The Summer Solstice And Seed Stage Squeeze

If you’ve been following my tweets lately, you’ve read some of my quick musings on the state of the seed market this summer. In short, in my 6.5 years of investing in the seed stage, I have never seen activity levels like I’m seeing today. Granted, 6.5 years is not a long arc – I have not experienced a prolonged down market as a private investor.

Despite that lack of experience, I am fortunate in that I have direct access to many of the greatest VC leaders and franchises for mentorship and guidance. This year, I’ve casually asked them about the 2019 “environment” and they all reply with some version of the following: They’ve never seen anything like this, they’re concerned about the cycle, but yet, in all of their paranoid analyses (and these people are successful because of that paranoia), they do not see what stops this momentum. They’ve all accepted that this is a new world of capital abundance and that the pistons driving the global economy are technology and network effects.

Back in 2017, Fred Wilson noted the strategic importance of the seed stage, writing:

Seed is really hard. You lose way more than you win. You wait the longest for liquidity. You lose influence as larger investors come into the cap table and start throwing their weight around. It is where most people start out. Making angel investments, raising small seed funds. They learn the business and many see better economics higher up in the food chain and head there as soon as they can. If you hit one or two right, you can make a fortune in seed. But those bets take a long time to get liquid. And if you don’t hit one or two right, you end up with a mediocre portfolio.

The seed “territory” is critical, indeed, and now that folks realize how important it is, there is a fight for that turf. When I put all of this together, what I see is: In the Bay Area, the seed stage is getting squeezed from all sides during this summer solstice of

1/ Bottoms-Up Competition – Seed funds are getting scooped by the well-heeled alumni of today’s web scale companies. Those employees and operators, who often have some book wealth now (or are running syndicates on AngelList or acting as a scout for another fund) can easily dump $50K-$100K into one of their ex-colleague’s new startups, or put this money into their friend’s new startup, or their friend’s new hot deal. That amount can rise to $500-750K pretty quickly for a pre-seed round. Most seed funds are not even a consideration in these ad hoc “angel rounds.”

2/ Lateral Competition – The number of “seed” funds has also grown during this boon. Samir Kaji from First Republic has been writing on this for years. More and more seed capital has flooded into the market, making the situation for funding seed rounds ~$2M-ish total size more competitive. When more capital is chasing the same set, entry prices go up and returns are likely to go down.

3/ Top-Down Competition – As I’ve tweeted about a few weeks ago, many of those pre-seeded founders with sophisticated technology backgrounds will often talk to larger VC platform funds and be able to raise more money for less dilution (since large platform VCs are typically more price-insensitive at seed) and get the benefit of the brand halo and network of said VC firm. On this dimension, most seed funds can’t even compete on network, brand, or the cost of capital.

4/ Orthogonal Competition –  I recently tweeted about a new breed of early-stage technology investor that has its roots in public equities (hedge funds, long/short, etc.) who have over decades built up a big book of business, large teams of analysts and researchers, and most critically data models to make investment inferences. Many of these new data-driven funds are hiring experienced VCs across early stages and building outposts in the Bay Area. It may be easy to mock these moves as “touristy,” but these fund managers didn’t build empires by being silly — they were strategic over the long-term and methodical. Like VC platforms, these funds could potentially be either as price-insensitive and/or provide more value via portfolio and market insights than a typical seed fund can. They have to deliver on this promise, though.

A lot has changed since when I wrote my first check in 2013. We all now know how big the stakes are. We know that technology and network effects (like marketplaces or in software) drive the world economy. We know private markets hold the key to 100x or even 1,000x multiples. We know global markets are open — today, for example, everyone in Malaysia could be a DAU for Zoom. We know the web and mobile internet have hit critical mass and embedded into our lives. We know that relationships with these creators is of tantamount importance — look at how influential an accelerator like Y Combinator is on its batch members, not just during the batch but years after. Early stages are where relationships are formed, and those early investors can earn the right to invest more, block out their competitors, and other advantages.

As a result, now in 2019 with these new phenomena, traditional seed funds need to reexamine what their offerings are, where their deal flow comes from, what their portfolio construction needs to be as fund sizes creep up, what entry prices they’re willing to stomach, and what this 360-degree of competition means for their businesses. For better or worse, I am sticking to my own knitting in what I know and have done over the first 6.5 years — focusing on earlier, smaller rounds (as I have since 2013), focusing on meeting people through tight networks, building long-term relationships, being disciplined about entry prices, increasing the time diversity of the new fund we’ll crack open soon, and having a long-term view about how many funds over the decades I want to deploy.


I was catching up on MG’s newsletter/blog and came across this opening line, which got me thinking about a concept in investing, specifically in deal sourcing:

To me, all information is about triangulation. Any single source, no matter how close to the situation — and often times because they’re too close to the situation — lacks full clarity.

Triangulation is one way to describe this. Another term to describe this is stolen from nature: echolocation. From Wikipedia:

Echolocating animals emit calls out to the environment and listen to the echoes of those calls that return from various objects near them. They use these echoes to locate and identify the objects. Echolocation is used for navigation and for foraging (or hunting) in various environments.

I’ve been thinking about this concept nonstop and MG’s post finally crystalized the thought in my mind. Nearly all the investments Haystack makes are initiated through a referral by someone we already know well. That’s pretty common practice, given so much of early-stage investing is a people-driven business. Now that there are so many new companies started, so much money in the ecosystem, and new types of funds out there, deal velocity is increasing. To find signal in all the noise of that deal flow stream, “who” the source is certainly matters.

Usually, one introduction is all it takes to trigger a meeting and even light diligence. But, then again, introductions can be a dime a dozen. Just because someone introduces you doesn’t mean you’ll get a meeting in a timely manner or engaged consideration. This is where echolocation comes in. If an investor begins to hear about a specific person, product, or company from various non-overlapping sources, that helps the investor triangulate to find some semblance of a signal in an otherwise noisy and hazy environment.

Early-stage investing is significantly more random than many folks would like to believe. Some investors have theses, some look for specific sectors or markets, others are attracted to metrics, and some look for specific types of business models or people. Whatever those investors end up picking, they all likely use some form of subconscious echolocation (I’m guessing) to prioritize what to pay attention to in an endless stream of early-stage deal flow. What does that mean for founders and early-stage companies? Just getting an introduction doesn’t mean much these days. Rather, having an investor hear about the team or the company through different channels (directly on email, indirectly on social media, casually in-person in conversation at a meet-up, hearing about a portfolio company which loves a new service, etc.) all are logged as data points that help investors triangulate. While full clarity may never be possible, having a better sense of what to focus on does help immensely. It also means that, perhaps, the best way to get the attention of a target is not by directly sending them a signal — but rather — by creating echoes that will bounce off other objects and end up reaching the right targets over time.

The Truth About Investor Updates

The topic of “investor updates” has been debated frequently. Most folks who are not close to early-stage startups and new company formation would be surprised to discover that a high number of companies, after receiving funding from individuals or institutions, do not send updates to their investors. Contrast that with a fund manager, who is often required to issue quarterly capital account statements usually paired with a cover note and updates on specific companies.

For me, I am pretty zen about this after six years of early-stage startup investment. Would I hope all founders updated their investors, even if briefly? Yes, of course. But reflecting back on how things have worked, it feels as if 33% of teams are on their way to institutional financing after the seed, and I just stay in touch with the founders on an as-needed basis; for the 33% that struggle to get a product out into market or to find product-market fit, the behavior ranges from no updates at all unless requested all the way to really, really long updates that are hard to read and hard to parse; and for the middle 33%, it’s a big mix, and thats the opportunity I wanted to write about.

The conventional wisdom is when taking money from others, there is some ethical and/or moral obligation to send brief updates. I now have a different point of view on this argument. I don’t think it matters what the obligation is — but rather — it’s an opportunity for the founders to supply their most passionate early supporters with information and ammunition to infuse into our conversations with downstream investors, potential candidates, and potential angels and BD prospects.

If a founder I’ve backed simply sends 5-7 bullet points per month with some key stats, metrics, and requests for specific connections and help, then over time I follow their “story” and it becomes a part of my daily vocabulary. I spend a good deal of time sharing deal flow up and downstream with Series A and B investors, and when they ask me about opportunities coming down the pipeline in 6-12 months, I usually share what I’ve been told from the founders themselves over email or phone — I become their subtle pitch man. Contrast that with the ones where it’s difficult to pull clear information out of — those startups don’t make it into the conversation unless it’s obvious to everyone things are working.

For angels and early-stage pre-seed and seed firms, most of those financings do not come with information rights. At the institutional Series A or B level, those financing documents do come with information rights — and it took me a while to understand why: because most won’t do it unless they’re required to by a binding document. Now, one can argue that an investor should be close enough to their companies to know all of this information via relationships. There is a grain of truth to that. But seed portfolios are largely different than larger funds.

To summarize the key point – I am zen about investor updates or the lack thereof. Want to send them? Great. Don’t think their important? That’s fine. The investors don’t own or run the company. But what I do feel strongly about — and have seen play out in the social networks among investors where potential deal information is shared — having a sense of the metrics over time and key accomplishments achieved is hugely valuable to arming me with information to begin the persuade the next investor to take a harder look, to take a meeting, and so forth. Most Series A financings are not big momentum rounds where everyone is competing — often it’s a personal connection forged after an angel or seed investor keeps telling a VC about a specific founder or company. As a founder, I think it makes sense to strive to be in that conversation, and brief email updates are a cheap and easy way to do just that.

VC Firm Creation Versus VC Firm Building

Earlier this year, I reflected on the difference between “fund investing” vs “fund management.” It’s a useful post for emerging managers, I’d recommend reading it. The gist of that post is – making investments is relatively easy, but learning to manage a VC fund is very complex and hard to learn.

Susa Ventures recently announced their 3rd seed fund. Susa has been one of a small handful of seed funds I recommend to LPs who are looking for folks who have a plan to build a firm. As a disclaimer, I am friends with Leo and Chad (and we co-invest frequently, or at least try to), and they did not ask me to write this.

I should be clear, not everyone who manages capital needs to build a firm in the traditional way — I do not, for instance. But, institutional LPs like this because their commitments can grow over time and it’s a model they have experience with. As fund formation for small funds has exploded, I get pinged by lots of people who want to be a professional investor with their own fund, and while they can get off the ground with a very small fund, it’s much harder to step back and be intentional around firm building. Susa, I believe, is a good example for folks to study.

Firm Building Done Right — Now, you have to pick great companies, and some of that is just out of an investor’s control. Yet, there are things that are in the VC’s control, and Susa is one of a few firms at seed that’s nailed it a short period of time:

1/ Started Out As An Angel Group – The core group started off writing angel checks and enjoyed each other’s company. I’d guess when they went into LPs, that cohesion was on display and it’s a story LPs can sell well internally, too. They also put their skin into the game early.

2/ Raised A Small Debut Fund – I believe Susa Fund I was $25M. I get pinged by folks who have never invested at all who want to raise over this, with one GP. They had four GPs. Raising a small fund enabled Susa to get into market quickly, get into good deals, and show momentum in raising the next fund, which I believe was $50M.

3/ Had A Clear Plan To Scale The Fund – Now, it helps that one of the fund’s co-founders is the son of a person who started another major VC firm. But the first time I met Chad, years ago, he had a very clear, simple plan to scale the fund. He intuitively understood how to tell a story over many vintages. He will add GPs over time but likely not turn into a mega fund. Many institutional LPs like to back funds which both have a plan to scale and that stick to their knitting — Susa had that plan and (so far) is committed to staking out a position in the market before larger Series A deals.

4/ Reallocated Fees Into Firm Building & Resources – One can do the math on a $25M fund with four GPs. You’re not making money on fees. That fund did really well, and as they went to $50M and now $90M, they’ve added to the team, have a clear market offering, and will likely go down the path of bringing more resources to their investments.

5/ Found Winners And Followed-Along In Them – LPs want to know a fund can pick a few winners, of course; but they also want to know if the firm can follow-on in future investments. This is a difficult thing to do and to get right. It’s hard because there’s competition for good deals, and a seed fund can’t follow-on into every company that progresses, so there’s a higher incidence for an error of omission (and always risk for errors of commission). Susa was able to show early they have the CEO-relationships down in order to keep investing.

6/ Built A Brand, Network, And Market Position – Raising $140M across two funds for a seed fund in this market with great LPs means one thing — the fund is established in the category as institutional, it will be around for a while, and barring any big changes among the GP ranks, will be a stable platform for founders to hang their hat on. That may end up giving Susa a pricing advantage over time, even in an overheated market. All of the GPs are relatively young, have active yet non-overlapping networks, and can now apply the last 5 years of learnings into the next decades of investing.

If you’re an emerging manager and looking for a recipe for how to grow smartly, here’s your example. This isn’t the only example, of course, but it’s the most recent one and illustrates what the bar is for building a team of GPs and limited partners.

Three Great Examples Of Email Newsletters Done Right

Earlier this week, I tweeted a thought about the difference I see between blogging versus publishing: “Publishing is when you draft a bunch of versions, have scores of people look at it, maybe a PR eye on it, etc. (often on Medium). Blogging is when you open up the CMS (usually on your own site) and just start typing and post it within 20-30 minutes.

This made me think of other mediums. As a heavy Twitter user, I’ve seen lots of people adopt tweetstorms. I’m not a big fan of them. People have encouraged me to follow suit and while I respect it’s native, “in-line” content, it feels a bit pushy to do it. Then I thought about blogs, and how lots of people in tech write online but very few blog in the way I think of it. And, then, I thought about a space in between – email newsletters. Email newsletters are important because email is a very important channel; you can track all sorts of analytics related to a campaign; and creating one every week or month is not that hard.

I wanted to highlight three people (and friends) who I think do email newsletters well:

1/ MG Siegler – everyone in tech knows MG. His blogs are usually must-reads. MG has shifted his writing a bit from the OG TechCrunch days and now, as a VC, has a slightly different style. His newsletter is really good – there’s a clear format, he writes 1-2 pieces, and then he links to others with his own commentary. I rarely read the articles he suggests because I’m most interested in MG’s take on the article itself. Subscribe to MG’s newsletter here.

2/ Connie Loizos – anyone following venture capital is likely a subscriber to StrictlyVC. Connie has nailed the daily newsletter format. Now, bear in mind this woman (and mother of 2) used to wake up maybe between 4-5am PST to organize her scoops; she’s changed a bit on timing now given she’s at TechCrunch now, but the format is solid and consistent, which includes breaking or headline news up top, a preview of her most recent piece on TechCrunch, funding news, and my personal favorite — her end section which has more whimsical links. I end up clicking on those the most. Note, like MG, Connie doesn’t really tweet that much. Subscribe to StrictlyVC here.

3/ Alex TaussigAlex may not be as well known within tech circles as MG or Connie, but his weekly email newsletter is really, really good. Alex is a consumer partner at Lightspeed, where I am a venture partner. Alex is the type of person whose brain is very active, and he is a polymath type, where his interests carry him into different arenas and he has the capacity to quickly learn a new sector very quickly. In his newsletter, you’ll find commentary on SMB trends, or Facebook Libra, or what’s happening in astronomy — all in a very digestible format. Of any newsletter I subscribe to, I’d go far as to say Alex’s is the best-designed one. I almost didn’t write that because I know this will go to his head, but it’s true. I meet lots of investors who want to share more of their viewpoints but don’t feel comfortable tweeting and don’t have the energy to blog, and for those folks I point them to Alex’s newsletter “Drinking From The Firehose” and encourage them to do it just 10-12 times a year. Subscribe to Alex’s newsletter here.

There are more sites popping up that let folks start these newsletters with less friction. That’s a good thing. But over time, I really believe in owning your content, owning your site, owning your domain, owning your design, and so forth. MG, Connie, and Alex are 3 people who have done a great job at this. Go check them out.

Two Simple Questions When Considering A Career In VC

There are countless posts on what one should consider when considering a career in VC. The reality today is that, as technology proliferates into all sectors and geographies, venture itself has grown in lockstep with the size of the opportunity. As the economy is now driven by technology, many folks are interested in venture — which I will admit, if you love it, is an incredible role with a fantastic business model (if things work out).

I recently gave a talk to a bunch of graduate and club students at a university which has produced a high number of VCs. The school name doesn’t really matter here, because this advice is actually relevant to anyone who covets this path. Before I begin here, a few important caveats: 1/ The advice below is just one man’s POV; 2/ the advice is worth what you paid for it; and 3/ While I am no expert on this topic and many others have written on this, this is intended to be very brief and pose questions to the reader to help him/her evaluate their own desire to go down the VC path. Now, with those disclaimers out of the way, here are the points I made to the students:

1/ Career Certainty Matters – It’s important to be certain that VC is the desired path, especially of grad students or folks approaching 30 years old. Why? Well, spending 3-4 years in VC and not being totally committed to it is actually…a fantastic waste of time. The opportunity cost of those 3-4 years is very large for talented, driven folks.

2/ So, How Does One Get Certainty? Network your way to observe what a real board meeting is like of a Series B or C-level company. Go study what folks do on boards, how they prepare (or don’t prepare), what the politics are like, what the follow-ups are, etc. The governance function of institutional VC is a consistent, never-ending part of the job (and a huge reason I wanted to remain at seed versus moving up the stack).

2a/ If You Love Boards, Then… Go dive into an institutional fund that values their GPs joining the board. There’s a whole other matter of whether you have the qualifications to get into that room in a competitive environment, but liking board activity is a good sign to act on.

2b/ If You Don’t Love Boards, But Still Are Bullish, Then… Considering going into the early-stage VC ecosystem, the pre-seed and seed game. This isn’t for everyone. It is not very lucrative unless you start a fund that actually works. You also have many trends working against you. Go talk to seed VCs; go model out the fund economics, their ownership levels, etc. Learn the business of seed, because its venture model is very different from the institutional board-sitting VCs.

There’s a lot more I’m not covering here. It’s a complex decision with lots of mystique around it. What I’m trying to do is simplify the decision tree a bit — a warning for folks who are interested from afar to examine things more closely and protect their own time and attention. I felt motivated to write this because I’ve seen scores of folks get enamored with VC from afar without peering into the model. The risk is that going into the industry without asking these few questions can cost a young person their most valuable asset: time.

Load Management

I’m not a huge NBA fan, but I certainly appreciate the sport. From a business and growth perspective, there’s so much going on with the NBA that’s fascinating to me. And, this particular offseason with all the amazing free agents on the market makes for a dramatic scene. I am hooked.

If you’ve been following this drama, one term that’s used often now is “load management.” The brief context is: NBA players have 82-game seasons; for those who advance to the playoffs, those numbers just go up. The players are getting bigger, stronger, faster, and the pace of the game is testing the physical limits of even the most gifted specimens. Sadly, this year we witnessed tough injuries on some star players where their bodies said simply “no more, please.”

As NBA stars stand to make tens of millions playing and even more in big media markets, and as the seasons get longer, they and their management teams are growing more conscious of the idea of “load management,” such as limiting “back to back” games, having allocations for playing minutes per game, and so forth in an effort to preserve the body both for a longer post-season (to stay fresh) and for long-term career prospects.

Yes, I’m tying this back to the startup ecosystem.

Most people working in the early-stages of new business formation — founders, investors, early employees — are sacrificing income, time with their loved ones, etc. — to pursue something greater. It is common to see many of those people not conduct proper “load management” and perhaps become more likely to burnout or make suboptimal decisions.

But as private markets expand, as startups take longer to bake, as product-market fit is harder to hit, as fundraising cycles can get longer, etc., the NBA’s concept of load management may apply to the early-stage ecosystem, too. Like the NBA, there is a seasonality to how startups are formed, financed, built, and how they interact with the broader business community. Much like an animal that is both diurnal and nocturnal, different things can be accomplished at different times; energy can be preserved, banked, and reallocated at different times, and people can spend energy for peak performance at more intense periods of the game.

It’s common to say someone is “24/7,” but even NBA players aren’t, and they’re doing something right. More likely, they’re constantly conditioning but also resting, developing BD relationships for the long term, going in fits and spurts, bursts of energy at the time it’s most valuable. I think there’s a computer science term for it. Whatever it is, it seems like a good strategic principle to consider deeply. If you’re reading this, you’ve likely taking on a “load” of projects, commitments, and relationships you really like — that’s the joy of this work in early-stage startups — managing how to allocate energy toward that load seems like a critical skill to have. I’m still working on it, myself. If you have tips on this, I’m all ears!

Quickly Unpacking The Looker And Tableau Acquisitions

Normally, I like to pounce on these big acquisitions quickly with some quick analysis, but big M&A in tech is happening too fast, and it’s graduation season for the toddlers, and family is in town, so for this installment of the blog, we will talk about both Looker and Tableau together, as they’re in the same space.

So without further ado, here are my quick takeaways from both acquisitions:

1/ “Not Another BI Startup?” This phrase is a common refrain among many startup investors. And, there is some truth to it — there are plenty of “BI tools” and “analytics/dashboard” companies that were started and funded. It was a red ocean. Fast-forward to June 2019, and two BI companies were purchased for close to $18B combined. Of course, Tableau and Looker do much more than just “BI” but I’m sure there are a number of early founding teams and investors who are gritting their teeth with this news.

2/ Kurian Moves. In a post-Diane Green world at Google Cloud, new chief Thomas Kurian seems determined to push GCP up from #3 in the cloud infrastructure market. While catching MSFT may be possible from a share of market POV, catching up to Amazon may require a lot more time and money. (See below for #5.)

3/ Salesforce Strategery. Benioff is certainly a very smart — and strategic — fellow. He is also very acquisitive. In paying a 50% premium for Tableau for $15B+, this was Salesforce’s 60th acquisition in its 20-year history, and it’s richest by nearly a factor of three (Mulesoft was about $6B). With Tableau, Salesforce gobbles a bunch of strategic goodies — a new regional HQ in Seattle; over 75K customers; a growing product line that will go into data management and more intelligent services; and possibly signaling an interest to go deeper into data business lines.

4/ Pivot North, Indeed. Your standard growth, public, and venture investors made good coin by backing companies like Looker and Tableau. For those following the early-stage seed market, by now you’re used to seeing firms like First Round (which backed Looker) as an early investor in big outcomes — but you may not know of Pivot North, a modest $35M-ish fund run by a single person who was a former GP at Sequoia and USVP. Get used to hearing about Pivot North. This fund takes very early and concentrated positions in companies, such as Looker (and Chime and Sun Basket). There are only a handful of early-stage funds that will truly partner with founding teams and earn the right to own 20-25% of the company from Day 1 — IA Ventures, K9 Ventures, Baseline, Harrison Metal come to mind. In a world with so much growth capital and competitive rounds, these firms get in early with small dollars and can protect their equity in the event of a breakout. Assuming Pivot North owned 8% of Looker at exit (it could’ve owned more), that would return $200M-ish to the fund — nearly 6x-ing the fund in one swoop.

5/ “Oncoming Cloud Consolidation” As I alluded to in #2 above, the “Cloud Wars” between Google, Microsoft, and Amazon seem to have entered a new phase. One battle area involves the concept of “multi-cloud,” where companies and developers increasingly do not want to be locked-in to one cloud platform and thus want to be free to move their data and services between and across different cloud environments. Products like Looker already have this mindset baked in, and on the heels of Google’s Anthos announcement, we are moving toward a world where even the incumbent cloud giants will allow their users to (somewhat) seamlessly move between different cloud environments. I expect to see more blockbuster M&A in this broad category.

Quickly Unpacking The $1.4B Acquisition of Harry’s

Believe it or not, this will now be the second blog post on this site about a billion-dollar exit for a shaving-related startup. It was just about three years ago when the startup world learned that Unilever had decided to plunk down a cool $1B to buy LA’s Dollar Shave Club. Fast-forward to today, and we have a smaller conglomerate, Edgewell, paying a mix of cash and stock for NYC’s Harry’s. Any billion-dollar liquidity event is a rare event, so it will get the Haystack blog treatment.

Here are five (5) quick takeaways from the deal:

1/ Double-Down: What were the chances that one of the first really big direct-to-consumer (DTC) startup outcomes would be for razors? Perhaps one could have had a 20% chance of predicting that. Okay, I’ll give you that. But then, what would be the chances that there would be yet another, second exit in the same category? (See more on this in Point #3  below.)

2/ Capital Efficiency And Returns: While the companies aren’t exactly similar (slightly different models and product mixes), it is worthwhile to note that Dollar Shave raised about $170M, whereas Harry’s is believed to have raised somewhere between $350M-$400M in venture capital. No one is going to cry over a huge exit like this, but in terms of capital efficiency, we have to tip our hat again to Dollar Shave — capital efficiency, as folks only seem to figure out too late, helps preserve and pump up founder and employee equity, as well as drive multiples for the early investors. [*My colleague Alex Taussig smartly pointed out that Harry’s also took on debt to purchase a factory for manufacturing, so the amount raised for this by giving up equity is lower, ultimately.]

3/ Markets Matter: I read that Gillette owns nearly half the U.S. razor market. Harry’s reportedly captured single-digit percentages of that market, but it is such a key category and steady market (and channel for pushing other home goods through) that it could support not one, but two, large outcomes like this. One almost has to wonder if there’s a third razor exit lurking out there over the next few years.

4/ Frequency Matters: Underling a point made above, the channel relationship that Dollar Shave and Harry’s created with their customer base is very valuable for companies which own related brands and can cross-promote different mixes of products. Shaving satisfies that much needed “weekly active use case” (who shaves daily in the startup world?) that helps solidify the customer relationship.

5/ DNVB Ceilings and Floors: Does this mean we will see even more digitally-native vertical brands (DNVBs) getting more funding on the belief they can grow into multi-billion dollar outcomes? Or does this mean that it’s actually Dollar Shave and Harry’s demonstrating the top-end for what a brand can do without being able to IPO? My own opinion is that the outcomes forthcoming from brands like Warby Parker and Peloton (both NYC-based, too) will serve to show that this category could very likely stamp outcomes in the double-digit billions over the next few years.

Mapping The Haystack Portfolio Across The United States

Hello. It has been a while since I’ve posted here, nearly 3 months. My fingers are well-rested, but my writing prowess is likely rusty, so please forgive any rustiness in this post. I do plan to write a lot more this summer, so stay tuned. In March and April this year, I was on the road a lot — all fun and productive work trips, but also distracting; if the past two months were about being out there and extroverted, I feel a huge wave of introversion coming as the summer comes into focus. I’ve also been working on a project that I cannot yet discuss publicly, but that will be over soon, and we can resume regularly scheduled programming on this site.

Today, I am excited to share some data on the Haystack portfolio as it relates to geography. Over the past year, and especially over the last few days, the Bay Area tech Twitter echo chamber has been tweeting about the advent of remote, or distributed, or satellite teams for their companies across the country and the world. Of course, none of this is new nor should be a surprise — the world is undergoing a massive shift from the industrial age to the information age; technology is spreading horizontally across geographies and into new sectors (and creating new markets), but also seeping deep into industries; the cost of capital is showing no signs of increasing, fueling this incredibly elongated bull run; the spread of Shark Tank culture persists, where tech startups are the cool thing to build or invest in; and the expansion of tech incumbents in the Bay Area, as well as this startup boom, has triggered rapid local inflation, where the main input costs for startups (salaries and rent) are increasing at rate which cuts too deeply into their burn rates.

This is all happening, of course, to a region that doesn’t have a modern public transportation system.

As an investor in startups, there is considerable conventional wisdom around the idea of investing only in the Bay Area. Many investors will not admit it publicly, but they either won’t invest outside the Bay Area (and these investors are successful, mind you) because they feel most big outcomes happen here or because their style of company building engagement requires more frequent interaction. “Get a plane!” chants will come from the Twitter Peanut Gallery, and many VCs do — there are outcomes like Duo in Michigan, Qualtrics in Utah, or Atlassian in Australia.

For me, as a seed investor, I started to feel this struggle back in 2015. Until then, the overwhelming majority of Haystack investments were in the Bay Area. And then, after a few years, I started to wonder — with all these new startups forming while all these huge growth rounds were happening, how would a founder even be able to recruit after raising a couple of million bucks? Everyone they’d want to hire here either could make a fortune at Facebook, or need a bigger salary as their rents skyrocketed. I didn’t want to fund founders who would then need to transform into professional recruiters — I wanted to find early teams that were already sort-of built up already — and it just so happened I started to find more of them HQ’d outside of the Bay Area. So, Haystack slowly began backing those teams, as well.

In the six years Haystack has been around, here is a rough map of where our investments have been located. You will see we made a lot of seed investments — yes, that was a part of the strategy. You will see the majority are in the Bay Area, and then New York City, and a bit more around LA and Seattle — and things get really scattered. We have been fortunate to have backed many of these of these companies “out of market” that have gone on to raise impressive Series A financings; many of the founders of these companies are in the Bay Area on a monthly or bi-monthly basis, so I see them often in person anyway; and they can take their funding and stretch out their runway, without worrying about their team getting poached every evening at a startup event. The big question still remains to be seen – will this investment activity pay off in terms of returns. I hope so. But, perhaps its as simple as the following — today with Zoom, Slack, and other modern communication tools, it may help certain founders to build in the early-stages outside the Bay Area — where teams can form and bond, where the runway can last a bit longer, and where the team can be insulated from the noise of 2019 San Francisco.

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!