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).

The Story Behind My Investment In People.ai

A few years ago, during a YC cohort (before Demo Day), a few sources told me about a SaaS founder in the batch who was on a mission. Once I hear a name or company a few times in a short period, I begin to investigate. Within a few days, I got connected to Oleg from People.ai, and he immediately put me to work.

Oleg is a learning machine. In the very early days of the company, Oleg immediately demonstrated to me an intense desire to learn, to listen, and to sharpen his craft. I am not surprised that today, he is making a big announcement for the company’s new financing round — People.ai raised their Series B led by Andreessen Horowitz (this comes after the Series A led by Lightspeed, where I am a Venture Partner, a few years back).

You can and should read about what People.ai does, and you can find that information here and here. The company has 100 employees, is growing revenue at an impressive clip, and Oleg and his team show no signs of stopping on their mission to bring artificial intelligence to the CRM, improve sales processes, and ultimately measure the bottom-line impact of these activities for their 50 enterprise tech customers.

On this blog, I want to simply highlight that in my five-plus years of investing, Oleg is simply one of the most driven, most aggressive, most focused founders I’ve had the pleasure of backing. I have spent a ton of time with Oleg (this doesn’t the count the 30-100 text messages he sends me per month — sorry Oleg!), and I have never once seen or heard him complain about the fight he has ahead of him — instead, he finds it fun, like a game he has to master. He thrives on the challenge. In helping Oleg secure his Series A with Lightspeed (with Nakul Mandan on the board) and then helping him connect with our friends at a16z (Peter Levine), it was easy to introduce Oleg and vouch for him. No slide deck was needed for the introduction. Instead, I just recommended Oleg with the description I used above. In many ways, despite all the blog posts, tweets, and panels on Series A financings out there, all founders really need to get to the next round is a hard-earned recommendation.

A New VC Crop of Series A Firms

Many of the most storied brands in venture capital made their name by being the investor of record in a specific company’s “Series A” round — largely thought of as the round after friends, after family, and more recently, after seed, where the new investor would lead the round, set terms, join the board, reserve capital, and make a long-term commitment to the company. However, as technology has proliferated throughout society at large and into new areas of the economy, the rate of startup formation has increased, and more funds (often at seed) have sprung up to meet this demand — and as a result, many of the most successful VC brands have scaled up to larger funds (Benchmark and USV, notably, have not) to get more “bites at the apple” in case a mega-company like the next Facebook or Uber breaks out.

The expansion of the venture capital industry (as explained brilliantly by Eric Feng recently here) has created space for a new breed of Series A investor, most of whom arrived at this point by slowly scaling up from smaller, more modest seed funds. Below is a brief graphic showing some of those fund names, their vintages (not fully complete), who the key GPs are (not a full list, I apologize), and some signature companies they’re associated with. The list is also likely not complete (I’m not trying to create a comprehensive list), but ones I’d specifically cite in the Bay Area include Aspect, Defy, Bullpen, Felicis, Slow, Amplified, ENIAC, and Craft (list below). Many of these funds will say they still do seed — and they do — but they also have more capacity to pre-empt and lead rounds at the A-level if and when the opportunity arises.

As with any new change in the landscape, there are both opportunities and challenges.

The opportunities for these new funds are endless. They can build a brand with the next generation of entrepreneurs as the pure “seed & Series A” funds; they can gobble up more ownership on the cap table by doing a mix of pre-seed, full seed, and small or larger As; they can benefit from the changes in the industry over the last decade and (hopefully) not repeat old mistakes, as so much more knowledge about how VC works is available for free online; and instead of picking companies by precise rifle shot, they can build and manage their own funnels from very early checks and “drip” capital into portfolio companies that are working with the huge, added benefit of having more time to evaluate the team before making that larger commitment. The largest benefit, of course, is that most have kept their fund sizes relatively small, so should they find 2-3 big winners and maintain ownership, their LPs and GPs will profit.

Their future is bright, but also not without its own challenges. In order to play the Series A game, take a board seat, and credibly lead those rounds from Series A to Series B, these new firms will have to build a strong roster of GPs who are qualified to sit on these boards — this would have to be done in a time when many of the very top tier VC brands are struggling to recruit the types of folks they would like to have (a subject for another post); these new funds will also have to fight for and maintain their ownership (could be double what they’re used to) in a market that’s seeing more and more aggressive private capital coming in earlier and earlier (include more pay-to-play games); they’ll be on the hook for corporate governance in a way that isn’t really required at seed; they’re founders and other VCs may expect them to provide life-cycle financial support as private market timeline continue to elongate; and exposing their portfolio to signaling risk if they don’t come into the Series A.

Time will tell how this shakes out. The larger firms have gotten much bigger and taken on multi-strategy techniques, but they’re also very experienced in managing funds across many vintages. At the same time, this new breed of the “New Series A” funds didn’t get here by accident, either – some have already been part of bigger funds, and some have slowly risen from humble seed beginnings. I’m excited to see the next decade of seed and Series A unfold and revisit this post to see how things actually shook out.

The Market Holds The Best Fundraising Advice

As lines of code continue to proliferate through the world, as the rate of startup formation increases to seize those opportunities, and as the VC industry expands to support those new teams and opportunities, there is no shortage of people to visit for advice — not to mention all the resources online.

In my short time investing to date, I have experienced a phenomenon that, in my own opinion, hurts more than helps — getting advice from too many sources. This is made worse by our own human impulses to seek out sources who will say what we want to hear.

Ultimately, 99% of those sources are noise. And when it comes to fundraising advice, the investment market itself offers the best advice.

I’ve seen this pattern repeat so often now, I’m confident I can break down how it forms and why it does not work. Many founders will seek out other founders to get advice on their early rounds. One of those sources will tell the founder just starting out “Hey, I think you should just raise a huge round now, go for it!” Then the founder will bring that nugget back to me, and ask for my feedback, to which I’ll reply: “I wouldn’t personally advise that, but go test the market and see.” The more I start to dig into where this information comes from, the more it becomes apparent — as the startup and VC sector has grown — that nearly everyone is a founder and/or investor, and the advice (mostly bad, some good) is just flowing like boxed wine.

[A brief aside… This is, in part, why I’ve personally changed my investing style over the last year. I am only participating in structured rounds where I know the other 1-2 investors around the table. We have worked together before in some capacity and rarely overstep the other. We all work with the CEO, and that CEO has 2-3 folks she can call/text anytime to get advice. I can’t afford — workwise or simply emotionally — to have a CEO I work with getting advice from 25 people all the time, because I now know from investment experience what happens in those situations: The noise of the cap table drowns out the signal from reality.]

When I encounter founders in these early stages (both for companies and for funds), I try my best to first share what I would do if in their shoes, but then also try to coach them on how to seek out *credible* sources who are founders and investors and to take notes in those meetings and find truth in feedback from a smaller set of people. Ultimately, the founder has to decide. And for me, it’s a valuable “tell,” because another pattern I’ve picked up is that the quicker a founder can triangulate and decide, the more successful they’re likely to be.

Reflections On The Big Shake-Up At Kleiner Perkins

For folks who know me, they know I’m obsessed with Twitter, but this week, I had so many work-related and personal/family things going on, I simply couldn’t keep up. That said, I did certainly see all the email subject lines this morning about Kleiner Perkins, the famous Sand Hill venture capital firm, splitting up.

We have to step back and pause for a minute. Despite the firm’s missteps (and there are a bunch), most of us (myself included) can’t really comprehend how dominating Kleiner Perkins, or simply, “Kleiner,” was for so long. When you scan its Wikipedia entry and the list of truly iconic companies that started out with a check from the firm, it’s astonishing. In the U.S. venture market, only Kleiner and Sequoia can put their names beside category-defining companies across decades and generations. There are certainly (relatively) newer firms that have taken over today and are considered Top Tier, but the Kleiner name is truly storied.

[This isn’t relevant to the whole story, but I should stop here and share that I have had good friends work at Kleiner, they were the first firm to bring me on as a consultant to give me a window into the VC world (and trusted me) many years ago, and their alumni have gone on to make great contributions to technology and the VC ecosystem.]

Here are the thoughts swirling around my brain in response to the news…

1/ Leadership Succession Is Really Hard: As the multi-name brand of the firm suggests, the original founders somehow managed to hand-off leadership to a newer guard a generation ago. It helps that the new leader was John Doerr. Look at Doerr’s Wikipedia page for his signature investments. They are insanely amazing. Doerr was a force at Kleiner for so many years, finding the right companies ahead of the right waves. What Kleiner got right in the first handoff, it’s now in the process to see if it can pull this trick again, recruiting a rising mega-star VC in Mamoon Hamid, who already boasts a lights-out investment track record.

2/ Multi-Strategy Venture Capital Is Really Hard: I’m not saying it’s impossible, but investing well *across* stages in venture capital is, in my opinion, really freaking hard. There are plenty of exceptions that break this rule, but I feel this distinction personally. For years now, after I was able to hit a bunch of amazing companies in my initial seed funds, I started to get offers to join firms as a GP and “write bigger checks” at the Series A or even Series B level. In that moment, your impulse is to think “Yeah, of course, I can do that.” But the more I reflected on it, I believe these are entirely different muscles. Seed is different than Series A & B, which is really different from growth. And when firms grow and have different strategies from within, it gets more complicated — if the product of a VC firm is to make decisions, having folks with different stage expertise deciding on seed vs Series A/B vs growth deals can increase the noise to signal ratio. At Kleiner specifically, after slowly shedding the “green” energy practice (more on that below), the growth team (led by Mary Meeker, more on her below) worked with the early-stage team, which is in rebuild-mode as Doerr eventually stepped aside.

3/ It’s Difficult To Outrun The Big Missteps: Alongside the incredible successes, Kleiner had big missteps. There were serious interpersonal issues. There was the foray into “green tech.” Both of these missteps left huge financial and reputation craters behind. These events take a huge toll and could’ve easily taken down any firm.

4/ The VC Industry Is Changing Rapidly: Every day, we here pundits lament about how much money is flowing into private technology investing. Sure, it is a lot, but one way to look at this is to consider it *in relation to* the rate of startup formation rising itself. Through that lens, it is rational for more money to come into tech investing because that’s where the greatest growth opportunities reside. Because of these types of global and technological forces, the VC game is changing so rapidly. it’s harder for most of the big ocean liners to keep up. As a result, we have a flurry of new (usually smaller) VC funds sprouting up, we have funds that specialized now in terms of sector, stage, geography — even into secondaries, and more. For instance, how do founders think about pitching a firm that has an early-stage practice, a growth team, and so on? Every individual VC and every firm needs some edge, a specific swim lane to swim in, given the level of competition. There are many VC franchises which look like Kleiner (with an early-stage team and a venture team) that are firing on all cylinders. Many firms are making it work, but as the stakes get higher and as you throw in other variables (like succession and/or the operational stresses of multistrategy and/or previous missteps) the margin for error can be slim.

5/ Dealflow Patterns In Venture Have Changed Dramatically: Many firms, like Kleiner, among many others, flourished in an age when founders had (relatively) fewer choices for capital. Over the last twenty years, let’s quickly take stock of what is emerged underneath: The original wave of seed funds, AWS, crowdfunding, AngelList, Y Combinator, initial coin offerings, and so much more. As a result, it is no longer fait accompli that the best opportunities will bubble-up to the core VC funds. Yes, some of these funds do have a knack of finding some of them, but no longer all of them. In this new world, VC has sort of morphed into a top-of-funnel optimization game where marketing chops may trump other factors. Today, in 2018, no major firm can assume their brand cache will last the test of time nor that the next founders will be persuaded by whatever impression they have the firm — let alone recognizing it.

6/ Big GP Losses: This part is simple. Even looking beyond her signature “Internet Trends” annual update, I’d argue Mary Meeker is *UNDERRATED* as a VC. Look at Meeker’s track record on the KP site — just a sampling, but Meeker and her growth team invested early (say, around $1B valuation or more) in companies such as DocuSign, Square, Spotify, Slack, Stripe, Pinterest, Peloton, and many more. Sure, some of those are over $1B, but at least Spotify and Slack were. Those two alone are huge. Now that Meeker and her team are leaving the Kleiner brand behind, the franchise will be down to its early-stage roots with Hamid at the helm. (Meeker’s new fund, rumored to be out in 2019, will have *no* problem attracting investors.) Oh, and consider Beth Seidenberg, another rainmaker for Kleiner in the health/bio space who recently left to run her own shop.

So, here we are. With a brand as big as Kleiner’s, any organizational moves will be scrutinized. What could’ve killed most VC firms hasn’t signaled the end of Kleiner. It will be very hard, but I wouldn’t bet against the new team they’re building. It just takes one new deal to light that spark. A number of folks have told me about how LPs in Accel jumped off the train in the fund right before they led the Series A in Facebook — since that call, Accel has been on a roll. This type of organizational change will certainly be a big topic of conversation on Sand Hill and among VCs at the larger firms. No firm is inoculated from these forces. What can happen to Kleiner could, in slightly different forms, happen to others. It is a good sign to remind all VCs to be vigilant over their own franchises and not take tomorrow’s funds for granted today.

The Long Haul Of Building A Venture Capital Firm

There are countless posts flying around the web now about “How to build a startup.” It’s great that all this knowledge has made its way online. On a slightly smaller impact scale, there isn’t a lot of content out there about “How to build a venture fund.” Yet, this topic has become increasingly interesting in a world where tech startups are mainstream, Shark Tank is popular nationwide, where Y Combinator has opened Demo Day to more and more investors, where new funds sprout up every year, more and more.

I have been lucky to know and been mentored by many folks who have actually started VC funds and scaled them into institutions. Some “made it” in their first two funds, like Josh Kopelman with First Round, or Mike Maples and Ann Mira-Ko with FLOODGATE; some quickly ramped large funds and took about a decade to arrive, like Marc Andreessen and Ben Horowitz with a16z; or someone like Fred Wilson and Brad Burnham, who built USV out of the ashes of a previous fund that dissolved; or Peter Hebert and Josh Wolfe from Lux Capital often muse that in building their firm, “we became a 17-year overnight success.” Another co-founder of a multibillion-dollar fund told me what it was like when, 10 years ago, most of their LPs abandoned them, and how they built the firm back up brick by brick.

Depending on how you interpret the data, today there are well over 500 new funds (including Haystack!). Most of them won’t see a Fund II, and very few, if any, will become a permanent part of the venture fabric. There are funds who are ambitious and getting there — some names which come to mind are Felicis, Forerunner, Slow, Initialized, and a few others who have smartly scaled their team and AUM. It is really hard, though. I know a little bit about this pain in trying to make Haystack sustainable across funds. While I don’t have the ambition to build “out” a huge fund with a huge team and scaling capital, raising successive funds is not easy and building out real firm infrastructure is a grind.

For those out there that want to build a real firm, I’d encourage you to carefully listen to this new episode of The Twenty Minute VC with Harry Stebbings. Harry interviews Barry Eggers, one of the four co-founders of Lightspeed. In this podcast, Eggers details his view of the phases the venture capital industry has gone through and recounts some stories about how Lightspeed was able to break through, and how hard it was to get that chance.

As regular readers of this site know all too well, find the entire VC industry fascinating. I’ve been lucky to have seen the inside of a firm like GGV, operating across the U.S. and China, managing billions of dollars and driving returns for their LPs in being early investors in companies like Wish, Buddy Media, OpenDoor in the U.S. and Didi, Qunar, and countless others in China.

Now having been at Lightspeed as a Venture Partner (and running Haystack) for a few months and seeing upfront how they’ve scaled it twenty years into its history, it’s been eye-opening to witness how the firm is structured to have investment partners in Israel, to have franchised early-stage arms in India and China, and how its Select and Growth vehicles are set up to take advantage of opportunities from its various networks. Only a small handful of other venture firms have grown into such global powers, such as Sequoia and Accel. [Of course, that’s not the only model that works in the top tier of VC — cases in point being firms like a16z, Benchmark, Founders Fund, USV, Foundry, Emergence, True, among others — each who have their unique, signature method of operating and taking advantage of their know-how and networks.] Lightspeed companies like AppDynamics, Mulesoft, Nutanix, and Snap (among others) have had incredible outcomes in the U.S. over the last few years; in India, a Lightspeed portfolio company Udaan just hit the billion-dollar valuation mark; and last month in China, Pinduoduo rocketed from $0 to $23B+ in less than four years, going public.

I’d recommend this 20 Min VC podcast conversation with Barry to any investor who is trying to build out and scale up a venture fund. Barry is incredibly thoughtful about what has worked well (and what hasn’t) in the industry, how to bring in fresh new talent and groom them at the fund, and how to create pathways for folks to move up and grow but also to wind down slowly and help the guard change over time.

Conviction, Diversification, and Portfolio Construction

Sometime within the last 48 hours, I tweeted about a potential test for an investor’s true conviction in a company he or she invests in. Specifically, I wrote:

Investment “conviction” is a really overused term. If you want to test it, most investors’ LPAs permit them to invest 10%, in some cases 20%, and for some funds, no restriction, into one startup. Percentage of a fund into one company is the true test.

Luckily, a number of people replied to disagree, including some VCs who have real experience in driving returns across funds.

The first wave of reactions centered around the importance of diversification in a portfolio. I totally agree diversification is an important concept to help protect LPs and maximize returns for the GP. Of course, a fund can over-diversify — like many newer seed funds do — in order to increase the surface area to find a great investment or, simply, because they don’t know any better. I know this is true because I lived it myself.

Ok, sure, so portfolio diversification is wise, yet behind closed doors, we hear many LPs grumble about a fund they’ve backed that’s found 1 or even 2 huge winners but where the check size is so small the returns don’t even return the fund at a multi-billion dollar exit. That may be too much diversification. Then there’s the other end of the spectrum, over-concentration, which also puts the pool of capital at risk.

There are countless posts on portfolio construction, or how many investments are ideal in a venture portfolio, and so forth. I am not qualified to opine on the topic. In fact, I’m hoping folks read this and respond with their own experience and data, as I’d love to learn more about. What I do is that the topic of VC fund portfolio construction is not an easy way to grasp, and is likely even harder to master in practice.

If you open my original tweet and scroll through the thread, you’ll see lots of VCs pushing back on how much of their fund would be allocated to one company. I am stuck here because I am having a hard time seeing how the math shakes out. Sure, if you have a very small fund, or if there’s high ownership for the fund early, or if the fund hits 2-3 monsters, I can see how the math works — absent of that, it’s hard to model out.

So, we have this portfolio construction tension between concentrating money into the best companies in a portfolio versus protecting the GP and LPs via diversification. Things are even more complicated with the fact that top-tier seed funds now boast growth or opportunity funds. My questions for readers would be — how much ownership should be targeted for an initial investment as a function of fund size? How diversified or concentrated are the best fund vintages? What percentage of fund allocated to one company begins to constitute reckless behavior? At what point should a fund introduce a separate side vehicle or process for SPVs for follow-ons to preserve early-stage diversification but also reap the benefits of concentration in things that are more de-risked?

Thanks in advance for your answers and comments. It’s interesting that this whole thread started around the emotional concept of conviction, but veered into the limits of how portfolios are actually constructed.

Rolling Closes Versus Synchronous Closes

Earlier this week, in the wake of Y Combinator’s Demo Day, I saw a tweet go viral and generate lots of chatter. The tweet was written by YC’s President, Michael Seibel. I’ve never met Seibel (yet) though, of course, have heard amazing things about him from everyone I know and admired his style from afar. His tweet reads:

New weak investor move. I’ll commit now but won’t wire until the entire round is raised. If you have conviction: invest and help the founder finish their round with good intros to other investors. If you don’t have conviction: no problem, move on. No half-conviction.

Now, I have been around “tech Twitter” long enough not to wade into this topic in 280 characters. I have participated in many different types of seed rounds, but based on my experience of participating in over 100 seeds over the last 5+ years, I’d say the majority of those seed rounds (including around YC) were orchestrated by the founder to close on a specific date. Yes, sure, some of them are “rolling” closes where the investor who commits signs a document (usually a SAFE note) and then wires around that time. But, again, the majority of those rounds were coordinated to have documents circulated and wires set at a specific time.

In the case that Seibel cited in his tweet, we really don’t know what was going on in the example — did the investor simply mean that he or she wanted to know when the closing is so they could wire, or did the investor mean “round up all the commitments first, and then we can all wire at the same time”? It’s hard to know. While there is no shortage of bad behavior among investors (especially at a scene like YC, which has ballooned in size), I definitely know of a seed stage company that was based in the Valley, raised some seed capital with no real lead investors, and moved the team to Europe, worked out of a big castle, pivoted a few times, barely kept investor in the loop, and disbanded eventually.

Most of the rounds I participate in today are priced equity rounds. There is a process the founder goes through, he or she collects interest, and then works on closing the round with their lawyers at a fixed time. Most of these rounds have the investor wire on a specific day. The equity round process bakes this in, and helps every participant to know what they’re raising or holding at any given point, dissuading the company from taking on additional capital without some burden. I also participate in notes, like I just did with Downstream, and the founders still closed wires on the same day.

The point is — there are so many companies forming, and so many seed rounds, and so many different types of seed rounds, and so many little preferences around those processes, that is hard to know what is kosher and what is not. I am not here to judge what the investor cited in the tweet did or didn’t do well.

What I do feel deeply, however, is that we all in the early-stage startup ecosystem are likely being a bit too over-protective. For any startup selling an annual license, the deal may not get signed right away. Payment may be delayed. For any investor raising their own funds, you may have to chase down capital calls for each investment. People will say one thing, and then do another, or drag their feet. That is what happens to everyone. It is not fair. It could be better. Business life isn’t fair, though.

For me, how I work, I like synchronous events. I am happy to invest on a rolling basis if both sides are clear about what that means; and I also like to know that during a specific window, everyone in the round will sign the same documents and wire money to the same company. Perhaps this is all a function of synchronicity — in a rolling close, perhaps even with escalating caps on the notes or SAFES, the undulating nature of that process can be in conflict with a person’s desire for things to come together at a specific point in time. As they say in relationships, it’s often critically important “to be in sync.”

Putting The Money To Work

About two years ago, when I was starting to raise Haystack IV, I sat down with one of my VC mentors at The Upfront Summit in LA to get his quick feedback on my slides. He ended up focusing only on 2-3 slides and then we got into a discussion about his own fundraising history. As we were walking back into the sessions, he asked me how I was balancing the act of fundraising for a fund with investing the capital from a previous fund. The short answer is, it’s hard to do. There is significant competition for your attention in that scenario. And, making an investment decision requires a lot of RAM, so a decision like that chews up a lot of resources. To which the VC responded, “Yeah, but you still need to put the money to work.”

That line has stuck with me. The world doesn’t care if I, as a fund manager, am trying to make new investments, help existing investments, AND also raising a fund like I did a while back — I still need to “put the money to work.” I was reminded of this line because I actually used it in a slightly different context with a founder I’m working with and invested in.

I’ve seen this pattern pop up a few times. A company is starting to get its sea legs, they’re booking revenues and growing, and they raise a hefty seed round of, say, $3M-ish dollars. In today’s funding environment, these kinds of rounds are quite common. Those founders can often choose from a few term sheets.

Once they decide and the money hits the bank, a new problem arises — how does the company “put the money to work?” Sometimes, we’ll see a company that spends or burns the money too fast. No one wants that, for obvious reasons. At the other end of the spectrum, I do see companies being too timid with their spend, so in these scenarios, I try to coach the CEO to think about using the funds “as an investment” vehicle. In other words, if the founder has raised $3M-ish and is booking revenues and trying to set up the company for a big box VC round (which, let’s be frank, 99% of founders here want to pursue), those larger VC firms actually want to *see how* the CEO “invested” the initial $3M they raised. Like other pieces of evidence, how the CEO leverages the resources they have is part of the decision a larger VC calculates, thinking to themselves “Well, if I give them $10M, how do I know how they’ll leverage it?”

There are some bread and butter things the CEO above can do to leverage their position. They can invest in activities that boost customer acquisition and/or engagement. But, most critical in my opinion in today’s fragmented talent market, is to see if a CEO can take the money (which is relatively easy to raise) and turn that into a recruiting advantage. Can the CEO recruit even just 1-2 incredible people and form a stronger team? Can they invest in products that help them acquire more customers and/or get those customers more deeply tied to the service? The sweet spot is a bit of a Goldilocks — VCs do get skittish when they see a wild burn rate, but they also lose interest when they don’t see how the CEO has invested the capital he or she has raised. So, like investors, CEOs who go down this path also have to “put the money to work.”

Scooters, Clear Lanes, And Permissionless Innovation

It’s been a summer of change. I had been meaning for weeks to write a longer post on scooters, as an attempt to collect my thoughts on the topic, specifically around the market size, unit economics, and defensibility– but life got in the way. (Perhaps one day I will write that post.)

Let me state upfront that I am pro-scooters. It is incredible to see the category explode onto the scene, it is incredible to see consumer demand for getting from Point A to Point B, and yet consumers don’t naturally want to “dock” those scooters at the end of a trip. In other words, a large number of consumers are saying “I will do anything and also pay good money to get to Point B quickly, and I’d prefer to leave the scooter on the ground (likely sidewalk) at Point B when I’m done.”

Yesterday we found it that, for some cities, the powers that be didn’t want things to work like this. There is a whole debate to be had about “who owns the sidewalks?” and “did government meddle and/or grant monopolies?” and so on. I’ll let someone else cover those.

What I found myself reflecting on yesterday (bleeding into this morning) is that we do, indeed, live in a post-Uber world. As Fred Wilson noted yesterday, as technology networks mature and spread into new markets (including devices, like scooters), the complexities associated with investing in “atoms” vs “bits” raise many issues. Whereas Google and Facebook didn’t require permission to write the code for and distribute its products on the web, companies like Uber over the last decade and the rash of scooter outfits today require many points of permission to sustain.

The caveat now with scooters is that we live in this post-Uber world. The story of how Uber spread from city to city, from country to country, is known. It was a brute force mission and an incredible accomplishment. During those early years, most didn’t realize the stakes were so high. Uber has one domestic competitor, and overseas it has a few in key markets as well. Today, when cities assess the impact of scooters, the memory of Uber is fresh in their minds. The stakes are high. The market for short trips is enormous. And while Uber was bringing software-driven networks to vehicle capacity for cars which were already permitted to legally operate on the roads, scooter use often tended to drift into the sidewalk, which is a seemingly small but meaningful distinction.

[A quick aside: Like Uber worked for items that were already street-legal, Airbnb initially enabled homeowners to rent their extra space. Of course, as this software-driven network grew, hosts took advantage of the marketplace demand and skirted some housing rules, but yet again the stakes during that time were not immediately obvious to everyone. Today, as Airbnb faces regulations in megamarkets like New York City, it is too late to curtail the Airbnb movement — they have won, and consumers want it. I believe it is important to consider the time in which Uber and Airbnb grew their networks. Today is a very different time. The impact of software on transportation and housing is evident.]

In a perfect world (or my perfect world) cities would regulate the amount of cars on the street, install congestion pricing schemes, open up the streets for mixed-used transportation — bikes, scooters, boards, pedicabs, people movers, etc. Sadly, that won’t happen. So, scooters are stuck without a clear lane, and consumers are going to need to fight for them if they’re ever to exist.

I don’t know how we’ll get there, but I believe eventually cities will permit more and more scooters for people to use. I’m optimistic about that. However, the previously-used methods of brute force feel less likely to work. Instead, working with cities and governments may turn into more of an RFP-style game for startups, where the most successful companies become expert at helping designing regulatory structures with their hosts and to excel at either meeting or exceeding expectations on these applications. In this post-Uber world, we should expect moving atoms will require permission.

Discussing All Things VC On The Recode Decode Podcast

A few weeks ago, I sat in “the red chair” of Recode Media’s Decode Podcast recording studio in San Francisco. Most tech podcasts I’ve been on are usually recorded in some back room or startup side room, but not this episode… no, no. Recode’s senior finance reporter, Teddy Schleifer, was kind enough to host me on the famous “Recode Decode” podcast and the episode aired today. You can listen to our discussion above via SoundCloud, or by clicking here (for my favorite mobile app for podcasts).

Ted guided us through a fantastic discussion that touches on many facets of what I’ve observed in the world of venture capital — how to break in, how to land a role, how firms think about hiring, what processes firms use to make an investment decisions, how the public has come to think of venture capital, what the limits of VCs are, why there are so many mega-rounds, how there are growing numbers of VC scale opportunities outside the Bay Area in the U.S., and much more. Take a listen in the car when you have time and let me know what you think, and thanks to Teddy for hosting, and thank you for listening.

The Story Behind My Investment In Downstream

Earlier this summer, my friend Michael told me about a small investment his team made up in Seattle in the Amazon ecosystem. We were about to move houses and with all the impending details that process was generating, I initially didn’t give it a proper look. As we were reviewing new deals, we flagged this one for being different in nature. And as we dug in more, we began to uncover how little we know about a new potential business line for Amazon.

Today, Downstream officially launched, though it is already in the market and helping Fortune 1000 companies get smarter about their spend on Amazon. You can read about their news today here in Geekwire, and I’m happy to be co-investing alongside friends like Michael, Micah, Dave, Chris, and others in Downstream’s seed round.

For me, there were two revelations in researching this deal – 1) That in terms of product search, it was astonishing to see the rate at which Amazon’s search business was growing, even in a world with Google PLA; and 2) It didn’t immediately dawn on me that the scale of Amazon is so massive, it could actually sell us goods at cost or even at a negative margin and, instead, sell ads against our product searches. It is a more elegant business model and, as Facebook has shown over the last decade, simply works. For those looking to try out Downstream, they’re currently offering a 30-day trial.

As I’ve been writing about, I’m actively investing both inside and outside the Bay Area, and this idea from Downstream in Seattle, as I was learning about it on the fly, made me realize how far away the Amazon world is. The team at Downstream had worked for many years at Amazon and developed a technical sophistication about their insights into the ad business, and it was this secret that led them to spin out, and Haystack is lucky to have picked them out of the many startups we have the chance to invest in — and we are pretty excited about that fact.

“There’s A Disturbance In The Force”

I say “no” every day, multiple times a day. Even though I know I’m upsetting folks, I try to be direct, open, quick, and honest. Not everyone will like it. So be it. I elect to be consistent and fair rather than liked. Yet, once in a while, when I say “no,” I carry it around with me. And sometimes, as you carry that “no” you delivered around, it starts to get heavier, and you recall it more frequently.

I had that experience last year. I called the founder to say “no” and the founder was incredibly graceful. A few days later, I ran into a mentor-investor who had also spent time with this founder and didn’t get all the way there. I told him, “I say ‘no’ often, but this one – I felt terrible.”

My mentor responded: “Ah, yes… you felt a disturbance in The Force.”

Many of you will recognize this famous line from the silver screen. For those of you don’t know, start here to learn. When he repeated this line, I didn’t respond. It was the perfect retort to my story. I did, indeed, feel a disturbance in the force, and it has grown considerably since the event many months ago.

I’m mad at myself because I let the analytic part of my brain overtake what the intuitive side was telling me. As an early-stage investor, which is an amazing gig, these decisions on the margin are difficult because of opportunity cost — when you say “no” it means you’re able to say “yes” when things line up. On the flip, if you say “yes” too freely, you may have buyer’s remorse, and you can’t undo the union.

This is not a complaint, but so much of what is hard about making decisions is that the market wants you to be smart & rational, when in reality what counts is intuition & feel. All the marketing by investors on Twitter or to their LPs is basically, “Hey! Look at how smart and helpful I am!,” when in reality, most of the calls we make are about reading signals and hunting for the future indicators of outlier successes. That type of work doesn’t fit on a webpage or Powerpoint slide — it’s stuff you feel when you daydream, when you have a glass of whiskey late at night, when your mind is at rest.

The “Star Wars” franchise could be an analogy for many things, including meeting early-stage founders. As investors, we are basically evaluating these potential future indicators. We get distracted by email introductions, scheduling, slide decks, and market size — now, those are important, to a degree — but we are all on the hunt for those with “The Force.” There are many markets to attack, many products and services to be designed — but the brutal law of nature is that not many people have “The Force.” And, when you recognize you missed this in retrospect, you feel it — at least I do.

When Alderaan was destroyed, Obi-Wan “sensed” it, saying, “I felt a great disturbance in the Force, as if millions of voices suddenly cried out in terror and were suddenly silenced. I fear something terrible has happened.” Perhaps this is my fear, my fear of missing out — not necessarily on the next big thing, but on failing to recognize the most important ingredient we search for in our work.

Investing Outside The Bay Area

This is a post I’ve wanted to write for a long time, but I needed the time to digest all the other great posts on the topics by other investors, and to analyze specific portfolio data from Haystack over the last five years. Well, that time has finally come. As a warning, this post will have more subheading than usual, and it will be packed with lots of links — please click through and read them. I believe this is an important post for both founders and investors in the Bay Area and outside the Bay Area to read carefully.

When I began investing a little over five years ago, it felt like the conventional wisdom was that one had to invest in the Bay Area to harvest venture-like returns. Of course, that was not 100% true, with innovative startups and large outcomes occurring in Europe, in Asia, and other parts of the USA. But, it wasn’t directionally wrong, looking at enormous multinational companies like Apple, Google, and Facebook which rose from the hallowed ground of Silicon Valley.

From an investment point of view, managing and deploying capital in the same physical area makes sense, where investors can work with young companies and help them with a variety of things. More recently, this trend has shifted a bit within the Bay Area, which today’s giants like Uber, Airbnb, and Stripe being built in San Francisco proper while incumbents down south have begun scooping up premium commercial real estate in the city.

Over the past two years, however, I’ve felt that something is out of balance. Yes, the concentration of entrepreneurial founding and management talent is here in the Bay Area, but so too is lots of private money, more and more large platforms which continue to grow in market share. And, so, I began to ask myself, in the face of intense local inflation for rents, for talent, for simply getting around — are the fundamental of the Bay Area’s local conditions simply inhospitable to fledgling startups that I am trying to invest in? Will folks be able to buy a house and raise their families here? Will the Bay Area’s cost structure compress the precious runway these newco’s have? Will the next company to raise $100M in financing just poach from decent seed-stage companies and pay triple the amount to lock up talent? These questions have been rattling around my brain. Anyone who spends time with me knows I obsess over it.

So, about two years ago, as a Bay Area resident, living right off Sand Hill Road, started intentionally investing outside the Bay Area. I wouldn’t say I’m entirely comfortable with it just yet — it is hard — but I’m getting more comfortable with each passing month. Below, I’m going to share some of the influential data and posts I’ve collected along the way, because it is too easy and en-vogue to say “the Bay Area is overheated” or to make armchair claims without the benefit of data. Here goes….

Learning From USV and Foundry

If you follow me on Twitter, you’ve by now gathered I often share Fred Wilson’s posts. I have been reading Fred’s blog AVC for about a decade now. I sort of feel mentored by Fred via his blog, which is pretty remarkable for just writing words on the web and sharing them. One topic Fred has been writing about for many years is the geographic diversity at his firm, USV. Fred and his partners Albert, John, Andy, before Brad, now Rebecca have operated headquartered out of New York City, and have invested successfully near home (Esty, MongoDB, Kickstarter), in the Bay Area (Twitter, Coinbase) and in Europe (SoundCloud).

To highlight some of Fred’s writing on the topic, consider the following: In 2015, writing about how roughly 25% of USV’s investments were based in Europe; In 2016, citing Richard Florida’s work on global venture capital distribution tilting toward going global and urban; later in 2016, writing about “The Spillover Effect” from the Bay Area to other parts of the country due to the rising cost for talent; and again in 2016, writing about “tiers” of startups hubs in the USA, which caused a bit of a backlash for his classification, but was directionally correct. The argument threaded through Fred’s posts above is that significant venture-scale opportunities for VCs existed outside the Bay Area.

Another firm linked closely to USV — Foundry Group in Boulder — has also been investing with an eye for geographic diversity. While I don’t have portfolio level stats for them, their new endeavor Foundry Next (to invest in smaller funds and then follow-on into key investments) has built up an LP basket of 23 positions in a variety of new VC funds. Of the 23 funds listed here, 13 are in the Bay Area, 3 in NYC, 3 in Boston, 2 in LA, and one each in Detroit, Seattle, Toronto, Waterloo, Indianapolis, and Fargo, North Dakota. This is a very clever way of helping new funds get their footing and hearing about what is working before others may pick up the scent.

Global and Local

Of course, over the last decade, the rest of the world doesn’t need to read these blogs to see what’s going on. I caught a glimpse of this energy during my Venture Partner tenure with the folks at GGV Capital, who’ve been successfully investing exclusively across China and the U.S. and seen the rise of absolute juggernauts with deeply global ambitions such as Baidu, Alibaba, Tencent, and Xiaomi. More recently, as I sit as a Venture Partner at Lightspeed, their franchise model across Israel, India, and China lends even more credence to the fact that consumer-level and application-grade innovation now knows no geographical boundaries. Just like Sequoia with their franchise model, or Accel, or the other larger funs, the top-tier venture capital firms have scaled up and out to grab these opportunities.

The global story is undeniable, but what about what’s going in the USA outside the Bay Area? Before we leave the Bay Area, consider this stat: In 2017, NYC received more venture capital dollars than the South Bay (aka The Peninsula, or what is really Silicon Valley). San Francisco proper was #1, and taken on the whole, the Bay Area, of course, receives more venture capital investment than anywhere else, naturally. However, while no American city will take that mantle in the foreseeable future, more cities beyond NYC, LA, Seattle, and Boston are getting more venture capital dollars as the private markets grow. Bloomberg published an incredible piece full of graphs and graphics looking back at 2017 venture capital data, which is worth a close examination. Pitchbook also published interesting historical data going back to 2010 for the Top 20 cities (not including the Bay Area) to receive venture dollars and how those numbers change year over year.

Migration, Diasporas, and Rejuvenation

For a host of reasons (including the housing and transportation crisis in the Bay Area), the region now carries two key risks: One, will we witness talent migration away from the Bay Area, where entrepreneurial talent simply opts-out of the system? And, two, will the next generation of builders and dreamers be able to afford to live in the Bay Area? (I can’t even tackle the more systemic issue around immigration here, but consider that yet another risk to value creation for the region.)

On question #1, we see good indicators that folks are leaving. Job site Indeed blogged that nearly 50% of Bay Area-based technology job seekers searched outside the Bay Area, and this climbed to nearly 60% for the age 55-64 bracket; on that same blog, Indeed demonstrated a city like Austin, for instance, saw both the largest decrease in outbound job searches as well as the highest increases in inbound searches (i.e. people looking to move to Austin).

Redfin, the Seattle-based home buying site/app, has been beating this drum for years, recently stating that we will see “mass migration” from the Bay Area based on housing. The CEO writes “Silicon Valley is going to leave Silicon Valley… the technology companies… they’re chasing talent, and talent is chasing affordable housing.” Redfin specifically identifies Denver, San Antonio, and Houston as the next hubs newer generations will seek out. (I cannot name the company, but heard from a friend that a very large SF-based startup that’s looking to build a new location outside the Bay Area offered relocation packages for folks to move and it filled up to 100 requests in a day. People are voting with their feet.)

On question #2, it’s too early to tell. How many fresh college graduates are going to LA or Seattle or New York versus coming to the Bay Area? I think it will take a few years to understand these numbers and the impact. A blog entry for another day.

On the ground, I am seeing more hybrid solutions. There are quite a growing number of founders who start a company in the Bay Area and are technically headquartered there, but then they “offshore” some parts of the operation (to another country) to keep costs sane; or they “onshore” to a lower-cost center with the USA (such as having an engineering office in Portland); there’s also “nearshoring” where the executives may be in San Francisco proper but customer support and other staff may be in Santa Clara or the East Bay, to help save costs; and then there are companies which are entirely “distributed” from the beginning. Much of this would fly in the face of conventional Silicon Valley lore, but today are usually considered basic norms. “Raise here, but deploy elsewhere” is not a crazy strategy in today’s times.

Haystack Portfolio Data

We spent a good part of this year analyzing portfolio data across three previous Haystack funds and the fourth which is currently underway. Here are the high-level geographic stats:

  • Of all the companies Haystack has invested in, 68% are in the Bay Area, with 32% outside the Bay Area (20% in LA, NYC, Boston, or Seattle; and 12% in a host of other cities, including in Canada).
  • Of the companies in the Bay Area (which makes up 68% of the total portfolio), 41% (of the total portfolio) are in San Francisco proper, while 27% (of the total portfolio) are mainly spread across the South Bay, the East Bay, and one in the North Bay.
  • Of the Haystack companies which are in major startup hubs outside the Bay Area (which makes up 20% of the total portfolio), 13% are in NYC, 4% in LA, and nearly 2% each in Seattle and Boston.

In terms of dollars at work,

  • In Haystack II, nearly 10% of the fund’s capital was invested outside the Bay Area.
  • In Haystack III, nearly 25% of the fund’s capital was invested outside the Bay Area.
  • In the current fund, Haystack IV, a bit over 50% of the capital invested to date has been invested outside the Bay Area, though it’s early in the fund’s life and this percentage could change quickly in a few months or by next year.

The Future and Future Posts

This is as far as I’ve gotten. It will take more time to see if my instincts were right. And there are more posts to write about the challenges and opportunities created by the flattening of company creation and venture funding. For instance, I’ve noticed within Haystack’s companies outside the Bay Area, it’s possible to build up a core team and recruit people out to their headquarters, but then preparing the companies for follow-on Series A financing in the Bay Area is a grueling exercise. New technologies make it easier to communicate quickly across state borders, but how do you make for serendipitous interactions or peer pressure from being around other startups? That’s just the tip of the iceberg. I have lots more to share on this for founders, so hopefully, I can get through it during the summer.

The First Live Meeting With A Founder

Recently on this blog, I’ve been attempting to unpack how an investor can sort through deal flow and potential investment opportunities. After writing about “the quick kill” to discard of inbound flow, next I wrote about what actually captures my attention and graduates to a meeting.

So, now, what happens in the actual meeting?

This is hard to explain, actually, because I can have a range of reactions to a meeting. I understand entrepreneurs would like to know the outcome of a decision at a meeting or soon thereafter — and sometimes that can happen — but sometimes it takes a while for things to take shape.

Immediate “Yes” – It is not common, but it is possible that I leave the meeting with all the information I need and, with some quick reflection, signal the founder that I’d like to invest. This can be as short as 24-48 hours.

Immediate “No” – This is very common. I will save the last minutes of our time in person and lay out why the current opportunity is not a fit for me. I am careful to acknowledge I may be getting this wrong, and like every other investor, I have plenty of incorrect calls. I do this in the meeting partly to stay present about having a proper close to the meeting, to give the founder a clear sense of what I’m thinking, and to stop the back-and-forth email that can occur after a meeting.

“Fascinating, I need to think about it…” – Being an early-stage investor, I do encounter amazing people building entirely new things I have not even conceived. I try to wake up each day with an open mind and so much of the job is reactive to meeting that one great founding team with a cool idea. Sometimes I’ll leave a meeting and say “Wow, I need to digest this.” Here, the onus is on me to re-engage with the founder and ask for their time. At times when I say this, the founder can be confused and still is waiting for a yes/no answer from me, when in reality, I don’t know where I sit with the idea.

“Fascinating, I’d like to meet again…” – Most of my investment decisions that get to “yes” follow this path. I’ll meet a team. The meeting is great. And, I’ll want to meet again within a week where both sides do some homework on each other. I find this to be a very collaborative and enjoyable experience, as it gives both sides a little time to diligence, to see how it is to work with someone else and builds some “deal momentum” relative to other things that are in the pipeline.

Workshopping An Idea – This is happening more frequently. I will meet a founder with great potential. But, it’s so early and they’re a first-time founder, and there’s not much there, and I don’t know them yet. But, I like them. There are some patterns to these meetings. There are no formal materials yet. They’re looking for investment but haven’t really figured out what they’d do with investment. Sometimes founders are just fundraising and don’t like this, and that’s fine for me — one less meeting. Sometimes they find it refreshing, and we get to know each other better, and hopefully, they find these sessions useful. Of course, should things progress in a manner that I like, I can always invest. Occasionally here, I’ll make a smaller investment to start and help syndicate.

Ultimately, I view my role in the ecosystem is to help those I meet with direct feedback. I cannot meet everyone, so I spend a lot of time filtering out “who” to meet. And, after seeing the deck and meeting a person, I work really hard to give my mind the time and space to come to a point of rest, where my subconscious can kick in and do its work. Too often in looking at a deck or hearing a live pitch, the analytical parts of our brains are firing — but the decision to invest so early is also heavily influenced by the potential entrepreneurial energy locked inside the protagonist. In evaluating a population that is mostly first-time founders, I need to understand the arc of their entire story and drill down to the core motivators. And for the markets these founders play in, I need time to let my brain run the various paths their creations could take. I do not proclaim to be perfect, and I have had my fair share of scheduling and transportation challenges that have frustrated a founder here and there, but I’d like to think overall I’m pretty direct about where I stand, including when I tell someone “I need the time and space to reflect on this.” That is my process in meetings and so far it has worked well for me.

 

Paying Attention To Inbound Deal Flow

About a month ago, I wrote a post about how the Bay Area seed ecosystem is generating deal flow levels that are nearly impossible to keep up with. In the post, titled “Seed Deal Flow Tsunami And The Quick Kill,” I attempted to explain how, in the face of the deal flow firehose, I get to a quick “no” which I hope is helpful for both sides.

Now, I want to write about a slightly touchier topic: What actually gets my attention?

To set the context, all new inbound deal flow comes to me via text message (20%) or email (80%). In no particular order, here are the ingredients that push me toward the feeling “Yes, I’d like to meet!” Note, these are in no particular order, and the more ingredients that are presented to me upfront, the faster I want to meet:

-A strong, brief, but detailed introduction from someone I know well, such as a close investor friend, founder in my portfolio, or someone I’ve worked with. (Note, this actually means that the person pinging me has taken the time to write even just 2-3 sentences about “why” this is an interesting person to meet.)

-A strong reference from an investor who has already invested. (Someone who has already invested and is willing to risk his/her reputation in sharing a deal clears a high threshold. Less common, but still valuable, is when an investor passes on an opportunity — for stage, or sector — but truly loves the founders and wants to share with others to help.)

-An authentic connection between the CEO and/or founding team and the task at hand. Whether it’s right or not, my investment pattern has been to find founders where I can see a line of sight looking back from their current work to previous experiences, whether those are work-related or not. (These traits often manifest themselves in deeper insights in the pitch itself and the ability to argue the opportunities and challenges they may face from a variety of angles.)

-Evidence of resourcefulness in the founders. There’s a lot of money out there. I’m trying to make a quick mental calculation about how much the team has done already with the money they’ve raised to date (even if it’s just their own time and money), bound by time.

-A crisp investment pitch deck in PDF format that clearly demonstrates the team’s ability to communicate & present information in a compelling manner. (I will tackle this in more detail in a separate post, but for now, I am judging how someone shares information with me as a proxy for how they will share information with a potential customer they’re courting.)

-If I don’t have a connection to the team, a cold email that’s brief, personalized, and written in an authentic way that’s meant to build a relationship. (I simply do not have the time anymore to answer cold emails, let alone process them. I know people will say that’s unfair, but I do think part of the game is to get people to advocate for you. Even I have to do that in my work. It is what it is. That said, cold emails done well can and do work.)

If a deal comes across my desk that has even just one of those things, I do pay attention. One or more, and I start to pay more attention. If I look back on the investment decisions I’ve made, most of these ingredients are presented to me before I even had met those specific founders. Perhaps you can say I’m looking for signals in the deal flow that matter to me specifically, that are hard to fake. People are smart and certain signals can be manufactured — it could be massaging metrics, or placing big logos around a person or business. I do not proclaim to make correct decisions all the time nor to catch every great thing. I will miss things.

I know some will read this and bark it’s unfair, but in a noisy world, I need signals to guide the way. These are the signals that matter to me. This is the process that has worked for me to date, and it leads to me working with a type of founder I want to partner with. That is the ultimate goal and what I’m saving my limited attention for.

The Harsh Reality Of The Preference Stack

I recently shared this article and tweeted this, and I was quite surprised by the thread it triggered and the reaction it generated. After reflecting on it for a day, I began to understand why — even though this topic has been written about many times, “technology” as a sector and industry now has gone from vertical to horizontal, entirely pervasive across industries, across sectors, across geographies and cultures. And with this, every year, a new cohort enters into the “tech startup” world, and there’s no official canon to read, no “one-stop shopping” site or user manual to get briefed on the things you absolutely need to know.

So, that’s why I’m writing this short post specifically for 1) employees of early-stage startups and 2) the earliest investors in these startups, who are often themselves new to the entire sector. And as a disclaimer, 1) I am figuring this out myself in real-time. Maybe I have a 1-2 year headstart. And 2) things may vary on a case by case basis, so rather than get lost in nuance here, I want to keep this post short, sweet, simple, and entirely accessible to everyone — I view this as “must-know information.”

For brief context, how did we get here? The private markets have ballooned, and the VC model is based on building a portfolio of companies such that the best ones can be acquired or go public. While companies today can still go public and get acquired, those events are quite rare relative to the explosion in new startup formation. That can seem dire, but the new age also presents opportunities in hotly-contested secondaries.

For employees at early-stage companies… the equity you’ve been granted is likely options for common stock in the future “stock options,” just like the founders. You can read more about the types of stock granted in startups here. If the startup you’re working at begins to raise lots of money, and especially if it attracts non-traditional investors to startups (private equity, hedge funds, and so forth) it’s likely those rounds could be “highly-structured” financings which is another way of saying those investors likely put terms on the financing that, in the event of liquidity, their shares will rank higher on a “preference stack” relative to others. Knowing where you sit on this preference stack is a good thing to know, so you should ask. For more reading, check out this more detailed post by Scott Belsky.

For early investors in companies… the notes you’ve converted into shares and the equity you own in startups that breakout and raise lots of money will not only likely get diluted (very few early-stage funds can defend their positions over time or grab enough ownership upfront to withstand the dilution) but also will likely get demoted on the preference stack. While folks will feel sympathy for line employees at startups who don’t make any gains in a sale, no one will feel sorry for early-stage investors who get washed out. I’m writing this to underline the point that early-stage investors should be aware of the risks of being “trampled by a unicorn” as Belsky writes, to be on top of changes to the price per share, to keep their documentation sound, and to potentially use the advent of mega-financings at huge valuations as a new point of liquidity – for example, if you invested in a company at a $4M cap and it just raised $100M at a $1.5B valuation, that’s sort of like a new IPO, but without the lockup period. (Again, things will be different on a case by case basis, but at least being aware of this will help.)

No one is forced to work at or invest in a new company. All of this activity is at-will. There is also no promise of a reward or payout. I do feel, however, we are in a unique time as it relates to capital 1) in the market and 2) focused on technology — and this has created never-before-seen conditions, mega-financings from traditionally public or indirect investors. This trend has created new challenges but also some new opportunities. There will be more stories to follow of high-flying startups that find a home where some people will make money and others won’t, and this will be especially jarring for folks who see their colleagues get paid while they don’t. To put on twist on a famous line, you’re either at the table for the most recent mega-financing, or you’re likely to be near or at the bottom of the preference stack.

Quickly Unpacking Amazon’s Acquisition Of PillPack

By now, one wonders what tech news will be tucked into the public record the days before a major holiday travel week approaches. While I have no horse in this particular race, I was really excited to read that Boston’s PillPack was being sold to Amazon:

Let’s quickly unpack the highlights from this deal:

1/ No Schlep Blindness Here – Pillpack succeeded for a variety of reasons, one of them being that the team actually thought about the underlying processes in the industry and rebuilt them with better flows, software, and operations. This success reminds me of a famous Paul Graham post, Schlep Blindness, where Graham argues while incredible startup ideas lie around us, this specific work can feel to many to be both tedious and boring. “Reinventing the direct mail pharmacy business” doesn’t have the sexiest appeal, sure, but it’s clear reading all the reports the team thought deeply about each process and succeeded at creating value for all stakeholders in its orbit.

2/ Amazon’s Broader Health Initiatives – Amazon recently made national headlines in launching a new healthcare initiative in partnership with JP Morgan and Berkshire Hathaway (where Atul Gawande was recently named CEO); Amazon made big waves with its purchase of the Whole Foods franchise, which instantaneously gave Amazon over 400 new retail locations; and years ago, purchased Drugstore.com. It remains to be seen if and how all of this comes together, but given Amazon’s rate of execution these days versus the state of our nation’s healthcare sector today, I’d wager many would be rooting for Amazon to enter the space and make an impact.

3/ The Ultimate Retail M&A Cage Match – If I could be anywhere in the world, I’d be a majority shareholder in a company that both Walmart and Amazon are in pursuit of. Jokes aside, it is clear Walmart is eager to play after its moves with Jet.com and Bonobos, but it’s hard to keep up with the strategic moves of Amazon, most recently with Ring (around home security and automation) and now with a foray into pharmacies. Whether it’s angling for multi-billion dollar franchises in faraway places like India, or competing for a small startup in Boston — the gloves are off and founders in the right position stand to benefit.

4/ Not A Great Of Contact High – As soon as the news of PillPack hit, various public pharmacy and drug store companies got pummeled in the markets. One analyst estimated $15b+ of incumbent market value was wiped out. Those numbers are likely to go up and down a bit, and I’d guess many analysts have already baked Amazon’s moves here into their longer-term forecasts. That said, I’d have to disagree with the Walgreen’s CEO who said he wasn’t terribly worried by Amazon — I would definitely be worried about Amazon and would be analyzing inventory to make sure our stores were providing the SKUs and services consumers need.

5/ (Pill) Bottle Returns – This is the part where we talk about the venture-scale return. PillPack raised a bit over $100M and, if the rumors are true, getting purchased for $1B (or close to it) for a company formed in 2013 is a fantastic outcome in a relatively short period of time. PillPack didn’t over-raise venture capital, likely had several million on the balance sheet when it was acquired, and the acquisition presents a terrific outcome for the Boston area. That is much-needed news for a region with incredible talent and passion despite many larger VC firms (and their LPs) quietly moving out of the area.

6/ Real Brass – On a personal level, I was introduced to one PillPack founder, TJ Parker, by a close mutual friend (Steve Schlafman) who has an incredible knack for finding authentic founders (and we have co-invested often over the years) told me about TJ as one of his favorite entrepreneurs. So, I met TJ once just to hang out, and I loved the kid. He is the type of person I’m always looking to find – quiet, a good listener, someone who kind of lives in his or her own world, who tunes out noise or things that a pure waste of time — in a short hang out session TJ quietly oozed entrepreneurial rigor. While I don’t know TJ well, I am super happy for him, his cofounders, colleagues, and folks in the PillPack orbit. Well done!

Quickly Unpacking ATT’s Acquisition Of AppNexus

What does a massive telco do to follow up an $85B acquisition of Time Warner? Spend about $1.6-$2.0B on AppNexus, of course. In an age where $7.5B exits like that of GitHub to Microsoft make the big waves, acquisitions like that of AT&T buying AppNexus can feel, relatively speaking, small — but that would be a mistake to perceive it that way.

Founded about a decade ago, NYC-based AppNexus went on to raise well over $300M in private capital. Some of the most recent investments in the company were likely done at a price which is not that far off the final price tag. We don’t know if the most recent investors placed any preferential stacking, but this particular exit is revealing for a number of random reasons:

1/ Mobile Disruption All The Way To The Application Layer – Back in 2010, then TechCrunch contributor Steve Cheney wrote this great post on how video calls and application messaging would render the carriers as dumb pipes. As usual, Cheney’s notes were quite prescient — fast-forward to today and aside from broadband and mobile monthly subscriptions, users are treating them like they’re treating Comcast — as pipes to bring them the content they want. AT&T purchased Time Warner to get more content in the hands of mobile users and to leverage that data for other initiatives. AppNexus makes sense in the aftermath of the TW acquisition as to way to monetize content inventory at scale.

2/ Mega Media Industry Consolidation – Major telecommunications providers are using their cash balances to scoop up more content, whether it’s Verizon (Yahoo, AOL), Comcast (Fox?), or now AT&T. Does this pressure to consolidate move all the way up the chain to HBO or even services like Spotify or Netflix? It’s not a sexy category overall for venture, but against a potential backdrop of massive industrial pressure to consolidate here, perhaps having the next AppNexus in your back-pocket isn’t a bad idea.

3/ Cord-Cutting, Streaming, and Closing A New Loop – In an age of IGTV, future generations aren’t interested in cable and satellite bundles for $200/month that bind them to regularly-scheduled programming; instead, they’re buying Internet service and opting to stream content from services like Spotify and Netflix, among others. AT&T’s logic is that these new generations are mobile-first, so if they buy an AT&T network phone, that is potentially extensible at home into a new service relationship around live and premium television content. Buying a sell-side ad-exchange llike AppNexus helps AT&T close the loop from its network, its content (live, scheduled, and library), and its end-user by putting the right ads (informed by user data) in the right places (including outside the U.S.) at the right time across both broadband and mobile networks.

4/ 2008 Feels Like 3 Decades Ago – This isn’t fair to AppNexus at all, because a $1.6B+ exit is huge stuff, but it is a long time ago, and the way news cycles move today, feels eons ago; additionally, in the wake of $7.5B mega-exits, AppNexus can feel much smaller than it really is. No matter, the company found a way to find a new home, and that is no easy feat. To me, it’s yet another reminder of how long this game takes to play out and how much patience is really required by all participants.

5/ Sobering Reminder on VC Model Mathematics – I feel silly writing this, because again $1.6B+ for an exit is huge! But let’s assume the seed fund here generously owns 7% at exit, and the Series A lead firm owns 16% at exit. On a $2B purchase price tag, the seed fund returns $140M while the Series A fund returns $320M. The catch, of course, is that many of today’s seed funds have grown to around or above $100M in fund size, which wouldn’t really move the needle on their newer funds; and the math is even more severe for Series A firms, as $320M is a great number but often not enough to return a big VC fund. A seed VC once taught me that every investment in his firm has a “RTF Magic Number,” whereby each deal would be assigned a target exit value at which the fund would be made “whole” in that sale — the idea is that you want every potential $B+ outcome to return the fund. Much easier written than done.

When The Profile Gets Ahead Of The Proof

I heard this line this past week, and it’s been like a catchy lyric playing over and over again inside my head: “Their profile is ahead of their proof.”

Written another way, when Profile > Proof.

It could apply to a company, a startup, a venture fund, and of course, an individual. And it reminded me the profile of any of these entities can be built up, pumped up, and broadcast widely for not much money or effort. The age of social media is in full-swing, as we all know too well — entirely digital brands are going direct to consumers, disrupting traditional brick and mortar stores; traditional media outlets such as newspapers and cable television are being replaced by celebrity- and influencer-driven “channels”; and “startup culture” is now defacto corporate culture, with early-stage, well-funded startups executives on the coasts commanding compensation packages at many multiples of what their counterparts may make across flyover country.

There are countless ways this phenomenon of beefing up a profile ahead of an event — a launch, a new hire, a new funding round, etc. — manifests in startup land. The manner in which I encounter it most is around early-stage financing. In the Bay Area in 2018 (and yes, I concede it’s radically different elsewhere), there really is a lot of money floating around and even more startups who are seeking it. But this isn’t just a few $100,000 dollars here and there — we are talking about rounds with 2-person teams getting oversubscribed and ballooning from $1M upward. VCs don’t help the cause, as they’re on the hunt for ownership percentage to hit their targets.

This is the local market today. I don’t complain about it, because it is what it is. What does surprise me, however, is how folks who are super early in their company journey start to conflate “being oversubscribed” with a real signal, or investors who believe they’re entitled to the next fund based on very little from the previous fund. At some point on the funding treadmill, people begin to discount the profile and look for evidence of proof. You could perhaps categorize early rounds or early funds as evidence that some folks believe in the profile enough to deliver proof — but in today’s age, it’s significantly easier to create a profile and, paradoxically, much harder to demonstrate proof.

Perhaps the reason this line “Profile > Proof” stuck with me is because I have felt it myself. Although it sounds nice for a second, I do have folks telling me “Congrats on your success!” — and after those few seconds ware off, I am immediately snapped back into my normal paranoid resting state, usually retorting with “Ah, you mean congrats on surviving!” I mean this wholeheartedly. New investors like myself are still totally unsure of what the results — the proof — will look like in the future, but we have all these interim indicators out there. Folks can often judge others on proxies — not always the real thing. Of course, I see this also take root from the inebriation of many oversubscribed rounds spilling over into future rounds.

What I’ve ultimately concluded for myself, and I would guess this applies for all other entities, too, is that there is no substitute for proof. Someone can package all the interim markers and proxies they want to, and we all spend a great deal of energy in that exercise, but without the proof, it’s likely all moot.