not that great of a piece, nothing new or earth-shattering is revealed, but I’d wager it was shared so widely because people have experienced a dose of this themselves, whether they like to admit it or not.

In the article, the author talks about “side hustles” as a lifeline for many professionals in the economy under 35, coming up at a time after the 2008 financial crisis, after sharing economy networks arose and 1099s took the place of full-time work. Eventually, the author contends, the side hustles run out and folks will be forced to grow up, focus, and take on responsibility.

The article also reminded me I’ve been “side hustling” since high school. If I think through the phases of my life:

8-15: If my work was “school” at the time, there was mowing lawns, shoveling driveways, etc.
16-22: School got more serious and into college, was working in various kitchens (where I developed a passion for cooking).
22-28: This is when the side hustling really started, working nights as a bartender in NYC or working as a bartender for private parties in the Bay Area.
29-33: To defer some grad school costs, I worked as a researcher for various professors across the university and research departments. I would hustle to find pockets of scholarships and hunt them down, a few thousand bucks here, a few thousand bucks there. I finished grad school in June 2008.
34-present: Little did I know The Side-Hustle Muscle would not only help me here in the Valley, it was a critical lifeline for me to survive, stabilize, and get my bearings. It wasn’t paid, but I became a regular contributor to TechCrunch for a weekly column and TV show I started; and I started consulting with a handful of VC firms on Sand Hill Road as a way to learn the business and meet more people. I was lucky that, while I was working at companies, my colleagues not only supported this — they encouraged it.

And, here we are, over 20 years later, and the side hustling mentality isn’t coming to a stop — it’s just now more focused in a particular area (that I really enjoy). Rather than being dispersed, now the hustle remains but is channeled into the pieces of building a managing a small fund — how to find LPs, how to report, how to sift through deal flow, how to work with companies and founders, how to work with new investment partners, and the list goes on and on. The hustle continues, but finally got streamlined.

All this said, I wouldn’t sit here and say “this path led me here!” or recommend it to other people, because there are many downsides to taking this path, too.  I wanted to cut in directly, but that option wasn’t on the table. It’s risky and I’m still paying for it in a way. It was never by design — I was always gunning for a regular full-time job but they never arrived. The side hustle is not one I would openly advocate for, as well. I’m lucky I have a chance to cut into a field I truly enjoy — and I am grateful that hustle provided enough fuel to get this far.

 

The Story Behind My Investment In Tempo Automation

About a year ago, my friend in NYC Joel pinged me about a company he had invested in. It was a short description, but I took the intro and met Jeff, the CEO of Tempo Automation, for coffee. We had a great discussion, and he had the right background in hardware, automation, and systems. My shortcoming at the time was that I didn’t totally understand his market, so I kind of asked to just leave the conversation. Jeff pressed me over email and now, looking back, was incredibly gracious and thoughtful in making time for me.

In those subsequent conversations, I saw Jeff’s measured aggressiveness emerge (I mean this in a good way) and he took the time to teach me about his world. I am looking over the email threads right now as I’m writing this, and it’s embarrassing that he put up with my questions. Nevertheless, through his relentless and thorough answers, I finally said “OK.”

Today, Tempo Automation, one of my companies in Haystack Fund #2 announced their Series A led by Lux Capital, where I am close with the partnership. The round was actually done way back in 2015. The news about their announcement reminds me what an unorthodox and lucky story it was in terms of how I got involved with the company.

That turned out to be a good decision on my part. What I didn’t realize at the time was (1) the company sits at a very dynamic point in the ecosystem for manufacturing and (2) Jeff, the CEO, is an absolute machine. As software has invaded the industrial manufacturing process (like 3D printing — which I’ll write more about soon), Tempo Automation’s factory harnesses software to make the business of hardware move faster. Tempo started by automating the most cumbersome piece of the process (logistics) and will expand into other production processes as they grow, driving time and cost savings to hardware developers. This frees engineers designing hardware to focus on what they know best and not have to become logistics experts, as well.

Other investors noticed as well. Tempo ended up going to from “seed to Series A” faster than any other company I’ve been fortunate enough to seed, and I’ve been around some fast ones. Part of that is because investors are starting to recognize the scope of the opportunity in the industrial space, and part of that is because the team’s leadership focus in pursuit of building the company. Now with a team of 25 and growing, it is humbling to look back on all my questions I peppered Jeff with. It is my job to ask questions and listen, but it’s also my job to lean in without perfect information and try to help out. I’m thankful they gave me a few chances to do so.

Reflections On The Startup Funding Climate As We Slip Into Summertime

Disclaimers: This isn’t a doom and gloom speech. There’s tons of opportunity out there. And, this is mainly focused on consumer markets. Also, this post is a little long in the tooth. Please forgive me. I haven’t had time to write with all the little kids running around my house, but I’m devoted to changing that this summer. More soon.

It is fashionable to hold a contrarian position. If everyone believes in X, believing that things will unfold in a different direction than X — if chosen wisely — can be the key to public acclaim, riches, and legacy. Of course, there are many who subscribe to a contrarian script and are wrong — only a very select few end up being right.

In terms of startups and investing in them, it is fashionable to say, even in times of uncertainty or financial restraint, that “great companies can be built at anytime.” It is a contrarian position, in opposition to combinatory external forces — in today’s case, geopolitical risk abroad and at home, financial risk in the form of monetary policy and liquidity crunches, pricing risk as seen in the dislocation between public and private markets for technology stocks.

So, we must ask of the contrarians, are they right today? Is this, indeed, a good time to start a new technology startup? Of course it is. Time doesn’t matter. There will always be new technologies to bring to market, new teams forming that can drive value and change the world. In this narrative, many often cite companies like Airbnb, Uber, Whatsapp, and other companies started around the financial crisis of 2008 as examples that, in fact, it’s possible to start great companies during dire times.

What’s missing from that storied contrarian stump speech, however, is the fact that, at some point early in the lives of these companies — they found a growth vector. They may have spent some money acquiring customers, but they didn’t rely on paid acquisition entirely. Since 2011, when these three companies began to take off and caught the eye of some of the best venture firms in the Valley, the timing coincided with (1) a rush of cheap capital flooding into the technology startup sector and (2) a restructuring of the global economy toward technology and networks.

The result was that, in an effort to chase the growth curves of the companies cited above, investors started investing even earlier in the life of a company, sometimes just in the people themselves. Traditional venture capital firms grew in size and morphed their DNA to go beyond active board management, building batteries of portfolio services in the same vein that a private equity shop would bring with it to a portfolio company. There’s nothing wrong this shift, and many companies and LPs believe it was the right way to get the inside track on an investment (a competitive arms race) and the right way to help manage an investment beyond the limited scale of a single general partner in a fund model.

One issue, however, is that era of larger institutions making multi-millionaire investments before looking at data (including growth curves) is coming to a halt. We thought, back in January and February of 2016, that the time had arrived, but not just quite yet. At seed, companies are still being funded left and right, and even some Series As occur, but most of them are closed on the back of some type of demonstrable growth vector. It’s pretty clear for the past few months that while there’s enough to seed most people who want it, the next round requires bringing some meat to the table. Most don’t have it. They’re just chasing growth. It’s a noble pursuit, but the lifelines to support these experiments has shortened.

Put another way, there’s a slight decrease in the number of experiments being funded (it’s still huge on an absolute basis), and the amount of time allotted to those experiments will shorten. As a result, I believe the following will be ripple effects:

1/ Fewer Seeds: We’re going to have fewer quality seed deals, relative to before. Most investors downstream won’t notice this because they will only see the quality that bubbles up. People those who play in the very early stages already have been living it.

2/ Slower Rounds: As a result, the rounds will take longer to unfold. The only triggers that make a round move ultra-fast are when one of the very few credible leads makes a move and those who syndicate fawn over them, and/or when the founder knows how to play the fundraising game. The rest are much slower.

3/ Extending Runway: As most teams will spend more time fundraising and have read enough about market conditions on blogs like this (sorry), I suspect founders will be more careful about burn rate, especially as it relates to vendor burn, office rent, and most critically, headcount.

4/ Financing Extensions: These are harder to get done. They actually require real relationships with the earlier investors. I’ve participated in a few of these recently, and I’ve let many just go. The ones that work are involving investors and demonstrating progress in an authentic way. These also take a long time to get done because some people get hung up on price.

5/ Point Break: After a startup gets through 1-3 (or 1-4), it’s judgment time. Is there a Series A with a lead investor who joins the Board? Is it time to look for a strategic acquirer? Or is it time to call it a day?

And, this is where things in the future will get much clearer. One could argue it already has. There are still Series As happening, but definitely not as much. Nowhere near levels from 4-5 years ago. More founders are open to the idea of landing the company for acquisition, but even though we read about the good stories in the press, most won’t find soft landings like this. I spent all of the first quarter this year meeting with corp dev departments and M&A teams at all the big consumer and enterprise companies. They have mandates to buy companies, but probably not at the rate you’re thinking of.

To underscore, this is not doom and gloom. This is all very healthy for the ecosystem. I am still investing and excited by new stuff. But about 18 months ago, I started investing in entirely new stuff — I am excited to write more about those companies this summer as I catch up on my writing and on life. I started to invest in more frontier technologies applied to industrial and commercial settings — sensor networks, software for 3D printing machines, commercial drones, and technologies that could play a part in helping people deal with climate change, rare diseases, or even large regulated industries like insurance.

As we slip into summer and investors slow down a bit (yes, despite what they say — they do!), I suspect the fall — like every fall — will be a frenzy fundraising pitches, and that after a summer break, the investors downstream will be looking for simple evidence: Is there demonstrable momentum? Or, is this is a hot team in a big market? Or, is this on the frontier of what could happen in the next decade? If you’re a founder or early investor in a company preparing for Fall 2016, it would be wise to ask these questions and, depending on the answers, to plan accordingly.

Haystack 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