When a founding team is raising institutional money — either an institutional seed or Series A/B round — those founding teams may have a slide in their pitch deck which shows the competition in their market or sector. This is often referred to as “the competition slide.” Yet, while many investors do want to know what other incumbents and upstarts are competing in the space, oftentimes the startups pitching miscalculate who their real competition in that moment is. For instance, say an education marketplace company is about to pitch a firm for their Series A. That team may assume they’re competing for investment dollars against other education marketplaces who seek money. It’s slightly true, yes, but what is often more true on the ground is that startup is actually competing with every other single investment opportunity an investor sees on a daily or weekly basis.
I’ll illustrate with an example. September and October are historically months where many GPs at firms will strike for a Series A investment. A GP may have capacity for only one deal. So in that two-month period, that GP will tee up intros, take referrals from the summer, build up his/her own list, and start meeting teams, talking to customers, and seeing how different investment opportunities develop. While that GP may be taking a deep dive in a specific vertical, my observation is that’s rarely the case — instead, they’re spending time with folks they are naturally drawn to and those who have been given strong referrals and recommendations. As each week passes, they’ll go over their notes, think about the “shape” of an investment ($5M to own 10% vs another deal where $10M gets me 20% ownership, etc.) and refining the list down to a few candidates. Rarely are those final candidates from the same specific sector.
So, yes, that education startup does somewhat compete for its business with other education marketplaces, but in the early-stage throes of getting financed, that education startup is often competing with a diversified hodgepodge or cohort of startups who are also seeking funding at the same time from the same investment firms. The “competition slide” is important, but at same time, the investor is building his/her “cohort slide” — and that presents the real competition.
Here are my quick takeaways from the deal (assuming this all converts and an acquisition happens in full). This is one of those posts I write where I will cite and link to a bunch of my previous work on the topic. The posts are short so I’ll just link instead of quoting text:
3/ Continual Beverage Consolidation: Every quarter, a favorite microbrewery is scooped up by a larger beverage conglomerate. Something similar has happened in coffee with Intelligentsia and others. Now with Blue Bottle, Nestle has a powerful new channel to expose loyal customers to other brands in its diverse portfolio of over 8,000 brands worldwide. (I was re-reading this post from a number of years ago after Blue Bottle starting raising venture capital in the first place.)
4/ Software And Deep Tech Aren’t The Only Ways To Quickly Create Massive Value: I sort of touched on this in my post on Jet’s acquisition. There’s a tendency among some in tech and startups to look down on tech VCs investing in a consumer coffee company. Nevertheless, respected tech VCs have invested in Blue Bottle (True, Morgan Stanley), Philz Coffee (Summit), Sudden Coffee (Founder Collective & others) and Bulletproof (which received an investment from Trinity, which originally invested in Starbucks over 30 years ago!). It’s another reminder that deep technology and pure software startups aren’t the only company vehicles for creating value and reaching a homerun exit.
About a decade ago, when I was finishing grad school and picking up various consulting engagements to keep afloat, I was reminded recently of one of those engagements. In the pursuit of as many leads as I could find, I accepted a statistical modeling assignment that, in retrospect, was a bit out of my league. I figured that I would figure it out. I asked all the right questions and clarified information with the client upfront. He went away for a month and I had to finish it in three months. It wasn’t for a lot of money, but I needed it, and I was excited to finally have this professor as a client after chasing him for a year.
As I was digging into the work, it became increasingly apparent that I was out over my skis. I asked a few friends for guidance, tried to learn the specific modeling technique on my own, and was committed to delivering the finished product to the client. Fast-forward to the due date, I sent him the zip file, and got this response a few days later:
“I know you worked hard on the inputs, but I need the right outputs.”
I sent an invoice with the work but, and his office paid it, but in retrospect, they shouldn’t have. I was reminded of this episode recently for two reasons: (1) as I see many of the founders I work with put all of their energy into various inputs and struggle to sell the outputs as progress; and (2) I see the same dynamic (but slightly different) on the investor side, where it’s easy to write checks and look busy and “work hard” or take lots of meetings or any other inputs and the outputs are somewhat out of the investor’s control and take years to materialize.
Ultimately, the market doesn’t show emotion and could very well repeat the words of that professor 10 years ago: “I know you worked hard on the inputs, but I need the right outputs.”
Founders and investors, ultimately, only control the inputs. Which market or product decision did the founder make at the onset? How did that investor choose to spend his/her time every week? I could go on and on, and while the work ethic and precision of the inputs should be celebrated when done well, the inputs ultimately don’t get judged — it’s the outputs that matter. Perhaps that is not fair. It is easy to get a company or fund off the ground these days, but eventually, the belief in inputs shifts to a demand for outputs.
Earlier this week (on Monday the 11th), I wrote the following note to every CEO/founder I’ve invested in. I didn’t intend to write to write for it public consumption, but a bunch of them said it should be made public. So, I cleaned it up a bit and, well, here you go.
I’ve been thinking about writing the following note below to a handful of folks in the Haystack portfolio, and as I was writing it, it occurred to me that more should read it. It is not an easy note to write, and I want to strike the right tone. I am hoping this is taken in the spirit of sharing a point of view.
As some of you know, on Mondays for the past three (3) years, I sit on Sand Hill Road and see all the deal flow as it emerges from Seed to Series A, B, C, and growth — recaps, acquisitions, wind downs, and everything in between across different firms, partners, and networks. I also work really closely with startups I’ve invested in across three funds over almost five years through their Series A fundings (and sometimes even at the Series B). This work spans across nearly every big VC firm you can name, spare a few. I write this from that vantage point.
Just as it was relatively easy for me personally to raise and deploy small funds, so too has it been easy for companies raising seed capital. But, after 2015, the shape of what institutional VCs want has shifted quite dramatically, and I seem to enter into the same conversation with founders on a monthly basis about this. It’s hard because those founders are living it and by nature feel they’re the exception — I see this across hundreds of companies.
I only see Series As and Series Bs happening when one or more of the following conditions are met: (a) An elite executive team (bonus if they know the VC already). “the team test“; (b) Highly demonstrable month-over-month or even quarter-by-quarter growth in key metrics. “the metrics test“; and/or (c) A well-reasoned, detailed roadmap and vision for taking the company from Point A to Point B. “the communications test” — Most seed-stage companies don’t have these (yet). I advise anyone serious about raising Institutional VC to ponder these conditions.
That being said, one doesn’t “have to” raise Institutional VC — there is no rule or convention around it. There are other ways to finance a business. Companies can elect to prioritize their own profitability. They can explore a strategic sale of the business. They can pivot. I realize these are all difficult choices, but the main reason I wanted to write this difficult email is to underscore a key point about maintaining a high level of intellectual honesty — while the seed rounds were relatively easy, the next rounds of funding are (as some of you already know) pretty brutal. So, if for whatever reason, you really want to score that big VC round, put all of your energy into one or more of those bullets above, at whatever cost you’re willing to live with.
My only tactical recommendation is to get into the habit of briefly updating your investors by email and simply focus on A, B, and C in those updates. At minimum, your investors will be able to track the story, jump in to help, and perhaps save you some time, heartache, heartburn, or all of the above.
I would not recommend anyone assume the next round is going to materialize, even from insiders. Many big VCs won’t say this publicly, but behind closed doors, they view the majority of the seed-stage as little league. Yes, they pay attention to what certain seed-stage companies and a few investors do — but on the whole, they’re highly skeptical of current market conditions and expect seeded startups with a few million and time runway to have already positioned their company to shine in terms of (a), (b), and (c). And, they will happily wait a year or two until they find that company before deploying $5M+ checks.
I felt compelled to write this to everyone because it has been weighing on my mind as there is more and more VC money in the market, as the stock market is rising, and as everyone seems to be “doing great!” I also want you to succeed individually and for your co-founders, colleagues, and staff to do well and have a great experience in the end.
I’ve written here quite often — perhaps too much — about what early-stage founders need to think about when graduating from seed stage to institutional Series A stage. I won’t go into that here, but another aspect of this journey has been highlighted in my mind that I want to surface and share on this blog: The Series A process is a “business role play” game where the VC is evaluating each interaction with a founder as proxy for how that founder would interact in different business environments — recruiting a top candidate, generating a high-value lead, closing a big sale, and so forth.
Yes, there are companies that score a quick Series A because its metrics are out of control and/or the team is known/proven. But, most cases out there aren’t so cut and dry; in reality, most Series A investments are basically “bets on the founder and team” even if there’s a bit of data here and there. We have seen countless Series A’s raised on spiky growth and then the company crumbles to the ground.
So, what happens when a great Series A happens in a company that’s not “growing like gangbusters” and is more of a speculative investment? What traits does the key founder (who is running the process) exhibit that makes this deal happen?
I believe there are three (3) core traits founders exhibit which can increase the likelihood that an institutional Series A can actually happen. Those traits are:
(1) Openness Around Information: Lately, I’ve seen a considerable number of founders be very cagey about sharing very basic information about their businesses. It’s the founders right to be selective about what is shared with whom, but on some level, if one is asking for a $5M+ commitment and don’t have a ton of offers, and if one is making it hard for the investor to get the basic information, it is a huge turnoff and the VC has 10+ other deals they can pursue with more clear information.
(2) Transparent In Conversation: Lately, I’ve seen founders who are not willing to be brutally upfront about how their business started, the twists and turns along the way, and how they got it from Point A to Point B. Of course, all of these real stories are messy. And, many VCs want to hear the more pretty vision for the future. Yet, in diligence, they will ask about the past, and I have seen quite a number of founders really get tripped up on sharing the journey. As a result, they become less transparent, even opaque, and as a result, the VC doesn’t feel a personal connection to the founder and can end up passing simply because they don’t have enough information to understand the journey the founder has been on.
(3) Diligent Follow-Up: This is the one that kills me because it’s basic Business 101. It blows my mind that a great VC who is looking at a business can ask for 2-3 follow-up items from a founder and literally the founder won’t follow-up. Maybe they forgot, they didn’t write it down, or they’re really busy parallel-processing. Whatever the excuse, this behavior leaves stale breadcrumbs for the VC to chew on — “if he/she isn’t following-up with me, are they on top of their stuff for other matters?”
I know VCs themselves aren’t perfect and can at times be cagey, can not be transparent, and don’t follow-up, but this is about those cases on the margin where it’s not a slam dunk deal and the founder is asking for money and a commitment. In those cases, which are the majority of cases, these three (3) traits are absolute table stakes for a founder to have a chance to be successful in the fundraise. Any slips here, and you’re likely out of luck.
These days, it’s easy to start a company — and it’s hard to build one. And, we know 90% of new ventures don’t ultimately work out. We all focus on the growth and momentum, the outliers and the high-fliers, and for good reason — those outcomes end up “covering” the rest of the table. When things don’t work out, investors know it’s coming, but no one can say anything. It’s not our story to tell. And despite what we read in Medium post-mortems, there is not a uniformity of action and integrity when the founders of a failed newco wind things down. A dream passes away and across one’s mind while one signs paperwork and answers the same questions over and over again.
I wanted to highlight that, in these moments, not everyone acts out the finale of the play. Sometimes, folks can’t bear to go through the motions. In some cases, one can understand. But, there are some who wind down their dreams with class and grace. They did this specific work not because they have to or are obligated — they actually wanted to finish the work.
“Finishing the work” is part of the journey. Recently, I have had a front-row seat to founders I worked closely with who all have impeccable credentials, resumes, drive, professional backgrounds. They didn’t raise too much money. They didn’t seek unreasonable PR coverage. They didn’t go to parties or show up at random meetups. Their products and services reached their intended target customers, just not with the velocity and scale required to warrant more serious funding. That is not to suggest value wasn’t created — it was, and a few of them were able to obtain acquisition offers from well-known companies.
Watching these founders — in this case, folks I considered friends — finish their work was painful to just observe. It took a lot of time. They weighed the considerations of all stakeholders and felt personally responsible for families of their colleagues. It is hard to concentrate on other matters, and finding a “home” within a larger company is no cakewalk. It can be pretty brutal, actually, and often it’s just not that urgent for the larger company. Some of you who’ve gone through it know — but we will see many, many more go through this as the bloated funding rounds of 2014-15 reach their final dollars and runway.
I only know my portfolio. Many have “finished the work” quite valiantly. Some have disappeared, and I do understand why. Most recently, I wanted to single out friends Victor Echevarria, Tad Milbourn, and Alanna Gregory as founders and CEOs who unapologetically came up short of their vision but finished the work they started with grace. Each of them, for months, initiated new meetings, lobbied for employees, communicated with investors, never once complaining. They will be different people after this part of the journey, no doubt about that, and they will have built new muscle to arm themselves for the next journey.
I’ll end by repeating a line from above, with emphasis: “They did this specific work not because they have to or are obligated — they actually wanted to finish the work.” Thank you.
Sometimes, picking a company to invest in is just easy. The hard part is getting in.
About two years ago now, I met Jason Boehmig of Ironclad during YC’s Summer 2015 batch (before Demo Day). One of my founders who was in YC singled out Jason as outstanding. Jason’s pitch was exactly what I love to hear, paraphrased: “I was an attorney (at a prestigious Valley fund). I taught myself to code. I quit my job. I founded this company to bring systems intelligence to the legal department of enterprise companies and beyond.”
I had to pitch Jason to let me in and also to make a gracious consideration for me.
I started to help Jason with his round immediately and got working some customers. Jason put me to work right up front but he was easy to work with. In fact, I would say he’s one of the most organized founders I’ve seen — his emails are clear, instructive, and written as if a lawyer, programmer, and BD rock star were mashed into one person. At the time when he was raising, I was just starting my current Haystack Fund #3, and my wife was nearly 9-months pregnant – with twins. I needed to close my fund, tend to my family, and wire money I didn’t have. I explained the situation to Jason over email. Like a true gentleman, he listened and made the accommodation for me. It was a small gesture and not much money at the end of the day, but in the moment, it was stressful for me and Jason assured me it was all good.
It’s those kind of interactions which keep my interest focused on being an early investor and building early relationships with founders. In the months and years that followed, Jason would skillfully pump my network for customers. He sent the best email updates every month, and absorbed tough feedback like a pro. He always wants to get better and to learn, and that ethos is embodied in the Ironclad product and the Ironclad founders and team. And, it is that ethos and relentless drive which attracted the former head of Salesforce’s AI efforts, Steve Loughlin, to lead the company’s Series A from his new role at Accel Partners.
Jason’s true colors showed again during the Series A process. I had a front row seat. No surprise, Jason and team referenced incredibly well. He handled each interaction like a professional and I am sure he’s already on the Series B radar of other firms. I was fortunate to get to invest again in the A, and I know Jason will be calling on me for even more introductions. And, customers will be lining up. The legal department of enterprise companies remain one of the last open space in SaaS, and the Ironclad team will now barrel ahead with even more ammunition.
About a year ago, a few ex-Box friends mentioned one of their colleagues “Ted” was starting a new company. That was enough for me to swing into action. I googled around and targeted “Ted Blosser,” found we had a few close friends in common, and a few email requests later, found myself sitting in his makeshift office near Facebook HQ. In the first meeting, it was clear that Ted was driven, had a vision for the product he wanted to build, and took a sober approach to testing and refining his hypotheses as he built.
We talked about general investment strategies, not related to his company, “WorkRamp“, and I liked Ted so much that I offered to start making customer introductions for the product. Generally, I like this way of getting to know a founder and product. I prefer to make introductions in advance of investing so I can build up a rapport with the founder, see how they leverage my network, see how they communicate, see how they use persuasion techniques, and so much more. Ted passed with flying colors.
Ted decided to raise a smaller round to start and luckily I received a call to participate in WorkRamp’s first round. I accepted and Haystack is a proud early investor in the company. Fast-forward to today, WorkRamp recently announced “The Work Room,” its platform play to connect employees with product leaders at other companies, such as Airbnb, Uber, and others. The ultimate goal is to help drive the democratization of all that expertise into a training platform for WorkRamp customers. It’s been great to see Ted and his team move so quickly in this emerging space. As new and growing technology companies hire more people quickly, traditional learning management systems aren’t equipped to help new recruits get up-to-speed on how the most cutting-edge companies are run. A marketplace model is the perfect solution to getting the right information from the right minds into the right hands. Keep an eye on Ted and the WorkRamp team — they’re knocking down customer targets left and right, and it’s been fun to watch.
As I began to raise my first fund back in early 2013, I reached out to my friend Satya to see if he’d like to make a small LP investment. We met up in The Mission and I walked him through what I was trying, and he said he unfortunately couldn’t and it was related to something new he was doing with his old friend. He couldn’t participate and share more details about his new thing. It was too bad, but I understood, and was now curious what new company he’d start so I could invest! Fast-forward a few weeks, and he sent me a note right before the news about Homebrew hit. “Ah….so that’s why!”
Always looking out for those around him, I began investing and Satya was kind enough to share a new deal he was working on with Homebrew. It was there that I mean Sean Conway and his company, at the time called “Airenvy.” Back then, Sean’s vision was a bit different, but he was operating in the same market he’s in today, and it’s a big and rapidly-changing market. From the first minute of meeting Sean, it was crystal clear he was a sharp communicator and extremely self-driven. He also had a chip on his shoulder about his previous company. I was invited to the round led by Homebrew with a small check and was happy to sign along.
When I started investing, it seemed like Series As just happened right after seed. That’s not the case anymore. Sean and “Airenvy” (now the company is called Pillow) kept chipping away at their market and embarked on a journey to find the right fit within that market. If you read this piece about what is motivating Sean and his team with Pillow, you will see the deeper motivations that drive the company. It was that motivation and perseverance which propelled Pillow and Sean to raise a hard-earned Series A round from Mayfield last year (with friend Tim Chang joining the Board), which was only just recently announced here.
A theme which has been reinforced for me in the last four years of investing is that the people don’t change much — the products and services in the market, however, will certainly. When I first met Sean, the company then “Airenvy” had a different approach. In building his team and the company into Pillow, they all went on a journey into the market to see how the next generation wants to live. And, that’s where things get interesting — with Airbnb growing, with urbanization growing, and with housing prices in those urban centers growing, the next generation coming up may choose to live differently. That’s where we see the next innovation, with home-share networks like Common and Homeshare, among others. It’s in that world that Pillow found opportunity and launched “Pillow Residential” to build software, workflows, and tools to connect apartment owners with renters. It was a journey itself to discover the opportunity in the market. And, as I alluded to, the market changed and Airenvy changed (into Pillow), but Sean as a leader didn’t change. Satya as a friend didn’t change. They’re still the same people searching for and sharing opportunities with folks like me when I was starting out.
Back in Q1 of 2016, when the technology sector went through a sizable (but apparently now forgotten) correction fueled by sharp hits to public tech stocks, I was happily investing into the very early-stage ecosystem, and in particular, deeper technology opportunities. It was at that time when my friend Julian introduced me to Grant Jordan, a co-founder of SkySafe.
I looked up Grant’s background and read up on his work. I was 90% convinced to invest in him after a bit of online sleuthing. In the first few minutes of meeting Grant, the decision was made. Grant’s industrial expertise was off-the-charts and focused in such a way that his approach to SkySafe became, literally, a no-brainer decision. Grant had grown up as a computer tinkerer, to put it mildly, studied CS, security systems, and EE at MIT, went on to work as a core engineer at Wright Patterson Air Force Base leading a team tasked with finding 101 ways to take down enemy UAVs of many shapes and sizes, parlayed that into a consulting firm with some of his colleagues — and now some of those folks have joined him to form SkySafe.
By now, you’ve likely heard of the various methods by which startups are trying to help others stop rogue drones. There are drones which will attack other drones, or drones which shoot out nets to capture other drones, and on and on. The problem is very real. On the battlefield, terrorists are outfitting off-the-shelf drones and weaponizing them with aftermarket upgrades. As the drone industry grows, we will see more flying above us in public spaces. It will go so far as testing the airspace regulations we have, as well as privacy rights citizens have.
Grant and his team have a unique approach to this emergent issue with SkySafe. The company’s technology is defined by radio frequency signals which are intelligent enough to detect rogue drones and force them to either leave or to land while permitting approved drones to continue operations. To hear Grant explain it, it’s the stuff of sci-fi — SkySafe’s systems reverse-engineer the communications and telemetry links unique to each model of drone and using electromagnetic pulses to disable the drone.
Wow, where do I send the Haystack wire?
I was fortunate to be a part of SkySafe’s seed round, which was led by a16z. Now, a16z is tripling down on Grant and his team with a new Series A announced a few weeks ago. While the near-term focus for Skysafe will be on defense applications — they are working specifically with the Naval Special Warfare unit and the SEALs in particular — the future will be marked by protecting public spaces and even private spaces. In a world like that, it’s good fortune for Haystack to be involved with SkySafe and to play a small part in bringing this technology from the battlefield to the world at-large.