The Story Behind Our Investment In Second Measure

About 3.5 years ago, we met Michael and Lillian from Second Measure while they were in Y Combinator. We were lucky to invest not only during this time, but also doubled down in an extension. And this week, the company announced it had raised a super-sized $20M Series A financing co-led by Kent Bennett from Bessemer Venture Partners and also Goldman Sachs. (The round was completed last fall, but announced this week.)

Second Measure is a unique company that also boasts a unique customer set. Second Measure’s technology empowers its customers to drill into consumer spending behaviors from a number of angles. With over 150 customers now, they range from financial institutions such as VC and PE firms, consumer product companies, and media organizations. These customers leverage Second Measure to analyze and cross-analyze how consumers are spending their cash, but going deeper, the platform enables customers to analyze rate of growth, cohort retention, benchmark against category competitors or regional performance, and much more. The company’s blog has become a destination for original research on consumer behavior and insights — check it out here:

The company received investment interest for a few years, but took their time to raise the Series A. The trajectory of Second Measure isn’t the norm, but I believe we could see more of this kind of path: The company went through Y Combinator, raised a small amount from individuals and microfunds (like Haystack), as well as a few discovery checks from larger VC funds, such as Bessemer which led this round. The company raised a seed-extension round midway through, and was doing well enough to use revenues to keep financing the business to iron out some wrinkles in the business and data model. As the company accumulated leverage, it was able to more or less control the timing in which it accepted Series A capital.

When I began investing in 2013, the Series A rounds were quite fast and furious after the seed rounds. That is not the case today. In conversation, most seed investors in private conversations (myself included) have all felt a longer period of time between seed rounds and A rounds, and that the overall rate of conversion to Series A rounds has declined and will continue to go down. On the other hand, solid businesses like Second Measure which have found product-market fit within the seed stage have more leverage on when to take financing and from what firm. We are lucky to have been involved with Second Measure from the early the days. Both Michael and Lillian were gracious in letting us participate not once, but twice, and are now well on their way to realizing the original vision for their company.

Amazon “Swipes Left” On New York City

Start spreading the news, indeed. Today, Amazon announced it will entirely abandon its plans to build its second headquarters (a/k/a “HQ2”) in Long Island City, a residential neighborhood in the borough of Queens, New York City. There’s no need for me to mince words here: This is a huge, huge development. It is shocking, really. I believe this will be talked about for months, which in today’s news cycle is saying something. But, it happened, and we have to step back for a moment and reflect on what got us here. So, here is my attempt to do that — for the record, I believe NYC made a huge mistake, but also that Amazon should’ve picked a different (and smaller) city to begin with. Here is what I take away from this breaking news:

1/ “The Decision” was not a great look for LeBron nor Amazon. I like LeBron now, but it always wasn’t the case. Back when he left his hometown Cavaliers for a new team in free agency, he branded his announcement as “The Decision.” That backfired on him, a stunt perceived by many to be the opposite of humble. In searching for its next HQ2, Amazon frankly evoked memories of “The Decision,” which is not a compliment. Going down a path like this is bound to engender some ill will and hurt feelings — feelings that could be suppressed for a while but will eventually bubble up and spill over into something greater and more intense.

2/ The power of persuasion is the most valuable currency. A long-time financial reporter based in NYC, Andrew Ross Sorkin, stipulated that, after analyzing the deal given to Amazon, that the State and City (of New York) would effectively give Amazon about $3B in tax breaks, but that the resulting economic effects of that investment in the form of future tax revenues and economic activity might have totaled $27B over time. What?! That’s a 9x return on investment for the region, which could’ve used the proceeds to improve infrastructure, services, and other things across the city. However, that message may not have had its own singular champion — rather, a vocal minority of residents (minority here is meant to be statistical) who opposed HQ2 (and their representatives) signaled they’d rather have those $3B of tax incentives instead funnel directly and immediately into said infrastructure and services. To be fair, the NYC MTA, among others, needs massive upgrades, especially on well-document, troubled lines. Those who banded together to oppose HQ2 won the war of persuasion, and they in turn wielded the most potent currency.

3/ A powerful warning shot to technology brands. Before Facebook, Airbnb, and Uber spread like wildfire across the world, we as a society didn’t really, truly understand how high the stakes were. Now, in 2019, everyone knows how high the stakes are, and as a result, opponents to this kind of change mobile much quicker and with greater force. We must acknowledge that while the majority of NYC residents (across the boroughs) were very much in favor of having Amazon in their backyard, there were enough who did not. Those opponents have a sense of what comes with the “big tech” bundle — changes to the neighborhood, changes to rent, changes to the culture they have today. A good number of folks do not want that change. I can empathize a bit here. I used to live right by Stanford University, starting in 2011. I lived down there for a while. In that time, the network scale juggernauts like Facebook, Apple, and Google became so successful, the cost of living increases down there are rising incredibly fast. Similar effects are seen in Seattle and surrounding neighborhoods, home to Amazon’s main HQ and Microsoft. Now that Google is building data centers across various states (and I’d expect Facebook to follow suit), now that Facebook has big offices in Seattle, NYC, Pittsburgh, and so forth, and now that Apple has moved into Austin, communities are fully aware of “the stakes” associated with these new types of neighbors.

4/ Politicians need to become dealmakers for their constituents. Given how polarizing “the stakes” can be and how critical persuasion is to winning, it is now incumbent upon politicians to improve their own dealmaking skills and to effectively communicate their positions repeatedly to their constituents. Representatives in Queens (which hosts Long Island City) may have been more savvy and persuasive in their use of statistics, social media, and incisive messaging to convince enough people — including Jeff Bezos — that they were not welcomed here. NYC’s loss is now another city’s gain. Another mayor or governor should swoop in, cut a new deal, and start selling the benefits of a potential 5-10x investment could have on their community.

5/ Network-scale businesses often have more power and leverage over governments. The truth of the matter is, Amazon doesn’t need NYC in order to succeed. It doesn’t need any city in particular, it just needs one or maybe two more cities to build HQ2 and then HQ3. Like a prosecutor pursuing a case, Amazon just needs to flip one witness to make its mark. The proposed $3B-for -$27B trade could likely be attractive enough to solicit significant interest from other locations.

The (theoretical) beauty of the American system is that individual states (and their cities) can compete for this business. There are no standard rules in this game. And the citizens can fight back to oppose these advances. The issue for the majority of NYC residents today, however, is that they will lose out on this potential surplus. Now, NYC and NY State officials have to figure out how to answer the calls from both sides, those who want the $3B appropriated today as well as those who are wondering why they’d blow off the potential $27B windfall. Meanwhile, Jeff Bezos and Amazon is on to the next thing, scoping the next location, ready to find another city to wheel and deal with. One region’s loss will be another region’s gain.

The Story Behind Our Investment In Fiddler Labs

This is the story of how we invested in Fiddler Labs. At the beginning of 2018, we almost invested in a startup with two strong founders. To make a long and private story short, on the morning I was about to call the founders to let them know I was in, they decided to amicably part ways. I was stunned, but also relieved it happened then and not much later. A few months passed, and we ended up investing in the company with one of the original founders. And, a few months after that, we heard the other founder came up with a new idea, and we had to scramble to chase him down. I’m glad we did.

My old friend Krishna Gade and his new co-founder, Amit Paka, were teaming up to build a new startup in one of the most exciting technology spaces out there today — artificial intelligence. But Gade’s and Paka’s vision wasn’t simply to leverage AI for a vertical application. Instead, drawing from their experiences at Facebook, Samsung, and other large technology companies, Fiddler Labs embarked on a journey to build the systems and interfaces to empower companies to handle one of the most critical areas of AI today: Explainability.

The last decade has seen both the explosion of new information and huge changes in how information moves around the world. Social media is one of the biggest examples of this, inverting and transforming how information flows. Algorithms are powering most of that flow, and these algorithms are often designed to maximize engagement, reduce costs, and the like. The data inputs and decisions of these algorithmic systems, however, have traditionally been hidden from the consumer’s view. This is what they call the “Black Box.” And, looking ahead, imagine a world where these algorithms get stronger, smarter, and more intuitive, to the point where they develop their own intuition in making decisions.

Enter, Fiddler Labs. In the future, will companies feel pressure to expose these black boxes to their customers, or to regulators, or to law enforcement? New laws like GDPR in Europe have introduced the concept of a “Right To Explanation” as a feature of data privacy laws. Some states in the U.S. use algorithms to help with school placements and other decisions which shape our lives and our children’s futures. Despite all of this, “Explainability” as a branch of AI is anything but straight-forward — many experts believe the drive for explainability in AI will either trigger a degradation of systems, or that an AI’s intuition will evolve into a form of reasoning, akin to a human’s, which cannot be easily explained.

Haystack is lucky to be a seed investor in Fiddler Labs, alongside Bloomberg BETA and Lightspeed Venture Partners, where I am also a Venture Partner. The story behind the deal is just as interesting — as you can imagine, Gade and Paka had a lot of interest in their round, so given that I knew Gade well from before, I did a few things I’ve never done before — I wrote a term sheet, committed my largest ever first check (gulp!), negotiated the post-money with the founders, and hand to fend off a number of strong funds who wanted to invest. Normally, this would have made me very nervous, but I have known Krishna for some time now, and I love the white space in this field of AI so much, I very much want to part of the ride. The ride is made even easier by knowing that my friends James Cham from Bloomberg BETA and one of my mentors and colleagues Ravi Mhatre, along with new Lightspeed partner Jay Madheswaran, will be forming a power-syndicate to help support Fiddler Labs and the future of Explainable AI.

Quickly Unpacking Spotify’s Acquisition Of Gimlet Media

I’ve been traveling all week, digging out of email, and closing two deals and — hence — have been pretty quiet online. As I was scrolling through Twitter today and saw the rumors around Gimlet, the podcast media company, being acquired by Spotify for $200M in cash, I knew I had to stop, write this post, and share some thoughts on what’s going on. So, here goes…

Well, actually, before I begin, this post needs a few disclaimers. One, I am a huge podcast nut and listen to podcasts more than I watch TV or movies, and some weeks, even music. Two, despite my love for podcasts, I did not invest in podcast apps or companies (aside from Vsporto, which I was drawn to for different reasons related to app constellations) for reasons I’ll share below — including Gimlet. To underscore here, I hope I am proven wrong on these matters. And three, I was an early employee of Swell Radio, a “Pandora for podcast” app which personalized spoken-word audio streams for users — Swell was ultimately acquired by a “large consumer technology company” and eventually retired as an app.

So, with those disclaimers, here are my takeaways from this alleged transaction:

1/ Engagement Minutes Are Hot
We typically think of “engagement” as clicks and views in the consumer world of Instagram and Snap, or more recently with the rise of prosumer enterprise applications like Slack and Airtable — but as Spotify has shown, for instance, engagement minutes of audio can be monetized. For Spotify’s core business, which charges consumer subscriptions for the ability to have unlimited mobile access to an enormous music library, music as the audio source converts high engagement minutes into recurring revenue via subscriptions. [Spotify will also get into commerce like its social network peers, but that’s a subject for another post.] However, podcasts are not songs, of course, and therefore not subject ot the same licensing, restrictions, or scarcity. A company like Spotify has a broader vision to capture more listening engagement, and they’ve already begun offering podcasts (which are free) inside the app to capture more engagement minutes.

2/ Big Consumer Tech Cares About Audio
Artists will launch new songs on YouTube, or Instagram, or Snap, or SoundCloud. Speaking of SoundCloud, remember Twitter tried to buy them? Remember Amazon bought Audible, for audiobooks? Remember Spotify got its big break in the U.S. market by launching in connection with Facebook viral invites? Remember Stitcher? Remember Pandora? Well, Pandora Christmas is pretty good. YouTube empowers its premium subscribers to experience YouTube Red or Premium, which allows users to play the audio of any YouTube video as background audio — much like a podcast. (This premium tier also allows users to download content to their device for offline viewing.) For the large consumer tech companies, they want to dominate your total available engagement minutes — at home, in the shower, on the walk to the grocery store, on that long drive or flight. This all represents a huge market for engagement minutes as audio as a medium, while not inherently viral, is likely more accessible to more people in terms of literacy and in many cases faster and more efficient than reading (though not in all cases). Apple is ultimately the 800-pound gorilla in the audio minutes space as it relates to podcasts, with their woefully outdated native Podcast app being the most dominant podcast app (and having native distribution at scale), despite years of mobile app innovation in podcasts.

3/ Audio As A Feature Of Streaming Services
Many folks think of podcasts as its own category. I do not. I came to that conclusion the hard way, after working in the field. Ultimately, I think of podcasts and audio more generally as a feature of multimedia streaming services. For instance, if I subscribe to Amazon Prime, I expect to get Prime Video but also Prime Music — naturally, Amazon tried to charge for that separately and that’s a tougher sell in a world of Spotify. In the future, I can imagine a world where Spotify has video content (like Netflix), or I can imagine a world where Netflix offers audio stories (like Spotify). I guess my main point here is — podcasts are (to me) just a feature of audio, and audio is an important feature of multimedia overall, and best in breed multimedia services which charge subscriptions for our attention are in a race to keep stuffing the services bundle.

4/ Audio Connectivity Points Increasing
CarPlay, Bluetooth, Airpods, Apple’s native podcast app being preloaded, global smartphone penetration — these all are contributing to the increase in podcasts. I also believe personally podcasts are increasing because social networks have proven to have adverse effects on many users and can feel cold or ironically isolating, whereas hearing the voices of others is almost as intimate as seeing a moving photograph or video. On top of this, it’s impossible to click on a news link from Twitter and not open up a bloated web page bogged down in banner ads, video interstitials, and just crappy layouts — it’s simply cleaner and a better experience to listen to most media company’s podcasts versus opening up their crappy websites. So in this world, if you see Bluetooth getting better, if terrestrial radio hasn’t innovated (it can’t, really), and now wireless headphones make it easier to tune out and tune in on the subway, these trends all converge to the point where we have the explosion of podcasts today.

5/ Underlying RSS Technology Not Optimal For 21st Century Media
I have fielded many startup pitches for podcast-related startups and basically said “no” to each one. Again, I hope to be proven wrong — I could’ve invested in Gimlet and today I wish I had. That said, the $200M price tag is likely tied to another feature of the company and team, which I’ll talk about below. In one of the podcast company pitches I said “no” to, the founder (who was very gracious) and I got into a great conversation about why podcasts are so good but also stuck — and he convinced me that the underlying RSS distribution for them is outdated and needs to be built from the ground up. I’d love to hear more opinions on this. And, this issue which then leads us to the next point around captivity…

6/ Video Is Captive, Audio Often Isn’t
It used to be if you wanted to watch Game Of Thrones, you had to subscribe to HBO. Howard Stern signed a huge deal decades ago to leave terrestrial radio for Sirius Satellite radio, so if you wanted your daily Stern fix, you had to pay Sirius every month for the benefit. MasterClass is an example of a company doing this well in the age of mobile, only issuing videos via its mobile application and therefore forcing would-be consumers to download its own app and charge them directly for that restricted content. Gimlet isn’t just a podcast company — they created their own content, and that’s likely why Spotify wanted this company. While it’s very hard to create a hit audio series like Serial, I think we will see more of the Netflix studio model applied to audio — now, while that sounds awesome, I think audio will simply never rival the engagement and emotion of a video series. Audio done well will capture those consumer engagement minutes, but it’s a different type of engagement and one that is likely to be a great feature of a paid service rather than the premium offering the bundle.

Endnote… The radio ad market was historically small and unattractive, too small for a company like Apple (which dominates audio clients) to care about — but it will be interesting to see if global smartphone penetration and all these new connection and listening points will have a 10x or even 100x effect on the market opportunity, and if more captive content (like Gimlet can create) is a part of that future. I do hope that’s the case — I personally listen to all the 5-7 big Sunday politics week-in-review shows, which are published freely every Sunday. I never watch the video. I may pay something small to listen to those or to hear really amazing interviews. Education is one area I think these content players can start adding real value — basically, take the MasterClass model to the long tail of topics. Maybe one of the new hot podcast companies will figure it out, like Breaker or Anchor or some other one I haven’ t yet heard of. I would be really excited to see something like that, both as an investor and a citizen of the world.

Reflecting On Haystack’s Investment In HelloSign (Acquired By Dropbox)

Over five years ago, as I began to deploy the first Haystack Fund, I was lucky to select HelloSign as my sixth investment ever. I discovered the product much like you might have – I used it to help handle the paperwork and signatures for the new fund. I had a friend who worked there (thanks Joel Andren!) and he was patient and over time found the right time to introduce me to Joseph Walla, one of the company’s cofounders. I took Joseph out for lunch, told him about me and Haystack, and asked to invest in the company.

Ultimately, Joseph invited me into the seed round. That turned out to be a good lunch. At that time, back in 2013, Docusign was known to be a well-performing company. In early 2014, Docusign became a unicorn and eventually went IPO in 2018 at a whopping $4.5B price tag. And it nearly tripled in the first year, now settling to be around the same market cap at Dropbox. During this time, the tech world didn’t really know how to think about these products. Was Dropbox just a storage provider, or a collaboration platform? Was Docusign just a place to get electronic signatures done, or could it have more tentacles into document-management systems across a variety of sectors?

Back to HelloSign, an early criticism that may have been used against the company is that electronic signatures is just a product feature of a larger platform. But over that five year period, signing documents online turned out to be a very important and profitable product feature, to the tune over $10B in market value. That provided an even bigger shot in the arm to the folks at HelloSign — after having tens of thousands of corporate customers, a growing suite of APIs for document management and signatures, and growing nicely without overspending, the surprising scale of Docusign’s success meant that, by proxy, HelloSign was more than just a product feature. It was a critically important product feature for modern workflows.

Dropbox agreed, today announcing it had come to terms to acquire HelloSign to help bolster its product suite for enterprise customers. It’s the largest acquisition by the company, ever. I’m really excited for Joseph, Neal, and their team. One thing that struck me about Joseph is how quiet and hardworking he is and no doubt his team is that way, too. In a way, it’s also a little bittersweet because, like Docusign, I think the company could’ve grown and grown because we now know the market is huge and growing. And Joseph is an authentic CEO – I recall we had to have one serious chat about product and Joseph personally called me to follow-up and I could hear in his voice how seriously he took that issue. He and his team really care about the perfection of the product. But that’s just me, and I’m waxing poetic – Dropbox is an incredible home for the HelloSign team, and I wanted to thank them all for all the work and for saving a small seat for me on their ride. Best of luck at DBX!

Bites At The Apple, Sharpshooting, And Shots On Goal

More often than not, I believe it is largely impossible to predict the shape of an outcome when making an initial venture investment. Investors, of course, will conduct significant due diligence, investigate sources, study trends and the competition — and much more. But, at the end of the day, the future is unknown and needs to unfurl naturally. The insight and data venture investors have to work with increases as a company matures — the earlier the investment, the more unknown the outcome is.

I’ve been thinking about this nearly immutable law of investing lately, specifically, as I crudely demarcate three distinct areas of investing: I/ Venture Seed, or before the Series A; II/ The Series A and Series B rounds; and III/ Venture Growth. Within each category, I believe there is an inherent tradeoff between information at the time of investment and the ability to approximate future value creation.

As such, I see a distinct strategy and style available to investors in each of the three segments. Briefly, Seed investors who keep their funds small have the benefit of having more “shots on goal”; Series A and Series B investors who typically take board seats with larger but moderate fund sizes still have a decent number of shots on goal but have to be much more precise with their shooting aim; and Venture Growth investors and the larger platform funds have smartly scaled to cover all stages and have “multiple bites at the apple” — if a larger fund misses on the next Uber at seed, or the at Series A or B, their flypaper can theoretically catch a piece of that next Uber at the growth rounds, and with the web and mobile penetration worldwide, the addressable markets and headroom even for growth companies is still enormous.

I do not have much experience with evaluating Venture Growth deals — but as the larger VC platforms have scaled, their funds have matured to the point where they have multiples bites at the apple. The conventional wisdom is to wonder if these firms are getting too big — the counterargument is equally as valid, with technology seeping into every sector and spreading across the world, and with private markets bulging, new companies are able to raise enough capital where they can directly challenge and overtake incumbents rather than waiting for them to acquire them.

I also don’t have lots of direct experience with Series A or B deals. From what I observe, these rounds are now incredibly competitive as the goalposts for Series As and Bs have continued to move further out, and the prices of these deals can be orders of magnitude past the seed round prices. In Series A and B, investors often have to be marksmen or markswomen, sharpshooting with incredible precision to hit the right targets. While individual investors may invest in 5-7 companies per fund, their fund partners may do the same, giving the fund more shots on goal.

Seed is what I know. While I get to observe multistage investing in my role as a Venture Partner with Lightspeed, seed is where I spend my time. In seed, assuming fund sizes are kept in check, can afford a manager many shots on goal. The extreme of this is a “spray and pray” approach. The other end of the spectrum are seed funds which concentrate positions upfront and behave more like Series A and B pickers. There is no “right” approach.

For me, I like having shots on goals. I have been very fortunate in selecting some seed investments since I started. But I would never say that I could have seen the shape of the outcome when I invested — well, there was one company that I knew would be a billion-dollar-plus company, but I had no idea about the others. In those moments when you’re investing at seed, you know the loss ratio is going to be high given just how hard it is to get to the Series A. Increasingly, the bar to hit Series A has gotten even higher. Having more shots on goal helps spread out the effects of the loss ratio.

But, most important, when I started out investing, I was very lucky to get lots of smart advice. One successful VC told me, paraphrased “Take more shots on goal. You want to be in companies that people recognize. They won’t remember the ones that didn’t work.” In the time that I’ve been investing now (nearly six years), I have been offered the chance to dabble in Series A or even beyond. While tempting at times, I concluded that I need to play the game that I know and feel comfortable with — and to have the ability to have some extra shots on goal. In assessing myself as an investor, I don’t think about having multiple bites at the apple, nor do I think about being a sharpshooter and picking the exact right startup out of the thousands that could be worthy of that Series A or B check. But at seed, which is much more fluid and collaborative, there’s comfort in knowing we have more shots on goal. In an uncertain and random world, it feels like the right anti-fragile approach that fits me best.

Fund Investing Versus Fund Management

When I started out investing (via a fund — not my money), I was just investing based on a simple schedule: About once a month, invest $25K into one company I liked. Pretty easy. Over the years, that check size grew slowly to $50K, then a few $100Ks, and I followed-on into a few at the $250K level, with two outsized pile-ins at $400K and $600K total exposure, respectively. That escalation from $25K back in 2013 took a little over four years.

I consciously took that ramp slowly because I found it was easy to trick myself into thinking going faster and bigger would be straight-forward. As a result of going more slowly, I had the time to make a few mistakes to learn some lessons, but the mistakes were never too big to leave a massive crater in the total value of the portfolio. The trick with these experiments and lessons is that in investing, you don’t get the feedback right away — it can take a few years at seed to understand the impact of those decisions.

As such, I feel like it really took me 4-5 years to internalize how all the aspects of fund management come together. The reason that’s important — and why I’m writing this — is that in helping lots of folks think through starting their own new funds (there are even more of them bubbling up today), I find there’s a crossing-point at which an investor transforms from being an angel or operating out of a small fund to being an ”investment manager” of other people’s money. Fund investing is easy — fund management is not.

This new mode of “investment management” is very different and requires the understanding of complex topics and how they are interrelated. Usually for funds who have become bonafide institutions and scaled up, they will then have enough resources to recruit and hire financial professionals and controllers to help with these topics — issues related to fund recycling, fee waivers, follow-on investment criteria, investment documentation, fund pacing, reserve management, cross-fund investing, secondaries, fund auditing, fund scaling and adding new partners, fund modeling, and the most critical, portfolio construction. While the big funds hire people to do this and the new angel/seed funds are just starting out and don’t even think about it when starting — it’s somewhere between years 3-5 where I’ve noticed this starts to sink in.

As new managers are meeting LPs to begin building those relationships, I know that many of those LPs will assess the GP as an investor (how good are they at investing?) but also assess them as a manager of assets (are they a good steward?). What makes this especially hard for newer managers is that the ability to understand and practice fund management takes a long time and can’t be learned in an online course, or through blogs — it has to be practiced in real life, and the GP has to take it upon themselves to learn it and craft it. (As a side note, one of many reasons LPs are more comfortable with spinouts from existing VC firms is that the GPs in those cases have been exposed to the sophistication of fund management through their previous roles. That doesn’t mean they’ll be expert at it, but the learning curve is so steep at the beginning, they’ll come in with more knowledge of it than their peers.)

I often mention this distinction to folks raising new funds because I am going through it right now myself. While I have not yet figured it all out (that’s a continuous process), I have noticed that it took me over four years for these parts to click in my brain, and with lots of help, am figuring out a way that all of these parts of fund management need to be managed and cared for on a monthly basis. In some ways, the current Haystack IV was only possible by running lots of experiments in Funds I-III and having enough time to let the lessons reveal themselves. For managers who have ambitions of scaling beyond the $10M fund mark (or thereabouts — and by the way, scaling isn’t something that’s required), I believe being of the mindset to learn and master these components of fund management will be one of the best investments one can make.

The Parlay

In gambling, particularly in sports, there’s a concept of “parlay.” The word can be used as a verb (“turn an initial stake or winnings from a previous bet into (a greater amount) by gambling”) or a noun (“a cumulative series of bets in which winnings accruing from each transaction are used as a stake for a further bet”). The more I discover about going beyond just writing checks into startups — concepts like portfolio construction, cross-fund management, and new fund formation — the more I realize how critical the parlay is.

Let’s focus on the noun first. In the NFL, for instance, you can make a series of connected bets that, if you’re right, can hit the parlay — the more games in the parlay, the bigger the payout. Picking the right 5 or 6 lottery numbers that show up on TV is a form of a parlay, albeit a random one.

Then there’s the verb, “to parlay.” I’m much more interested in this. “To parlay” something, as stated above formally, is the process of using earlier winnings to gamble — or, to invest — in the future. And naturally, I started to see patterns in the startup ecosystem. A savvy operator at a breakout technology company may parlay his/her early pick (in the form of stock, cash, or reputation) to an executive title in the next role, or a plush investment job; a daring creator may parlay a government grant into a product that works magically, and then parlay that into a company. There are so many examples of folks doing the parlay – accumulating resources, harnessing them, and exhibiting a willingness to forgo time and those early wins for a bigger prize. Recall, the odds of a parlay lower as more connected bets in the chain have to hit.

Naturally, I started thinking about the parlay as it relates to startup investing, building funds, and fund management. There are now many angels who have parlayed their early portfolios into VC funds (big and small), or taken that portfolio and turned it to a GP role at an established VC fund. Today, with more scout funds, syndicates, and newer funds forming weekly, those folks have parlayed whatever they’ve done before to get the chance to put money to work for others.

But, the parlay doesn’t stop there. This is just the beginning. What I’m finding as the Haystack funds slowly accumulate, the parlays required do, as well. As a fund manager and part of the GP, the GPs have to make a “GP commit” to show skin in the game. Most GPs can’t actually make that commitment, especially younger ones, so either the firm or a bank will loan or finance those commitments against future cash flows. Of course, if the fund does well, that investment compounds nicely. There are other parlays. A firm that writes lots of initial checks may have a strategy to concentrate their money in just a few of those companies after turning over a few cards. A new fund manager may have to engineer a secondary in a great company from a prior portfolio, convert some of that holding to cash, and use that cash as a show of good faith in a GP commit; he or she may elect to roll up previous good investments into a new vehicle to sweeten the pot for other LPs to come in and feel as if the first moves out of the gate are positive.

What threads this all together is the universal concept of taking risks. People undertake all sorts of personal and financial (and time) risks to get to the place they want to be. Yet, as people age and time gets more finite, the parlay is attractive — stringing bets together, we all have to concentrate our risks a bit and make decisions ahead of when we would like, ahead of when we have full information. The upside of the parlay is that it is a multivariate play, it is a shortcut to get to the next level — with plenty of risk baked in, and that’s the point.

Deal Opacity

When I moved back to the Bay Area in early 2011, the technology and startup sector didn’t feel as big or expansive as it does today. In that time, Twitter was just getting its sea legs, the Quora private beta was one of the hottest tickets in town, and TechCrunch was the de facto powerhouse in tech/startup media attention. During this time, when we didn’t really understand the stakes of what technology would hold for us all, it was relatively easy to know the investments made by the top VC funds — they’d either announce them on TechCrunch, or the early reporters at TechCrunch would somehow find out which deals were hotly contested and doing well.

Back then, there were fewer deals, smaller funds, and relatively speaking, more deal transparency.

Now, contrast 2011 with 2019, and we have an entirely different situation. Today, the stakes related to technology investment are known worldwide. Every single megafund all the way to some of the world’s most powerful sovereign wealth funds are now searching for the next Uber, either so they can invest directly or so one of their managers can ensnare it in its flytrap. And, with respect to deal transparency — it is basically gone, drowned out.

We now live in a world of relative deal opacity where very few people know and track the moves of the best technology and startup investment firms. I’ve been trying to think of “why” did this change happen, and also what the change means. Briefly, here’s what I’ve come up with:

1/ Erosion Of Crunchbase: It used to be that CrunchBase, which was created out of TechCrunch, was kept up to date with company information and investor participation. It was close to a single source of deal truth. People used to write basic apps to be able to get CrunchBase data on their phones. Then, TechCrunch was acquired by AOL (now “Oath,” or whatever – I can’t remember), and the product wasn’t able to keep up with the times and explosion of companies. The team valiantly tried to rebuild it, but too much time passed, and then eventually CrunchBase spun out into a private company which was then funded by Emergence Capital, which is attempting to build it into a much larger enterprise data product, holding competing information with Pitchbook, CBInsights, and others.

2/ Expansion Of Private Markets: Now every company is a startup. Every company is a tech company. Technology is spreading into every corner of the company. Every investor needs exposure to technology, and the earlier – the better. More money in the ecosystem is searching for these opportunities, or funding competitors. This all has compounding effects leading to more deal opacity, which I outline in more detail below.

3/ Carta Just Starting Out: One of the main opportunities for Carta (formerly eShares) is to pick up where CrunchBase left off, but more from the cap table as a starting point. This is important because lots of people (especially investors) fudge the truth about when they invested in a company, and how much in terms of percentage ownership. It’s a long slog that Carta is moving toward, and they are in a great position, but it will still take time for everyone and every important deal to be on this platform.

4/ Technology And Startup Fatigue: I can’t prove it, but I do believe the constant barrage of technology and startup news has forced some founders and investors to avoid any attention, period. In these cases, they’re less excited about announcing their rounds, or just want to wait for the big reveal, when something important happens, or a big milestone is reached.

5/ Copycat Culture And Stealth Mode Back En Vogue: I’ve alluded to this above and below, but now when a category gets hot, founders and capital flood it. So for teams who are early and/or disciplined about the environment, there’s little incentive to making big waves in the press.

OK, so what does this all mean, does it matter that the premium deals being done are more opaque?

In some regards, it doesn’t mean much. No big deal. In other ways, it is a significant change. As private markets expand and technology seeps through every sector transforming every company into a technology company, there are more investment firms across private equity who want to invest earlier, who want to invest closer to the point of innovation. And, many of these firms would love nothing better than to cherry pick from the portfolios of the best venture brands out there. And founders, who see competitors left and right getting propped up pre-traction with $100M+ rounds are not eager to publicize exactly what they’re working on, let alone their capital partners — until the time is exactly right.

I know a much smaller version of this phenomenon because I experienced it myself. I used to list every company I was an investor in. Now I do not. That is not to say every company I invest in will automatically be huge (I wish it were true!), but what started to happen is that investors from Series A firms all the way to growth investors would bombard the companies we invested in with offers of extra cash or wanting to extract information from the teams. I found that to be a huge distraction for the teams and myself, and I don’t blame founders, it’s easy to be seduced by the friendly inbound call. Nowadays, I keep a dynamic list of LPs and partners that I share our deal information with, and I don’t publish it on my site. Eventually the best companies will find their best partners when they’re ready.

Today in 2019, this deal information among the top VC brands is only really moving through smaller, trusted networks. Yes, LPs in these funds have information in terms of new companies, check size, and ownership, but not much more. Once a year, they may hear about a few companies or meet the founders at the annual meeting. Folks who are in the Bay Area, active angels and/or seed investors with larger portfolios, and a few select others have a way to know which top firms are doing which deals, but I would argue it’s considerably more opaque than the previous era, and no one has devised a great system for tracking this information.

In summary, the signal that used to be generated from a competitive deal is now hidden, obscured, and muffled. That’s how the investors and the founders often want it to be in 2019. Why invite the competition? Why invite more unsolicited inbound? Why invite the noise? I can’t blame them.

Looking Ahead, Predictions For 2019

Alright, here we go. My predictions for 2019. I am not great at these “looking ahead” posts. We all know the unknown will happen. Looking at my post last year, it wasn’t that great — and my take on crypto was proven wrong. Ok, let’s move on…for 2019’s prediction, I tried to keep it simple and cook up big questions that are on most peoples’ minds, and offer my two cents on them.

As to 2019…here are the big FAQs out there:

When will companies start going public? I predict: soon! Well, actually, quite a few tech companies IPO’d in 2018, though many of those are a bit underwater now given December’s public market volatility. That’s still OK given the IPO is more of a financing event than anything else, right? Many of the companies who are waiting for 2019-20 are likely wanting to file papers (or already have) and list. I am expecting to see this happen as soon as mid/late January. The next two years could be epic for tech IPOs and the Bay Area specifically — the combined market caps of the pipeline, even taken with a discount, total in the hundreds of billions, with many of the key shareholders (as investors and employees) residing in the Bay Area. If things hold up through lock-up periods, waves of cash will wash up in northern California. Caveat: The market could not be kind to some of these companies — What will investors think of Uber losing billions of dollars per quarter? How will they price Lyft (operating just in the U.S.) vs Uber (global)? Will Pinterest’s ad engine be compared to Facebook and Google, or to Snap? Ultimately, I predict these and other companies will go out soon, but for many of them, they may also go slightly underwater relative to their most recent private round valuations.

When will larger tech companies be subject to regulation? Not anytime soon, I think. Clearly, some of these companies have to look in the mirror and make difficult choices. That said, I don’t think Congress can do much (and are in deadlock as I write this), so taking on this subject now given all the other issues on the plate make it unlikely.

When will the crypto sector rebound? Not in 2019. I think this bear market is real and is medicine to deal with all the ICO hype of 2017. That doesn’t mean all things are bleak. There are great projects out there, stable coins continue to generate interest, and new models for network participation make me bullish that, perhaps after 2019, we could see a new platform (like Ethereum did) unlock a new innovation. I hope that is the case.

When will the Mueller Investigation be over? A few disclaimers: I am not a lawyer. I also want to share my apolitical point of view here without getting into a partisan squabble (if that’s possible). As some people play Fortnite or binge on Netflix, I am somewhat embarrassed to admit that I am obsessed with this storyline. And, I think it carries some pretty big implications for all of us, regardless of political persuasion. Here’s what I predict: The Special Counsel’s [SC] investigation will likely end in 2019. I believe the SC, which has a broad mandate, has referred material its found that are adjacent to the main investigation to other jurisdictions, such as the Southern District of New York (federal) or the New York State Attorney General (state), among others. I can’t keep track, but there are well over 10 separate investigations that touch on an organization tied to the current U.S. President. Many assume that an SC Report will mark the beginning of the end of the current presidency. I do not believe that will be the case. First, I expect significant litigation between the Justice Department, Congress, and The White House over whether the report can be made public. If it is made public, then these departments may redact certain portions of the report in the name of national security, individual privacy, or executive privilege. No matter what happens, no matter how damning any report could be, I expect the Senate to continue to still support the President. As 2019 rolls around, at some point (perhaps the fall), it will be too close to the next 2020 presidential election, such that Congress would likely prefer to have the voters express their will in 2020 than trying to interfere with the will of 2016 voters. The current President still has a very large and strong base of support, and I do not see that support changing enough to warrant other big changes in 2019.

When will the music stop? Everyone thinks we are headed for a downturn. December public market volatility was pretty messy. That all may be true, but as it pertains to technology startups and the long-term opportunity for technology and networks to seep into every part of the economy, even if the music stops in public markets, I still think we are past the point for the music ever stopping for funding startups. I subscribe to the thesis by USV’s Albert Wenger, that we are in a “World After Capital,” where capital is abundant and it is attention which is the scarce asset. Many countries around the world will continue to want to invest in innovation in the U.S. (especially the Bay Area) and China. That demand may actually intensify if the overall market corrects. And, who is to say a little correction here or there is a bad thing? We should all be on our toes and not take tomorrow for granted.

And with that, we wrap up 2018. Thank you for reading, happy holidays, and best wishes for the new year!

Looking Back On Tech, Startups, And VC In 2018

It’s that time of year, time to look back and reflect on the most significant storylines in the tech, startup, and VC world. A comprehensive post on this topic could be 5,000+ words, but we do not do such things here. We kept detailed notes month by month and today, I tried to organize them by key sections, what you’ll see below. There’s a good chance I’ve missed something — if you feel that way, by all means, please share your point of view on Twitter (or email) and link to the post.

And, with that warning, I offer to you, the big stories in the startup and investing ecosystem of 2018, written in ascending order of importance and magnitude…

6/ Venture Capital In Expansion Phase

Technology is, like water, flowing and seeping into nearly every sector and eventually into most of the global economy. And as more economies worldwide seek to shift their investment strategies offshore and seek out technology, hubs like Silicon Valley and Shanghai, among others, have reaped the benefits. Add to the mix that high growth companies now often prefer to stay private longer and some altogether shun public markets, venture capital firms have bulged in size, many of them leading $100M rounds, going multi-stage (from seed to growth to pre-IPO), going global (investing down the street and across the Pacific), and making sure they have enough assets to defend positions in their best companies. Traditional seed funds have gotten bigger, many armed with opportunity funds on top. Hundreds of new micro funds somehow keep getting into the market. More and more angels will be minted as the 2019 IPO class emerges. Public investors, cross-over investors, and even traditional private equity firms have taken notice, further blurring the lines of what constitutes true venture capital.

In such a bull market, rather than just share my two cents, I wanted to cite some of the best posts (in my opinion) on venture capital from this year: Fred Wilson of USV on how VCs can and should take money off the table; Ashmeet Sidana of Engineering Capital on how VC is no longer a life-cycle investment business; Elad Gil on why we saw so much large preemptive round behavior among VCs; and Eric Feng of Kleiner Perkins on a data-driven and historical look into how the VC sector has expanded. If every sector is to be transformed by technology, and if private markets keep growing, it makes today’s conditions understandable.

5/ Early Effects Of The Softbank Effect

In 2017, Softbank rounds caught folks’ attention. Now in 2018, there’s been significant rounds they’ve led or participated in — Pitchbook here recaps some of the biggest. And, privately, many investors up and down the stack are discussing what the true impact of these mega rounds will be. As more investors have more touch points with a “Softbank round” in their portfolio, a picture emerges — rounds here often take a long time to close. The fear of them investing in a competitor is real. During this time, there’s financial leverage used in the transaction to help buffer the firm’s cost of capital (e.g. the firm may have a right to raise up to $100B but may not call all of it). Also during this time, the underlying metrics in that business can change positively, potentially trapping companies to accept the initially-agreed upon valuation. And earlier investors who may have been expecting healthy secondaries for liquidity on the backs of these rounds found instead either no such tender or offers at very steep discounts. The original conventional wisdom was that capital could be a weapon for the winning company as private markets hold longer, but now as 2019 begins, I am not so sure. Perhaps we will look back on cases on like Bowery Farming vs Plenty in the urban plant growing market — one company raised a massive round early, and one just raised one to compete nearly two years after having more sustained growth. There are a number of battles like Bowery vs Plenty we can track, and I plan to do so over the years.

4/ Global Trade Wars Are For Real

This is a huge topic and one that I will address separately in the new year. The short story now is that I believe we as a society and economy are not only underestimating the rate of acceleration in climate change, we are doing the same with respect to the severity and intensity of global trade wars. And, this goes well beyond the current resident of 1600 Pennsylvania Avenue. China’s growth over the past few decades has been remarkable. Frankly, the scale of it has snuck up on the U.S. Over the next few decades, I expect forces in Washington DC to use economic and monetary policy to attempt to rebalance the trade relationship between the world’s two most dynamic countries. That will take a long time to settle.

In the meantime, we have what we have today. Governments blocking acquisitions, the curtailment of company expansion, more scrutiny on overseas operations of U.S. companies, more sensitivity around technology IP and security. This is again a much deeper topic to explore and I will do that in early 2019.

3/ Crypto Hibernation

It’s winter in crypto land, and the bulls are hiding with the bears now. This is probably the darkest hour crypto folks have faced. There was an insane level of hype, of course, so perhaps it was called for. Privately, friends who are deep in the industry have confided in me that they see the competition for talent cooling dramatically; that they believe it could be 18+ months before there’s enough confidence back in the market; that crypto solves problems below the application layer, but not really above it (yet); and that the SEC and regulators will begin to slowly clip the wings of a number of projects who aren’t properly operating under guidelines.

Consider the above paragraph versus how this year started. Telegram announced their ICO and raised over $1B from some of the best VC firms. Basis, a stable coin, raised over $100M from a similar caliber of firms. Coinbase, the largest crypto startup in the U.S. by a mile, continued to soar in volume and valuation. VC funds invested directly in MKR.

On the investment side, some of the best traditional VC firms made forays into the space, initially in the deals above, but eventually having partners break off to run crypto-native investment funds, such as Matt Huang leaving Sequoia (and joining Coinbase founder Fred Ehrsam) to launch Paradigm; Brad Burnham and Joel Monegro leaving USV to start Placeholder; and Chris Dixon teaming up with Katie Haun to launch a16z Crypto. These certainly are not the only funds playing in the space, but point to the quality of minds entering the space.

As the year ended, things changed. Prices for public coins dropped dramatically. People again began to question what the ultimate uses cases were. So far we know that you can make money in crypto by charging a fee for an exchange, launching a hedge fund to trade coins, raising through an initial coin offering, or being acquired. That so far may not be good enough. But, there are some positive signs on the horizon. The trend now seems to be bending toward incentivizing network participation, where those who see the opportunity will want to not just invest in a new network, but put their time and resources into participating by running nodes themselves.

2/ The Scooter Phenomenon

This was the big consumer behavior story of 2018, behind the rapid rise of digitally-native vertical brands (like the breakout, Hims), and the rise of prosumer-level data applications (like breakout Airtable). Influenced by the rapid growth of the bike-sharing craze in China, a savvy Uber employee spun out to create Bird. Launching out of Santa Monica, Bird grew like crazy, triggering U.S. bike-sharing company Lime to pivot to Scooters. Uber acquired Jump Bikes, and Lyft acquired Motivate. And, thus began the Scooter Wars, which saw consumers across major U.S. cities flocking to these machines, downloading apps for each network, and paying just a few bucks to get from Point A to B. The shift in consumer behavior and the intensity of the Scooter demand was undeniable. To follow this demand, some of the best venture capital firms in the world poured billions of dollars into these companies, making their valuations soar incredibly fast.

However, many cities and its citizens did not agree. If scooters were not being stolen, reprogrammed, vandalized, thrown into lakes, hung from trees, or pooped on, many city governments felt they were being hustled by these companies in a post-Uber world. Specifically, because scooters took up sidewalk space intended for pedestrians or would be too dangerous in mixed-traffic situations, and because of the public nuisance of having them strewn across the street after someone finished a ride, city governments fought back seeking to regulate how these companies would work in their confines, likely move toward using docking systems (a la bikes) and issue specific quotas to control the number of scooters on the street.

Scooters could’ve easily become more ubiquitous if it were not for these city interventions. Additionally, the wear and tear on these scooters, given the heavy use, put a strain on the asset, and when baking in the cost and operational complexity of recharging batteries and fixing broken scooters, the unit economics were materially affected. For me personally, it’s been fascinating to see just how much consumer demand scooters as an easy and fun option, and yet consumers don’t seem to want to charge or dock these items — the friction harshes the excitement of the ride.

1/ Social Network Interference

My goodness, where to begin. In 2017, we learned about how social media feeds were used to surface biased or planted information. By the end of last year, even Zuckerberg, in his annual proclamation to publicly set personal goals, vowed to orient Facebook more seriously toward stemming disinformation on the site. Then 2018 arrived. This year, in March, the world learned about the data techniques of Cambridge Analytica; in the summer, both Jack Dorsey and Zuck testified to Congress; Twitter removed millions of bot accounts that were active in the 2018 midterm elections; Facebook’s leaky APIs sadly led to newer data breaches (I don’t think I can cover them all here); and even the graveyard Google+ was hacked for PPI.

When I wrote last year’s review post, a friend replied by email to comment that he felt that 2017 also marked a year where society began to question whether social networks did more harm to society than good. That turned out to be a prescient comment. When I was in grammar school, the Berlin Wall came down and the U.S. ended the Cold War with the then Soviet Union. A concept discussed during that time was “glasnost,” a part of the new Russia’s restructuring to provide more openness and transparency in information.

Russia has evolved in a different direction, with tight information controls and state-run media. Next door in China, too, we see the government being careful with information sharing online within its own borders and restricting access to much of the Internet. Yet, we as a planet are beginning to understand just how much of the web is not true. In the west, we are programmed to believe open wins, but with 2018 entering the books, the big questions I have moving into 2019 is — does that still ring true, in real life? Are we just at the beginning of massive, widespread hacking and disinformation campaigns, even against corporations and individuals? And will society demand to have more of the algorithmic black box that feeds it information exposed in public? I don’t know the answers, but no doubt 2019 will open up new avenues to explore that none of us could’ve envisioned before.

Hot Deals And Good Deals

In the lexicon of startup investors, there’s a term I’ve felt needs to be unpacked a bit: “A good deal.” What is a good deal, really?

Is a good deal one that’s hot or competitive? Is that a sign of goodness? Or ones that are proprietary, where one or a few investors see it before others and have the option to do it first? Are those good deals? Is it a good deal if an investor can buy ownership for a cheap or reasonable amount? Given that ownership and multiples are what drive venture portfolio returns, does that qualify as the most important marker? Or what about deals which have hung out in the market too long, gone stale, and which could be the victim of adverse selection?

What I’ve observed in conversations among each other or with LPs, investors will often revert back to this term “good deals” and attach a belief to them that may be misplaced — and this is especially true for early-stage investors. When a company has raised some angel and/or seed funding, is growing, has awesome metrics, and a great team, there are 5+ VC firms who compete among each other to win the right to invest in the company. It’s a bit easier to correlate those good deals with hotness, competitiveness, etc.

But in the earliest stages, I am convinced no one knows what is ultimately good in the end. What appears good today could be a turd in a year, and what appears to be a turd today could turn into a jewel. Many folks conflate these properties together, but I believe the overlap happens less often than we presume. It’s easy to perceive from the outside that companies that are good today and growing fast had competitive rounds all the way, but it seems it’s more often the case the breakouts struggle to raise at some point early in their life.

Hot deals may indicate quality of founder or opportunity but I do not believe they automatically indicate it will, with hindsight, be a good deal. A good deal often comes down to the net multiple the investor can book in their ledger. A seed company doesn’t need to have a hot or competitive round to drive a good outcome for themselves and their investors. Every investor, by their nature, likely feels this in their bones but in conversation, will often refer back to designing processes to catch “good deals.” It’s easy to get caught up in the competitiveness of a deal and try to win. Investors are competitive people. It’s also easy to wonder why a company that’s still hanging out in the market wasn’t able to raise, especially given all the money sloshing around here. Investors pay attention to every market single they can find.

I don’t know how to put an endpoint on this post other than to say to founders out there, if you’re the beneficiary of a “hot round” don’t assume it will end up being a good deal, and if you’re on the other side of this, taking forever to raise that first or second seed round, it is quite common. It’s part of the maze nearly everyone has to get through. It’s not fair, it’s not efficient, and it’s often not very fun — but that seems to be a feature, not a bug, given that very few seem to know how to identify “good” until it’s obvious to many.

“Your Portfolio Is Your Path”

You are the average of the five people you spend the most time with. You are what you eat. About a year ago, I tracked down a VC who gave a talk I heard about where he referenced the phrase “Your portfolio is your path,” it stuck out in my mind because amid all the noise, it was simple, brief, and yet still open to interpretation. We hung out and I asked him about the entire talk he gives (a subject for another post, if he agrees to it), but this one a small portion of it and I think OK to share.

“Your portfolio is your path.”

At least in the Bay Area, it’s now considerably easier to get into the investing ecosystem at some level and start to make small investments. It could be a micro-fund, or being a scout, or working at a larger fund with a small checkbook — whatever the model, putting $25K or $100K into seed rounds is relatively easy. Investing this early shouldn’t be an exercise in over-thinking, but some thinking and judgment is required.

One element that new investors don’t immediately realize (and I say this because it took me 4-ish years for this to sink in) is that those decisions, those investments, regardless of size, become burnished in stone on your track record. Your track record follows you around, like a shadow. There will hopefully be items on that track record you can celebrate forever; and, yes, there will be items on there you will have to explain away forever.

It’s not popular to admit, but I believe there’s really no way for very early-stage investors to control what deals they ultimately see. Yes, they can filter their inbound and hone their decision-making skills and processes, but given all the new startups forming, unless you’re Y Combinator or First Round, I don’t know how you can see even 50% of what end up as great companies. Deal flow, then, is often a random walk. Investors can control their time, who they choose to engage with and meet, how much goodwill they put into the ecosystem. But after making an investment, most investors lose control, but the decision (that flash point of holding control) follows you around.

I’ve personally found that if I invest too quickly (meaning, overall fund pace) or write check sizes that aren’t somewhat uniform, it’s easy to not be as careful about why you add something to the portfolio — and it can catch up with you over time. The associations with the founders and the logos of the companies stick around, for better or worse. I experienced this in my Fund II, which was small ($3.2M) but invested far too quickly. I attempted new things in this fund — some chunky follow-ons, 2-3 investments per month in some months, and lumpy checks that I wish now could be sized differently. Ultimately in that mess, I hit a number of companies, but I am not personally proud of that particular fund and draw a bunch of lessons from it for myself. Luckily for me, it was early and it was a small fund — any mistake in there wouldn’t be a crater.

Slowly I have learned – the association investors have with certain founders, syndicate partners, and downstream VC firms matters; the people one chooses to work with as investor matters a great deal; and while the decisions may happen quickly, they stick around for a long time. The established VC firms are usually most thoughtful about this — look and see who is invited to present at their annual meetings with LPs, and that will begin to showcase how long and deep these associations can be. This becomes most clear when raising future funds — sophisticated LPs will access your data room and literally run through your bank ledger in and out for funds, and they’ll see items which stick out. It’s not bad to have those marks in there, but knowing why the decision was made and learning from each cell on the spreadsheet is critical. The portfolio is, indeed, your path. Pick carefully and wisely!

Opportunity Amid Volatility

It’s an unusual time in the markets. With high levels of public market volatility — the first we’ve seen in the age of social media and true real-time information — it feels like everyone and their grandmom is expecting a downturn. “We’re in the nth year of an unbelievable bull market!” “Most of the country doesn’t have any savings!” “Multiples and valuations are out of control!” “When the tide goes out, we’ll see who is swimming naked!” Pick your favorite doomsday one-liner, and it’s likely to fit the conversation. Then you have real successful professional investors like Bridgewater’s Ray Dalio who can dig deep into “the why” of now — read his latest post here, it’s quite good.

Much of this can trickle down into the startup ecosystem. There are many reasons for that, such as private equity and crossover investors investing earlier, or the fact that LPs in VC funds are affected by public market swings and could, theoretically, hit some VC firms to feel the pinch. You’ll see posts like this on TechCrunch about various VCs warning their portfolio founders to brace themselves for a cash crunch, and today USV’s Fred Wilson reiterated an important point he often returns to, that in the game of startup financing, it’s a game of going for growth or profitability, and eventually, valuation multiples compress.

I am expecting a downturn at some point. Maybe it will be 2019, or 2020 — or even 2021. Who knows. Yet, I keep wondering, that even in some downturn, both the U.S. (on a global stage) and specifically the Bay Area (within the U.S.) could become even more attractive regions for investment. USV’s Albert Wenger has been writing his book, World After Capital, which lays out the argument that money is no longer the scarce asset driving the economy, but rather, it’s attention. Samir Kaji of First Republic has chronicled the unbelievable rise in the number of new funds. TechCrunch’s Kate Clark has done a round-up of the largest “private VC” rounds of 2018, and there’s a whole other list for just $100M+ financings led by Softbank’s Vision Fund.

Money has been coming into the U.S. and the Bay Area specifically at a rapid rate. Now that everyone knows the stakes of a Facebook-like outcome, there’s more money looking to fund and fuel web-scale network-effect businesses. On top of this, the cost of bringing projects online has fallen, it’s become more fashionable to play the startup game, and so forth. Add to the mix that many foreign countries’ economies shift away from or toward natural resources, so we see massive direct and indirect investment into technology. This doesn’t even yet account for a bear-case scenario of all the private Bay Area juggernauts which are primed to IPO next year — if those all hit, and assuming local investors and employees own at least a third six months after IPO. the cash windfall to the Bay Area will surge past the days of Facebook’s offering.

This has placed a huge strain on the Bay Area, of course, resulting in intense competition for resources — mainly housing and talent. Home prices are moving in lock-step with higher salaries, to the point where many investors are hunting for deals outside the area, where teams are now starting off distributed or with a plurality of offices to locate some functions outside of the Bay Area costly square footage. A successful seed investor once remarked to me that he views “the traditional seed round” today for a good or proven founder to be akin to having a “free first move on the chess board.” More people are starting companies here, and there are more funds to help them get out of the gate.

If my analysis so far turns out to be correct — that if there is not a downturn, things will remain great for Bay Area founders; and if there is a downturn, the local conditions for raising money will get even better — how could a founder play this to his or her advantage?

Getting capital in the earliest stages continues to get easier. (Yes, I know for some it’s hard, and that will always be the case.) The pre-seed rounds, the seed rounds — they will find the good teams. If the first move on the chess board was free, it leads me to believe that for most, the second and even third moves will be costly. Those teams will need to demonstrate the ability to attract and retain talent in this inflated, local market; that they can potentially manage offices in different locations to defray costs; that they are masters of their own metrics and cash-planning; that they have found their way into an unbelievably large addressable market; and that they have the credibility to convince larger VC firms that they’re able to go the distance and soar past a billion-dollar outcome — many of the most successful funds have scaled to well over $B and they’re actively seeking multi-billion dollar outcomes to move the needle on their funds. They’ll have to back up the truck for their best companies, take acquisitions off the table, and go right after the incumbents head-on.

Speaking of acquisitions — many leaders of larger VC funds have privately given up on the incumbents buying their companies. Instead, they would prefer to back their winners to take on the incumbents head-on — hence, we have larger funds and longer hold periods to get liquidity. The larger web-scale companies often no longer view startups as a threat — they themselves can absorb large trends and put teams on copying and integrating features.

For those founders who’ve made it to the Bay Area, seed funding is plentiful. Dreams can be fueled here. Downturn or not, the intense competition for local resources is the real drag. Perhaps a downturn will force consumers to tighten their belts, or force companies to be more careful in signing long-term contracts for cloud software. The money for the next idea is already here, waiting; and more money is coming. All the do’s and don’ts of starting up a newco are listed online, ad nauseam, on countless forums across the web. Accelerators and incubators and angels can help new founders get their wings and leave the nest. Seed funds basically exist now to just hand founding teams $3M in one swoop.

I don’t know how I will end this post, because it’s a bit of a ramble. It’s also very focused on the Bay Area, but that’s what I know. I do think a national downturn will hurt funding in other (not all) markets because of the cultural norms around here with respect to angel funding and all the seed funds. And, founders will continue to spin out of the next crop of startups to cross the chasm, like Square, Stripe, Slack, and so forth. Maybe the region will be caught in this perpetual cycle of intense local inflation and an abundance of resources, and the ones who will thrive in such waters are those who, amid all these never-seen-before changes, seize the opportunity that volatility provides. Market volatility may shake loose some M&A departments to be more active, it may give VCs more confidence to attack a sector with a large percentage of their funds, it may empower the founders who can guide others through their own unique maze to see all this uncertainty and volatility around them and harness it to their advantage. You could call this “resourcefulness,” and it’s something I seek out in the founders we back. Hopefully focusing on that attribute will continue to pay off as the next years unfold.

Planning And Strategery Over The Holidays

The end of the year and holidays in general are, at least for me, a time to plan out the next year. Sure, as Mike Tyson mused, everyone has a plan until they’re punched in the face, but even if that punch is coming, having the time and space to let my brain rest a bit and mill around the house (even with kids and their chaos) let’s me think about what I want to focus on the next year and what I want to eliminate. I’m sure many of you reading this do some version of the same. It’s really the only time of year in the startup and investing world left.

Some folks entirely unplug in the evening, more do it for the weekends and even in the holidays. I find that hard to do, personally. In many ways, work/email has eaten into the evening-share minutes at home. But, most of us love what we do, and others around us do the same. That’s an old story. Weekends can be more sacred time, as Fred Wilson wrote about it earlier this year; I still do a ton of work on the weekends (doesn’t feel like work) because it’s the only quiet time I have during the week. Then there are holidays where folks go entirely off the grid, as Brad Feld has written about taking digital sabbaths. I hope to reach for these later in my career, but they feel far away right now with little kids and unproven funds.

The reason I like this time of year and the 2-3 week slow down is that it’s a real break from meetings. While I love what I do, it is a people-intensive, meeting-intensive business. I am a people-person (whatever that means), and I like meeting a variety of old and new faces each week. But meetings can generate some unwanted follow-ups, or just space in your brain. Each year at this time, I tell myself I will be more judicious with my time. And once Labor Day hits, schedules devolve into a mess.

What I do now is literally print out a 12-page calendar and start blocking off time. On Mondays, I am down on Sand Hill at the Lightspeed partner meetings; on Fridays, I am holed up in my home office taking no calls or meetings. From Tuesday to Friday, I walk my daughter to school. I’ll try and budget one evening per week for meeting friends or a work event and try to stick to it. I’ve already said “no” to a bunch of events or dinners for Q1 of 2019. I then hand this calendar to my EA to help set boundaries in my schedule, and ask my colleagues to always speak up if they see me lurching over my stated goals.

I’m going to try and write every day here — I have a backlog of topics I jotted down in 2018 but didn’t have time to think through. For the first time, I am entertaining the idea of getting office space — but I probably won’t. For the first time, we may actually brave the elements and take a family vacation via road trip, as our kids’ school breaks line up. I am going to preserve energy in the summer for the fall, which is always crazier I anticipate it to be. In terms of available hours, I am already in a finite territory, and that feels good — to leave those hours open for meeting new founders, and having the best opportunities compete for those limited slots.

Of course, there’s always a potential “punch in the face” coming. But, we cannot control such things, we can only be prepared for them if they arise, and my preparation is (hoping to) play offense with my time and attention in 2019. My kids are slowly growing up (and taking up more time), and the portfolio from earlier funds are maturing, and I’ve only known an incredible bull market driven by technology since I moved back to California in 2011. Now, looking ahead, I have to expect some cyclicality to be factored into the equation. That’s a topic I’ll muse on tomorrow…

Risk And Reward

I’ve been thinking about the timeless phrase, “risk and reward.” Entrepreneurs and investors both need risk in order to reap a reward. Of course, founders and early employees often take very different risks than investors do. There are always examples to break the rules, too — successful, repeat founders who become LPs in funds and/or invest on the side (even on a side fund), or investors who branch out on their own to start their own franchises. Whatever the blend, I still contend the following should be true: In any endeavor, the protagonist(s) of the story should take the first risk.

In a decade since the Global Financial Crisis, the availability of cash for startups in the Bay Area has increased to never-before-seen levels. A decade after Airbnb and Uber were founded, into the first decade of seeing Facebook and Amazon shoot past $500B market caps, society-at-large now knows how great the stakes are. Entrepreneurship, to me, still requires a special alchemy — a founder overcoming adversity, an investor concentrating a portfolio on something his or her peers (and LPs) do not yet understand.

The following is my opinion. I believe risk-taking matters a lot. As an investor managing a fund, I would not expect the LPs in my fund to have taken the first risk in our relationship — that burden rests with me. Similarly, when I invest in a new company, even if I am the first investor, I do not want to feel as if I’m taking the first risk. I’ve begun to think about this after hearing many pitches for new companies when the risk to be taken by the entrepreneurs is only contingent upon getting funded. I understand that the environment for funding has changed and made this possible, but for me, deep down inside, it messes up the special alchemy I look for when making an investment.

Risk-seeking behavior (measured) and the proven ability to overcome or at least fight through risks feels like a super-critical element to me. It’s often an element that I can’t get over. Perhaps some of it is misplaced survivorship bias — I have slowly fought and clawed my way to managing around $50M across a few funds, so it’s hard for me sometimes to just jump on board a fast-moving round that’s pre-product where the founding team hasn’t left their current jobs yet. Lucky for them, plenty of other people are there to invest in them.

All this said, the concept of “taking risk” in one’s life could mean something different for everyone. Perhaps founders should proactively identify and articulate the risks they’ve faced when seeking to convince investors or new recruits to jump onboard. (Of course, there will always be the very technically-sophisticated folks who will always attract funding, and usually the risk they take is the opportunity-cost of forgone salary and their time.) Nevertheless, the ability to seek risk and destroy is critical to the alchemy I’m talking about. Just think of Travis’ many failures pre-Uber, living in his mom’s basement at age 26; or think of Airbnb, going into credit card debt selling politically-themed cereal to stay alive. These are extreme examples, but founders will often face risky points in their business endeavor — Should we pivot to a new business model? Should we take a flat round or sell the company?

As an investor, I want to see prior evidence of risk-taking in founders I back because I know there will be new risks that they encounter in the life of the company. I want to know more about the founder’s thought-process in these situations — will they take the big risk that’s needed? I should be clear here that there are many ways to demonstrate the ability to take risk — the most common is financial risk, leaving that job or dipping into savings, etc; there’s family risk, as some folks need to support other family members or even live in different places; there are health risks, too — where people overcome incredible odds to fight on another day. The point here is not to glorify the risks or seek them out recklessly, but rather to acknowledge that, as a founder, risk management is a necessary skill and, as an investor, I need to feel comfortable that the folks I back will not shy away from risk, but rather have exhibited traits which lead me to believe they could thrive in it.

I’ve danced around the issue here in this post a bit. The truth is that this is a complex topic and I don’t want to offend someone who at least carefully reads this. There are lots of folks who view starting a company today akin to getting into college — and there may be lots of truth to that. But the blunt reality is that, in today’s environment — especially in the early-stage Bay Area market — the concept of risk has been nearly stripped away and vaporized. We often talk about how the reduction of risk is good, with more being able to participate — I get that argument. But we also need to consider the underbelly here, that if risk is scraped away, and if risk is correlated with reward, will there be enough reward to go around?

I don’t know the answer, but I feel confident we will find out in the next year or so. There are lots of companies priming to go public. There will be some belt-tightening on investing. The Bay Area remains the center of experienced “web-scale” management teams and networks, yet today is a brutal recruiting environment for new teams. At the end of the day, I cannot control these macro conditions, nor do I care — my job remains simple — to remember the risks I took, and seek out others who I hopefully can identify have taken similar risks themselves.

Briefly Reflecting On The Last Year

With 2018 winding down, I’ve finally gotten some downtime to digest the big changes I’ve personally undergone this year. They’re all good changes. After years of having pretty bad luck, I feel as if I have gotten a bit too lucky. Today is the day I begin to write my annual “Reflecting On 2018” post for tech, startups, and VC — but I don’t think I can get my mind in a place to do that work until I clear my brain first.

This year, our family (and me personally) went through some foundational changes. On the work front, I had the opportunity to join Lightspeed as a venture partner; and with Haystack, the seed fund I launched in 2013, Haystack finally recruited incredible help to come onboard, Haystack became slightly more institutional in nature (including fund infrastructure, leading deals selectively, etc.) and Haystack began to lay the foundation for a larger, more complex enterprise in the future (stay tuned).

But 2018 for me was also defined largely by personal decisions for myself and our family. With our eldest kid entering kindergarten, we searched around the Bay Area for a place to put down roots. For the past few years, I wasn’t sure I would have a career, or if we could stay in the Bay Area. When I moved to Palo Alto in 2011, I had no idea how the region and tech overall would transform into what it is today. Back then, we all didn’t realize the stakes.

While I knew selecting a new “hometown” was an important decision, I didn’t anticipate how hard it would be, and also how much of a responsibility it was. I was fortunate to be raised within one school system. I know folks will always say, “but kids are resilient” in response to moves, and I’m sure they are, but I wanted to see if we could plant them in one place. We all had to make sacrifices with this move. It took about a year’s worth of time for me to obsess over all the angles.

Now with our 3 kids in school — the two little twins are in nursery school, while my daughter started Kinder — I feel like this is an incredible gift we’ve been able to give them. It pales in comparison to what mothers have to go through, the physical stress, the sacrifice — but I feel grateful for the opportunity many others have shown to me to make this possible for my children. It is a huge reason why many of us obsess over work, why we pour everything into what we do. After a good year of planning the move, I am rewarded with the pleasure of walking my daughter to school almost every day of the week. We bump into other kids across grades on the stroll through the neighborhood to the school. Sometimes, she wants me to stay an extra second after the bell rings; other times, she runs into a buddy on the playground and waves at me that “she’s good” and I can go early. With so much of our collective work inputs driven by luck (which is derived from sacrifice and hard work), this new little morning tradition I have now in 2018 feels like the luckiest output in the world.

Now that I’ve written this and begun to clear my head, expect more writing here from me, over this holiday and into next year. With all the big work and life changes last year, I didn’t get to write as much as I would’ve liked to or need to. If I don’t write about my environment, I find that I don’t learn as quickly and that my brain gets clogged. So I’m looking forward to the next few weeks of writing and reflecting, and to prepare for what will likely be a very unpredictable 2019.

The Breakout Tech Company Of 2018

It’s that time of year, where I — as a committee of one judge, me! — select one startup in the tech ecosystem that “broke out” and has the makings of an even larger outcome should things continue to go right. As a little tradition on this blog, I’ve singled out companies starting in 2013 with Stripe; there was Snap back in 2014; Slack in 2015; took a break in 2016, as I wasn’t inspired to select one then; and last year, 2017, was Coinbase. (Had I begun this tradition earlier, for those wondering, it would’ve been Airbnb in 2012, and Uber in 2011.)

You may look at this and think to yourself “well, of course, how controversial are those?” This year, however, is like any other year in which I’ve tracked these and tried to single out one. [Here is the Google Doc where we tracked these.] Whereas in 2016 I struggled to come up with one, and whereas in 2017 it was obvious it was Coinbase, with 2018 comes the most money poured into U.S. venture capital deals, a spike in mega-financings where it’s common to see not only $100M private rounds, but companies that raise two or three types of financings like this in the same calendar year!

Therefore, I’m bracing myself for the fact most folks will disagree with or simply not like what I’ve selected this year, but it’s OK – there’s no easy answer. Let’s quickly take stock of 2018 – we witnessed micro-mobility startups like Bird and Lime, most notably, go from early-stage concepts into companies valued in the billions after raising hundreds of millions of the dollars; we saw enterprise businesses such as Netskope, TripActions, Flexport, and Brex; there were open-source giants like Hashicorp and Gitlab; incredible $100M-revenue breakouts in the robotic-processing automation space, such as Automation Anywhere and UIPath; consumer-facing companies like Hims, Allbirds, and Roblox have all quickly made the leap to unicorn status; and companies which were already deemed unicorns continued into higher levels of scaling, such as Opendoor, Instacart, DoorDash, Coinbase, Stripe, Tanium, and many others. In 2018, it was that kind year.

So, after all of those warnings and disclaimers (and, yes, you are free to disagree with my selection here), but after months of reflection, I believe Airtable is The Breakout Tech Company of 2018. This is the company, in my opinion, which only first appeared on the radar of most investors in 2018. Here’s why:

1/ Pro-sumer Trend Has Legs In Enterprise: The freemium pricing model ushered in a new wave of business applications and services. Look at Docusign, as one shining example — a company many folks thought would be a $1-2B outcome for a feature (e-signatures) transformed into a $10B+ document management platform. More recently, the success of Slack cemented in this trend in enterprise, where intense competition for eyeballs and engagement raised on the bar for startups to break in. As a result, we’ve seen both the rise of open-source networks leading to startups (a la Gitlab and Hashicorp, among others), as well as Docusign- and Slack-inspired freemium models designed to grow within groups at companies. Airtable isn’t the only company in this collaboration space — incumbents have invested resources in “low-code” platforms, such as Google’s App Maker, Microsoft’s PowerApps, Dell’s Boomi, and Intuit’s Quick Base; other great products on the startup side include Superhuman, Notion, Front, Coda, and a few others. It’s entirely possible the trend lifts these companies in due time, as well.

2/ The Metrics-Momentum Signal: According to Forbes, Airtable’s revenues are slated to grow 4x this year to $20M annualized, with over 80,000 different companies using some part of the platform. As Airtable only slowly moved into monetization, the last 4-6 quarters of retention and revenue growth likely convinced investors the product was not only here to stay, but very likely to accelerate revenue growth even more.

3/ The (Potential) Big Winners: It’s hard for me to know the exact funding lineage here, but if my memory serves me right, seed fund Freestyle hosted one of the founders as an intern, in turn getting the chance to invest early in the company, as did Ray Tonsing of Caffeinated Capital, who has found his way as an early investor into many of the companies listed above. This could also be the signature investment for CRV’s Max Gazor, who joined the firm a bit after 2010 and has quietly been making great enterprise picks.

4/ The Deal-Heat Signal: After raising around ~$50M earlier in 2018 (Q1 reported, so could’ve been late 2017, too), the race to track down Airtable for its Series C was hotly contested. It would be too easy to dismiss typical Bay Area “deal heat” as noise, however it’s been my observation that when this many high-quality firms circle around a young company — especially where firms will bend their own traditional norms (e.g. Benchmark investing in a $100M-sized round & Thrive and Coatue joining – we’ve learned it was Thrive who led, btw) — it is more likely to be an accurate, strong signal of company momentum. The way this deal was whispered about among both VCs, growth funds, and LPs in 2018 sort of reminded me how of how folks fought for the Snap “momentum round” in 2013.

5/ The Enduring Allure Of Platform Potential: Revenue is important. Revenue acceleration is, too. But in the early days of a young company, there’s one thing that captures the desire of investors — the ability to become a platform. That word, “platform,” can be overused — I define it as a central place where other developers can, without little or no permission, build new products and potentially extract more rents in new markets than the platform itself. A recent large example of this would be how companies like Uber and Instagram leverage the iPhone’s sensors to create new networks. With Airtable, beyond the trends, metrics, and fancy investors, is the potential promise of such a platform — one that has extended its reach slowly into tens of thousands of companies, smartly hooked in users by slowly layering in tiered pricing plans, and carrying forth a vision of a new, malleable, and user-friendly database which can serve as a ground truth for new apps and services we have yet to imagine.

Quickly Unpacking Two Recent Acquisitions (of Cylance; of PlanGrid)

It’s a holiday week, we’ve been cooped up inside with toddlers avoiding second-hand smoke from horrific #CampFire up north (and bracing ourselves for all the news that’s still to come out from what is left of Paradise, CA), and hosting family from out of town — so, this post is almost a week late and not as urgent as other matters, but better late than never.

Every time there is a big technology exit (usually via M&A), I attempt to quickly unpack key takeaways from the transaction. However, 2018 has other ideas, with the most money ever invested in U.S. venture capital to date (more on this in a separate post), unfortunately relegating billion-dollar exits as “ho-hum” events to the technology crowd. Here’s my quick analysis with respect to two major recent technology exits:

BlackBerry Acquires Cylance For $1.4B

1/ Cash Is King: The $1.4B price tag squeezed out by BlackBerry represented *over half* of the actual cash reserves it had sitting on its balance sheet. Typically in M&A, all-cash offers are more common when the acquirer dwarfs the target in terms of market cap; otherwise, M&A usually involves stock in the mix, which leads us to believe Cylance wouldn’t have accepted anything but cash — which makes sense given the company was reportedly booking $130M/year with 3,500 customers.

2/ Cyber-security Is Red-Hot: Earlier this year, Cisco acquired Duo for $2.2B and Thoma Bravo took over Veracode for $950M. Internet security has always been a favorite of technology VCs, but I personally suspect the idea of security will broaden as the Internet itself grows beyond phones, tablets, and other connected devices — as we see now in the news with our social graphs, artificial intelligence, crypto, and other emergent technologies. The overall surface-area for what security companies can target seems to be growing 100-fold alongside the size of the threats.

3/ BlackBerry Ripens: As BlackBerry begins a pivot from the once-leading smartphone manufacturer into an enterprise software and services company, Cylance helps bolster BlackBerry’s offering with a legitimate enterprise security player. It’s been a few years now since BlackBerry made phones, and this represents its largest purchase to date (by a factor of 3) since its 2015 acquisition of Good Technology.

4/ The Big Winners: Cylance raised around ~$280M in financing, with large equity stakeholders being Khosla Ventures, Fairhaven, and Blackstone. Khosla Ventures has quietly been on a roll over the past few years, most recently with Square (a monster, monster return, assuming they held post-IPO) and Guardant, among others; and they old early shares in Instacart, DoorDash, OpenDoor, and many winners in the most recent unicorn crop.

5/ Forgotten Fruits And Future Harvests: Ultimately, this is a notable transaction because it gives us a chance to reflect on the icon BlackBerry of yesteryear and imagine its future as an enterprise services company, now able to leverage artificial intelligence at scale via Cylance, and offer more goodies with respect to its shift toward chip-level security for all internet-connected devices, from devices that are not always connected all the way to autonomous vehicles.

AutoDesk Acquires PlanGrid For $875M

1/ A Pre-Seed Reminder: According to Crunchbase, PlanGrid was founded and went through Y Combinator in 2012. The company only raised a bit over $1M as seed capital. Compare that with $3-4M seed rounds today, you could say PlanGrid raised a pre-seed round, but then quickly found their market to target, and were able to finance operations with revenue until Sequoia knocked on their door.

2/ Transforming Old Industries: It’s almost cliche to hear founders and investors talking about their love of “unsexy markets” and using technology to transform old industries, and now in PlanGrid, we have a very large and notable example which should give other players hope in thinking this type of event can happen in their industry, too.

3/ AutoDesk Eyes New Markets: Despite going through leadership transitions and quarterly losses, AutoDesk remains an iconic software company that’s been nearly tripled its market value over the past three years. Originally built as the leading CAD software company, AutoDesk has smartly leveraged its brand and stock appreciation to place chess pieces like PlanGrid on the board in new and extremely large markets, such as construction. Autodesk will integrate PlanGrid’s software and its Autodesk Revit and Autodesk BIM 360 construction-management platform. With this purchase, AutoDesk brings with it 400 employees, 12,000 customers, and software that touches over 120,000 paid users. Those touchpoints, in turn, become an extension for AutoDesk to deepen its tentacles into fertile territory.

4/ The Big Winners: As we do with any big exits, we need to know who backed the company early. This represents one the largest outcomes for a Y Combinator company, after Dropbox, Cruise, and Twitch. Notable seed funds like SV Angel and Initialized backed the company early, and of course Sequoia led a large Series A in PlanGrid a few years after YC.

5/ The Crowd Saw X, We Saw Y: One of my favorite quotes about startups and technology comes from Instagram’s co-founder Systrom. In anticipation of the iPhone 4, he said (paraphrased): “Everyone saw a new phone with a great camera; we saw a great camera with a network.” If we rewind the clock back to 2011/2012, the announcement of the iPad was largely viewed through the lens of consumer apps — a notable example being Flipboard. PlanGrid, on the other hand, realized the complexity of construction workflows — captured nicely in this Tweetstorm by ex-PlanGrid engineer and current Gatsby.js co-founder Sam Bhagwat — was perfectly suited for the iPad in a rugged work environment. Perhaps while everyone saw a consumer device, the PlanGrid team saw a new canvas for building plans to drawn, edited, and built — a vision which leads to this month’s incredible outcome.

Quickly Unpacking SAP’s $8B Acquisition Of Qualtrics

Qualtrics recently filed to go public. Last night, SAP bought the company before it could IPO.

There are plenty of well-deserved articles by Axios and Forbes and tweets of praise for Qualtrics (must read Utah-based VC Bryce Roberts’ storm here), which you can and should read.

By all accounts, the Utah-HQ’d company did everything the right way, was an overnight success 16 years in the making, and only raised venture capital as a growth company after years of bootstrapping. In the wake of what is now considered the second-highest enterprise SaaS acquisition in history, below are some quick takeaways that are on my mind:

1/ The Efficiency Of Silicon Slopes – By now it should be no surprise that Utah’s tech ecosystem is on fire. In fact, it feels like old news, even a year after a this New York Times feature on the region. What’s also interesting to me here is not just how little venture dollars many of these companies have raised, but further, the ratio of enterprise value with respect to dollars raised. It speaks to a mentality we see less of in the Bay Area today, but one that nearly everyone admires and wishes would come back.

2/ The Pricing Pressure Of Going Public – Not to suggest Qualtrics was under any pressure whatsoever (it was not), but the pressure of preparing for IPO forces a company’s share price to fall within an acceptable range on the day of IPO. We’ve seen now a few large companies wait until that moment of pricing pressure to swoop in and snipe their targets, most recently with Cisco and AppDynamics. The behavior is logical: Private market valuations have felt, on the whole, dislocated from revenue multiples and public markets, so a larger acquirer has many incentives to wait to get as close to the market price for an asset before making a bid. Of course, SAP or others could’ve made a run at Qualtrics earlier, and who knows – maybe folks had tried and failed.

3/ The Price Of Incumbency – It seems like at the end of every year I’ve been an investor, various blog posts will prognosticate on whether the following year will truly be the year when incumbents start getting nervous and spend their cash reserves and high-priced stock on a big splashy acquisition. And, every year, it doesn’t materialize that way. Instead, we’ve seen a few massive buys, like Whatsapp, or more recently, RedHat. Elad Gil, the founder of Color Genomics and widely considered one of the most-connected angel investors in the Bay Area tweeted after the Qualtrics announcement, “Feels like we just turned a corner on BigTechCo M&A and lots of activity for the next 6 months as companies rethink the strategic playing board. IBM & Redhat, MSFT & Github, SAP & Qualtrics – probably lots more large acquisitions to come….” Gil is one of the few who tend to be more right than wrong, and if that holds up, it will be very good news for up-and-coming enterprise software category leaders.

4/ The Product Is The Message – I’ll end with a few notes on the importance of product in the case of Qualtrics. By all accounts, Qualtrics’ product was able to grow over the years to serving many thousands of customers and extend its product corpus into far-reaching corners of those customers. SAP’s CEO commented: “We are chasing the biggest prize in the world: to be the undisputed leader in the most exciting category I’ve seen in my career, called experience management.” Qualtrics could help SAP expand into CRM offerings. Qualtrics focuses on experience data, SAP focuses on operational data. With SAP’s global reach, merging experience-level data with SAP’s own data sets across other enterprise verticals is in line with the giant’s behavior in M&A. Tweeted VC Villi Iltchev, “This acquisition is completely consistent with prior SAP deals where you buy the leader and not worry about price (Ariba, SuccessFactors, Concur and now Q).