Outliers are valuable because they offer us 20/20 hindsight to reevaluate and challenge the assumptions we may have originally held to be true. Lyrically, it’s been a linguistic technique I’ve used in writing this one post about Snapchat and then another one about the Whatsapp acquisition — both posts went viral, in part because of the intense focus of global tech attention on the protagonist companies in question, but largely driven by, I believe, our subconscious, collective desire for and adherence to “convention.” The thought goes — if we do what are supposed to do, and what other elders say, that “convention” will ensure our success.
Yet, the reason these posts fly around the web is because, further down in our subconscious, we know conventions are challenged in deep ways, and especially by the companies listed in this post. It’s worth re-reading the posts above on Snapchat and Whatsapp, both for founders and investors alike. Subconsciously building up convention happens as a stealthy byproduct of being forced to recognize patterns in a fast-moving, dynamic environment. All of a sudden, there are things we are supposed to do, and the echo of social media hardens it into convention.
The latest company to break convention is Slack. You have may noticed me tweeting about it more. I’m trying to understand it. We all know it’s a great product, but I wanted to understand how big it can be, and what they did to make it happen. Below are some things I tweeted out, as well as a response from Anil Dash adding to the fire.
This is how Slack defied convention:
Slack originally HQ’d in SF/Valley — so many blogs and pundits liked to pander that “the next big thing won’t be in the Valley.” But, Uber is. Slack is. Whatsapp is. Snapchat born here, built in LA. For Slack, there was a distributed team with HQ in SF. Those are the facts.
Slack was funded with traditional VC — so many blogs and pundits like to talk about the end of traditional venture capital, even after firms like Greylock, Sequoia, and Benchmark, among others, are sitting on monster portfolios and exists. Maybe traditional VC isn’t all that bad.
Slack was the byproduct of a pivot — in an era where there could be 5-10 startups in a category, there are likely too many teams playing for 2nd place or worst. Why not re-roll the dice and reinvent? That’s what Slack did. Nothing to lose but investor’s money.
Slack was founded by an adult without a CS degree — via Anil. The success of Zuck and Spiegel and the fascination with youthful energy and creation has helped calcify a brand of ageism in the Valley. Add to this the “everyone must code” drumbeat and how could Butterfield have succeeded?
Slack openly embraces diversity – via Anil again. This is not to say other companies don’t, but it’s only recently been brought to light as a more systemic issue. Larger companies can be slower to respond. Startups are more nimble to create cultures in real time. This has been a touchy issue across the Bay Area startup ecosystem. Slack has shown leadership in its efforts to diversify and speak its mind beyond tech circles and topics.
Slack respects work/life balance — again, via Anil. The company sees most employees going home by 6pm. Sure, many work late into the night, but there is balance set into the culture from Day 1. I think that’s hard for very early-stage startups to have this luxury, but once a startup gets some serious funding, and with technology invading family life, companies can now help design structures to keep people out of the office (though still working, if they want) with a bit more ease.
Slack had a revenue model from beginning – via Anil. After the pivot, Slack went cross-platform with a paid product right away, possibly marking the end of the “build first, monetize later” mantra in the wake of Zuckerberg’s masterpiece. It reminds me of this great, prescient post by Mark Suster, “Why You Need To Ring The Freaking Cash Register.”
Independence Day is supposed to be about reflecting on and celebrating our collective independence, especially relative to the rest of the world, as well as the grave sacrifices generations have made to make it so. When taken in this light, it is likely something we all take for granted, and perhaps that’s the luxury symbiotically associated with it. Without independence, we wouldn’t be free to overlook why we are blessed with it.
The idea of “independence” has layers, especially within our personal and professional lives. For me, married with a kid, I am very lucky to have a small family that binds me to them, but they also work hard to let me do things independently — to travel, to keep odd hours, to work when I’m inspired to, and so forth. Here, “independence” exists within a structure of co-dependence.
In work, the layers are even more complex. I personally have been blessed throughout the recent past of being in roles at companies and with investment firms where everyone recognized and honored my desire for independence. Where else could that happen in the world? That’s why I can’t imagine living anywhere else.
Independence in work doesn’t always mean that you are your own boss and answer to no one, but more often it’s about having the freedom within your team or organization to take risks, to follow your instincts, to make decisions, to prosecute your ideas and beliefs. In all of my work experiences in venture, despite what you may read on Twitter and Hacker News, the groups’ structures have rules but underneath them are huge oceans of independence available to anyone who wants to navigate them. So, there are many layers to independence — our national independence, our independence to do what we want (within reason) on an individual level, the ability to exercise independence even within a family, and at least for me in investing, a chance to think freely about how the past may inform the future with the freedom to follow my intuition.
Last summer, while continuing to invest in early-stage seed Bitcoin-related companies, I wrote a post titled “The Bitcoin Crunch.” That post tried to encapsulate and summarize what I saw bubbling up when seeded Bitcoin companies tried to go for their next round of funding. Just like the broadly named Series A Crunch hammered the over-funded seeded companies, the verticalized crunch on Bitcoin companies was brutal but necessary.
Since then, things have stabilized. The price of Bitcoin has steadied, but more importantly, bigger companies building critical infrastructure in the ecosystem were rewarded with larger sums of downstream funding – Coinbase, Chain, BlockCypher, and many others — not to mention 21e6′s mega ambitious round to build mining chips for electronic devices.
Remember “The Series A Crunch”? Well, I think an offshoot of this will manifest itself across what feels like almost 500 Bitcoin related companies. I, myself – I am a Bitcoin believer and Bitcoin junkie. Yet, despite that optimism, I am continuously floored by just how many Bitcoin startups are out there. I don’t know who is funding them or how they’re making money to survive the typical cycles needed to make Series A investing, which I’ve recently heard defined as “when pros invest and set the terms.”
Here’s a brief snapshot of what Bitcoin 2.0 is shaping up to be:
Valuations Relatively Cheaper - With unicorn hunting distorting all sorts of investor behavior, investment firms with smaller AUM and/or a deeper conviction in this ecosystem can bridge or extend funding for quality teams at very reasonable prices. One could argue it’s a better bet for real venture right now vs paying up into a red ocean category where their may be only 1-2 survivors.
Weekend Hacks Not Getting Funded - The quick-release “me too” Bitcoin companies are fizzling out and not getting funded. It is tough for some, indeed, but unfortunately necessary. I hope the emergent platforms consider some of those former founders for operational roles in their companies. The seed market has rationalized on Bitcoin.
Making It Easier To Build On The Blockchain - We all know the 101 awesome things that theoretically “could” be built on the blockchain, but those aren’t being built just yet to a level where we can openly interact with them. In the meantime, blockchain middleware is emerging as a category — people who build systems that make it easier for developers to build on the blockchain.
Core Platforms Getting Funded - Coinbase is now the leading platform, and no one is close (in my opinion). I’m starting to see experienced entrepreneurs build on top of Coinbase with applications that have real world use cases right off the shelf. In the same way Uber wasn’t possible before the iPhone and maps, a new breed of companies that wouldn’t have otherwise been possible without Coinbase will slowly emerge.
It’s been a month since we organized The On-Demand Conference. The folks at TradeCraft were able to capture and upload media from the event, and there’s a great mix of content and knowledge from that day, now accessible to all below. I’ve tried to present the videos in chronological order, the best I could. As an investor in space, I particularly loved the sessions that focused on B2B on-demand (with Managed By Q, and others), the investor panel with Steve, Satya, Simon, and Patricia (which was very lively and touched on some controversial themes), and the panels on customer experience. But, of course, everything was great. Thanks to TradeCraft for organizing and creating this rich media for others to learn from.
My personal favorite was the start of the day — a fireside chat with Shervin. We discuss on-demand stuff, but really it was more of a chance for Shervin to share a rich history and reflection on his move to and time in the Valley. Shervin was one of the very first people I met when I moved here. He made time for me, and it was nice to reconnect and catch up in such a public way.
Finally, I had a chance to end the day with a short presentation on where I see the on-demand space headed. It’s about 10-minutes and has slides, and encapsulates much of my thinking around the topic right now.
There are a small handful of blogs/newsletters I read daily. The first one of those when I started on this path was AVC. About a week ago, Fred wrote a reflective post about the on-demand economy of today and all the startups who are riding this wave. You can read Fred’s post here, and the picture of Gotham Gal wearing the old Kozmo swag is awesome. (Kozmo was available in NYC right when I moved back after college to start working — I remember ordering from it a lot and how much free stuff they gave away.)
One of the lessons threaded throughout AVC is “history doesn’t repeat itself, but it rhymes.” The implication is the same themes emerge through cycles, even if today’s incarnation looks different from yesterday’s on the surface. In the post, Fred writes:
Kozmo pioneered the idea of same hour delivery in 1998, fifteen years before its time. Kozmo pioneered the idea of raising and spending hundreds of millions of dollars a year long before it became fashionable, even normal to do so. Kozmo nailed the practice of scaling while your unit economics are upside down. They took that practice into almost twenty markets before the capital markets turned on them and there wasn’t money available to incinerate anymore.
As someone who has spent a good portion of the time seeding and helping early-stage companies in the space, I wanted to digest Fred’s post and write out a structured POV on it. Briefly, here goes:
On Unit Economics: There’s a lot of truth to this and the arguments/concerns are sound. Early-stage investors have, in certain cases, given entrepreneurs incredible credit in advance of nailing unit economics. The reason they do so, I believe, is because there is some premium to proving, even in one market, that a team can create and deliver a service which triggers a behavior change. The next venture bet is on spreading out that behavior to other test markets. We will know in a few years if that was too much credit.
On Raising and Burning Hundreds of Millions: Outside of Uber, Lyft, Instacart, and a few others, there are more companies making noise about the on-demand economy than raising gobs of money. Sure, some of it is overfunded, but if you look at the base stickiness of those services, in many cases things can be justified, and many of the firms who are already into those companies have deep enough pockets to stay with them in the event of a turn in the market. Speaking of which…
What if Capital Markets Turn Suddenly? Many arguments here, but if it’s a general turn, and people have less disposable income, they may be more sensitive to overpaying for convenience and speed, and that could depress demand while also putting pressure on companies to raise prices, to price dynamically, and to bundle other services on top of the core. For those who are funded, while opening a city is a serious operational cost, most of these teams are expert in figuring out how much capital and time it takes for a city to become self-sufficient. The ones that can’t do that won’t survive.
Despite the froth in the category and acknowledging there will be some ups and down for companies to withstand, two things make me optimistic about the on-demand concept overall, moving forward:
Today’s Overall Competitive Structure: When Kozmo launched, people weren’t used to web-enabled inventory and delivery triggers. Now, we are, and huge companies like Google, eBay, Amazon, Walmart, and even Uber are all actively thinking about offering on-demand or scheduled services to increase the bond with their customers. These companies will certainly be acquisitive in the category (in this arms race) and provide a soft landing for many startups, assuming they haven’t been over-valued and assuming the core mobile and data teams come along for the ride.
Spreading the Concept to Business, Healthcare, etc: I am shifting my focus in this area to on-demand concepts that serve businesses as their customer (like Boomtown, and others), as well as spaces like healthcare and heavy industry. I am already seeing lots of activity, and there are more opportunities for founders to layer in SaaS+marketplace models into these startups given the customer base. Just like the sharing economy has spread to other industries like construction (Asseta, Cohealo, etc.), I suspect on-demand will as well. It’s just a matter of time.
One of the great stories of our time is the multiple “Arab Springs” that networked-devices and social media enable in big and small forms. One way to think about that shift is: Distributing computing power across citizenries can create a stronger force than concentrated authorities. As centralized authorities lose power with tech distributing among citizens, we may also expect a less orderly transition to what is next — the next order. That “less orderly transition” will be a test for how we all collectively behave when no one is watching yet everyone is watching.
Over four years ago, before I even worked at a real web/mobile tech startup, I wrote a guest column on TechCrunch titled, “The Next Mass Consumer Social Wave: Political Expression.” It’s worth re-reading today as so much has happened since then (click here for link). I wrote this a few weeks after the Arab Spring protests in Egypt. That was a crazy time. As a student of history, I couldn’t believe what was happening in real-time. The future arrived very quickly. I am still in shock this is only four years ago, especially when I see lines like this:
Most citizens in the Middle East do not have these luxuries we take for granted. For them, nations like GMail, Facebook, and Twitter provide that place, a common platform which helps them tap, refine, and express an assortment of pent-up desires, and as we have seen, generate tremendous kinetic energy most levees cannot withstand.
In the old days, centralized or local (or surveillance) teams would gather footage, but then decide editorially whether or not to broadcast that information; today, with ubiquitous data and pocket-based computing, with broadcast television powers in our pockets via Periscope and Meerkat, with social networks like Facebook and Twitter to host and route information, we see a lot more of our world. Capturing, uploading, and sharing 1st-hand citizen accounts is the new voting.
Are we decaying as a society, or just seeing more of what had always been happening under our noses? There’s so much to say, but I wanted to keep this apolitical and brief. I’ll close with two (2) thoughts:
One, so much of today’s discourse reminds me of Golding’s “Lord Of The Flies.” Who has The Conch? We can’t talk about (dis)order without revisiting the symbolism of The Conch. It used to be central authorities or networks — now the conch is distributed, so things sound noisier, and things feel disorderly. because we have to listen to 1,000 conches — not just one. Things may get worst before they get better.
Two, in an optimistic sense, I try to draw personal inspiration from this change, however bumpy and unsavory it is. Back in high school, my focus and ambition was to enter the world of politics in some way. That evolved and refined over time. I wanted to have an international life, to be a diplomat, to serve in foreign areas. I was dealt a setback in the college admissions process, and then turned to (almost) studying law as a means to exercise that desire. Luckily, a former boss stopped me from going to law school. Yet, the dream of international diplomacy still pulled at me, taking me to graduate school and a course of study focused on this — yet again. And, again, I was passed over, repeatedly. The worst experience was having an official from a not-to-be-named central authority request an interview, only to have the civil service employee arrive late, unprepared, and in sweat pants.
I couldn’t have imagined a career investing in technology. I do not know much about investing or technology. But, it is the path I’m on, and the best part is that some of the change I hoped to be a part of via diplomacy may not just also happen via technology, I may in fact be in a stronger position to advocate for it. Specifically, that could mean studying and investing in technologies that (1) increase and democratize web/app access for more and more people; (2) provide alternative, ad-hoc, and mesh networks for people and machines to communicate within; (3) foster new payment mechanisms which lower costs, provide different types proof (time, payment, justice, etc.), and empower the powerless; (4) create new employment opportunities that increase both take-home wages and flexibility around scheduling; and (5) change and improve how we live, work, and get around our physical environments.
An LP I know well pulled me aside recently to point out that investors who raise funds also, like entrepreneurs, have to go through a test — Who are you? What do you believe in? What do you stand for? Not too different from how The Joker described himself in The Dark Knight, sometimes in the pace of work, some investors can just revert to “dogs chasing cars.” I have felt that, for sure. But, after a while, that’s not good enough, according to that LP — and I think he’s right. Being able to invest, even small amounts like I do, is a sort of “Conch.” Diplomacy and statecraft are also Conches, in their own way. Now, everyone has one, and more people are using it — some of the sound encounters deconstructive interference, killing the signal; some, if we’re lucky, will eventually and constructively break through the noise to create bigger and louder waves.
Manu Kumar of K9 Ventures posted an excellent, long but to-the-point, well-written post last night. (I’m only writing this b/c I had so many reactions that wouldn’t fit in a comments section.) If you are in the micro-VC world as an investor or LP, it’s something that should be bookmarked and re-read over and over. Here’s the link (click here). In this post, I wanted to call out a few quotes and go into them a bit more and explain why, from my POV, they’re critical:
The Cost of Startups: Kumar writes that…
while the infrastructure cost and startup costs may have declined, the operating costs have increased.
It’s a common refrain to hear people say that it costs much less to start a company, and even in a correction, that price won’t go up. It may likely go down. However, right now in the Bay Area, the other cost inputs (rent, salary, etc.) are spiking very high, and those costs are one factor driving up seed prices, in addition to the oversupply of capital.
What’s In A Name? Kumar writes…
Seed is not the first round of financing any more
We have distinct stages now: Pre-Seed, Seed, and Post-Seed, all coming before the classic bigger firms get involved. There are exceptions, of course, but it’s not uncommon to see a company go through all these rounds to get to a point to pitch the Big VC firm. Furthermore, each of these stages is also “institutionalized,” meaning that each check is a pool of other peoples’ money that has a business model attached to it, and therefore needs even more outsized returns to make for a viable fund.
Boiling A Frog. Kumar writes…
Almost like boiling a frog the micro-VCs who started out as “super angels” (See my post from 2011 on Investor Nomenclature and the Venture Spiral) writing $25K – $100K checks with personal money, are now managing funds which are $40M – $140M in size, some with multiple partners and are writing checks which are $750K – $1.5M. The change in thinking is a natural and logical thing. The catch however is that some of these funds and their GPs haven’t admitted to themselves and to founders and to LPs that their thinking has indeed changed (as it should). They are either in a state of denial or haven’t had the time to adjust their messaging yet.
This is absolutely happening, and one of my favorite lines in the post. These are the new Series A funds, but how it’s presented to founders and LPs may inadvertently not be the same.
How To Define Pre-Seed? Kumar writes…
the Pre-Seed round, where the startup raises closer to $500K, could flirt with $1M possibly.
Yes. He also wonders if GPs at smaller funds break ranks to go fill this “Pre-Seed” hole.
How Nomenclature Influences. Kumar writes…
Too many founders still think that. And then they see stuff in the press about how Company X and Company Y raised $2M in their seed round and start to think that that’s the amount that they should raise too.
The mimicry effect here is powerful. It’s very rare to meet a great founder who wants to raise a small, modest round early to test things, and it’s hard to stay disciplined when things can get oversubscribed given the excess of capital in the stage.
Beware “The Venture Spiral.” Kumar writes:
Moving up stream is a natural evolution of a venture fund, especially as you get more money and more partners. I refer to this as The Venture Spiral (blog post from 2008). Reflect on the stage you’re investing at and be sure that you’re staying within the bands of your competency (and ergo not riding the spiral up to a level of incompetency).
This resonates with me personally. I have been doing pre-, regular, and post-seed deals, and participating in a few As. But sometimes I worry about whether I can actually do a proper A round one day. From the outside, investing all looks the same, but when you’re doing it, you realize how different it is. Not comparable, and it’s hard to be a true multi-stage investor. Very few are excellent at it, but there is a temptation to raise more money as a GP as your previous funds go well.
What’s An LP To Do? Kumar writes:
Your early stage investment portfolio may no longer really be early stage
It’s harder for some more established funds to inform their LPs that they’re investing later and later in rounds, and the blurring of lines around the nomenclature can confuse things further. Some don’t care to ask, but Kumar is raising a great point: In a 10-year fund, an LP may sign up for “early-stage” exposure, but what does that mean as things have changed from 2012 to 2015?
The Deck Won’t Reshuffle. There’ll Be A New Deck. Kumar writes…
Micro-VCs are the new Series A investors…there will still be a new crop of Pre-Seed funds that will emerge…There is an opportunity for LPs to pick the right Pre-Seed stage funds, but I certainly don’t envy their job as it’s not going to be an easy task.
This is something I’ve lived unknowingly for two years. If I were an LP, I’d have no idea who to pick to invest in. When people ask “How are your investments going?” I usually answer “Great, but ask me in 5-7 years.” The truth is, we don’t know, and it takes time, and today’s environment expects two-year-to-billion-dollar status trajectories. The whole thing is much more random and haphazard than anyone (especially LPs) would care to admit.
Why Do Funds Get Bigger? Kumar writes…
The management fee structure provides a perverse incentive to GPs to increase the size of their funds.
Yep. On top of this, GPs can “stack funds” and earn fees on many funds at the same time. This makes what a firm like USV does even more impressive — staying under $200M and sometimes even raising less in a subsequent vintage.
Again, here is the whole post, which should be bookmarked and read and read again. Thanks to Manu for contributing this, he has helped me a lot in the past and this post continues to do the same.
For the past few years, everyone has publicly blogged and tweeted about whether or not the Valley is experiencing a “technology bubble.” The prevailing argument in support of there not being a bubble is that many of the big, growing startups of today have real revenues, solid fundamentals. If we think of the “body” as the fundamentals, things do appear to be in shape. Companies are growing, making money, addressing growing global markets, and we are definitely in a deployment phase of technology infiltrating even the least sexy of industries.
What about the “mind” then?
I started to think about this after watching this short video discussion between @Chamath (Social+Capital) and @JessicaLessin (The Information). I’d recommend watching the video above. Chamath covers a lot of ground about the frustration around mobile apps and why text is surging, or how the next Facebooks of the world will help us curate better content. The most interesting piece in my view, toward the end, is when Chamath starts talking about the potential “imbalance” in the SF Bay Area ecosystem, and specifically he models out why many late-stage private companies are potentially staring a world of hurt when public market prices are more rational. If and when that starts to break apart, he contends, it won’t hurt the general public, but it will likely hurt the rank and file employees at many growing startups.
These people, he contends, in turn, may start to leave the area and feel as if they were taken advantage of.
There’s an “American Dream,” and that’s been under all sorts of pressure as the proliferation of computing power in everyone’s pockets has helped reshape how business is done. There’s also a “Silicon Valley” dream (one that Chamath lived through), and while it appears to be the envy of the world, the implication and warning in this video is while the body/fundamentals are in great shape, the mind may not be.
Is the mind of SF Bay Area’s tech & startup ecosystem healthy? I don’t know the answer, but it’s a great question to ask and reflect on.
I’ve been thinking about this tweet from Garry. I like the idea of an oath, at least in theory, because it forces one to stop and think about what they’re entering into and what they’re signing up for. Garry is one of the small handful people I follow very closely on Twitter and his blog because he is influential, he is a great picker of talent and companies, and he’s doing it all for the right reasons.
In this tweet, I think everyone can agree that investors should (for the most part) move quickly, respect a founder’s time ant attention, get out of the way if not adding value, and of course do no harm in the heat of battle. There are investors that probably do harm, though I have to think that’s a small minority — having worked across a wide variety of firms and with a wide variety of personalities at the GP level, what I mostly have observed is quiet, consistent coaching and support. That said, no doubt investors can always improve and remembering these basic tenets would be wise.
It’s easy to generalize across “all investors” but then it wouldn’t be fair to generalize across “all founders” either, would it?
Speaking of oaths, if investors were to sign a basic, clean, simple, no-nonsense oath, maybe founders should to. I’ve been trying to think what would make up the most basic “founder oath” in accepting venture capital?
(1) Brief Quarterly Updates To Stakeholders: I wish I would receive these. Just 5-8 lines in bullet points, including homework for investors on where to help. It’s rare to receive these and often when I do, they’re way, way, too long. Of course, at some point as the company matures from seed into an institutional round and set of investors, this matters less. This also helps early investors prep downstream investors ahead of time when there’s a potential match between an early-stage company and a larger VC firm. Informing the early investors may help tell those stories better.
(2) Transparency In And Around Potential M&A: I was surprised that existing investors weren’t often briefed on pending M&A. I can understand the sensitivity around leaks and sabotaging a deal, and M&A can be a complex topic (especially the first time through it), so people end up making decisions and then investors hear about it and the consequences often weeks or months later. That doesn’t feel right.
(3) Proactive Liquidity Consideration For Early Investors In Future Financings: With high-performing companies staying private longer, that means it’s much harder for early investors to sell a portion or all of their investment. When this does happen, the investor has to individually go and lobby the founders and others to even have a shot at this consideration. Why not just make it part of the regular dialog? Early investors don’t have to exercise this option, but it would be a nice gesture that’s not too administratively burdensome relative to the risk early investors bore.
(4) Realistic Modeling Around Runway, Future Financings: If founders could share basic bank balance stats in a brief quarterly update, I think early investors who are paying attention and have experience can easily point out when cash and burn may be too high and need a plan for future financing. Most of the existential risk here comes down to securing future financings. It’s easy to misjudge just how much runway someone has, especially when one thinks they can use the entire runway before needing to take off.
(5) Asking Investors To Do More: If the four tenets above are followed, then the investor should work even harder, and I’ve found that when the founder pushes me and other investors (over phone, text, email), other investors chime in to help, debate, and (dis)agree on a variety of things. It’s fun, quite social, and everyone learns. I wish more did that, even though it would kill my email inbox. But I love doing this investing thing, so when it comes to this stuff, the more, the merrier.
As I hinted at in my post last night, I kept a notebook section for topics I wanted to write more about. One catchall topic is labeled “Things You May Not Want To Hear.” My hope is that the following is conveyed economically and fairly. Most people won’t like it, but in the majority of cases, I believe the following maxims apply specifically to the noisy, murky, over-saturated world of the seed stage ecosystem:
Be Reference-able: Part of my job in the ecosystem now is to be one of the first investors a new or would-be founder may encounter. Of course, I have and will continue to make my own mistakes in evaluation, but in the pre-seed and seed stage, where there’s not much product or business yet, it all rests on how investors read people. Oftentimes, I’ll struggle to find out about someone’s background, their interests, education, previous jobs, etc. Why? There’s so many simple platforms now (About.me, Tumblr, to a name a few) where people can just write up a bit about themselves. Make it easy for me and others to reference check you through mutual connections, to understand how your background brings you to today. Online presence over time sort of acts as a de fact “peer review” of reputation, skill, and respect. It shouldn’t take more than a few hours of work and organization, but I’m surprised how many people make this hard. When there are lots of options out there for investors to fixate on, make it easy for them to understand who you are at a glance and double-click to go deeper if they choose to.
Write Things Down: I grew up working all sorts of service-related jobs, especially in restaurants. At the restaurant I worked at during high school, the GM was very relaxed about most things, though a few items would set him off: putting up chairs at closing time if people were still dining or finishing a meal; not paying out the bus boys (and girls) from the pooled tips from waitstaff and bartenders; and when waitstaff wouldn’t write down a guest’s dinner order only to submit an incorrect ticket to the kitchen. As a result, when someone is giving me information I requested, I write it down. It sounds old-fashioned now, but when asking people for feedback in any dimension, I’m surprised how many people don’t write these things down. Then again, I don’t get too worried about it, as a word to wise is also sufficient: Write it down.
Your Seed Extension Isn’t Impressive: Seed extensions happen much more now as angel/seed rounds are done with notes quickly and tranched. One effect of this easy money piecemeal is that when an extension is needed to bridge to even a small A, there’s a tension between what the valuation cap should be. In my opinion (and people won’t like this, but it’s what I feel), unless there are truly material upward-trajectory type advances in the business or product, the existing investors who bridge should get the same terms as the additional investment. They’re taking on more risk if progress is only incremental. For founders who want to split caps here, I encourage them to find new investors to do so. The market sorts itself out.
Introductions Are Now Mostly Commoditized and Have Cheapened In Value: Now that Twitter and Facebook have connected everyone in the startup ecosystem together, everyone knows everyone. Using a spreadsheet to assemble intros and ambassador advocates doesn’t often work because VCs are now inundated with intros from people they know. The trick is to be so compelling that someone takes the initiative to make a critical introduction for you. That can be hard to envision when you just want to meet that person, but if you break down how the VC may be parsing those signals, he/she likely wants to hear about something from many angles and get strong, forceful recommendations before engaging. Less is more here.
Optimize For Learning: We are in an age of abundant capital and greenfield opportunities in every industry across the globe. One result of this environment is people (founders and investors) have been trained to optimize for price in many transactions. I was walking with an older VC who has been very successful in his investments after an equally successful career as a technology founder and CTO. He remarked, rhetorically: “Why bother with people who are optimizing for price? I focus on people — founders and investors — who are optimizing for learning.” Wow. Noted, pinned to my wall. Thank you. What a great, clarifying statement.
Forcing Functions and Liar’s Poker: Any investor at any stage always has more good, viable opportunities to evaluate than they have time or mental bandwidth for. As a result, they tend to focus on ones where there’s deep conviction, proprietary knowledge, or…wait for it…a ticking time clock. Ah, the elusive forcing function. It’s a game mechanic, and if employed skillfully, a founder with real options can use time and pressure to his/her advantage and get things moving. Of course, many people are aware of this dynamic, so they try to engineer it out of thin air versus credibly building a case. Having now seen this a few times up close, it has backfired each time. Why? Because while investors may not know the ins and outs of the business they’re evaluating, they sure as hell know how to verify social information within their social networks. And, once they hear the same morsels from other investors they’ve collaborated with or co-invested with for years, this confirms their instincts, and game over. Play poker, yes, but don’t lie about the forcing function.
Seed Hubris, Institutional Realities: I like to say that in today’s environment, founders get to set terms in the seed, but VCs still (for the most part) set terms for the A. However, the huge supply of seed capital and the pace and girth of seed rounds and prices today seem to (generally speaking) empower folks who are raising money that things are all rosy. When you can set terms in your pre-seed, your seed, and your extension, and get the prices all the way from $6 to $12 to $30m on notes (I use these numbers because I’ve seen it happen up close — twice!), one can start to think fundraising is just a Mad Libs game with Monopoly money. The harsher truth is that this behavior is hard to course correct because it can be (understandably) intoxicating, but despite what you read in the news and on Twitter, while VC as a whole is undergoing changes, the best VC firms (and there are more than just 5-8 great, great VC firms) still have incredible leverage in most situations. So, I say, enjoy the bounty of seed, for it is a fine, fine ride, but then buck up and prepare for the visors, bean counters, and very smart, experienced, and networked big VCs to call those bluffs.