Month: September 2015
I got the following question from a friend yesterday.
“I’ve had a few conversations recently about how individual seed investors are getting kind of tapped out – for a variety of reasons, but in general it’s not that easy to find people who are still actively investing. I don’t recall your having blogged about this – are you seeing it too? Lots of talk about Series A crunch but maybe there is a seed crunch too?”
I blasted out a response by email, which follows. If you are an active angel, I’d love to hear what you think.
I’m not seeing much evidence of this – yet …
I have seen some of the more prolific angels start to slow down because capital is not recycling as fast as they are putting it out. That’s a pretty common phenomenon. But generally the pool of angel investors is increasing and the prolific ones who have a strategy (such as the angel strategy I advocate) seem to be keeping a steady pace.
There is also a huge amount of seed capital available from seed funds. Some angels are no longer competitive as they are overly price focused (e.g. if the valuation goes above $3m pre it’s too late for me). And the convertible note phenomenon hasn’t helped as many seed deals just keep raising small amounts of convertible debt.
The supply / demand imbalance is way off. While there is an increasing amount of seed capital / seed investors, the number of companies seeking seed investment has grown much faster in the last 24 months.
Also, I think some angels are just tired of the deal velocity. You have to work at it now more to stay in the flow because there’s just so much more of it, and that makes angels, especially semi-retired ones, tired.
If there is a big public market correction and angels feels (a) less wealthy and (b) less liquid (or not liquid), you’ll see a major pullback.
I feel like we are in a sloppy part of the cycle. Everyone is suddenly nervous. There are lots of uncomfortable macro signs, but it’s hard to get a feel for where things are really heading. And, at the same time, the cycle of innovation is intense – there is a huge amount of interesting stuff being created at all levels. And there is a massive amount of capital available that is seeking real returns, vs. low single digits.
The current usage of the word unicorn makes me tired. I could rant about it for a while, but that would make me tired of myself ranting about it.
Instead, I’d like to focus on a word that appeared a month ago by Aileen Lee in Welcome To The Unicorn Club, 2015: Learning From Billion-Dollar Companies. That word is unicorpse.
From section #6 in Aileen’s post:
“Given how much capital our private companies have raised in the past few years, most likely have cash to fund 2-4+ more years of runway. If private capital is no longer available in the future, these companies will seek a public offering or acquisition. Some will demonstrate strategically justifiable metrics and have fantastic ‘up round’ exits; others may see liquidation preferences kick in which will negatively impact founders and employees; others may fulfill the adage “IPO is the new down round”, which has been the case for more than half of the public companies on our list. Or worse, some may become “Unicorpses” :)).”
The word showed up again in Nick Bilton’s Vanity Fair article Is Silicon Valley in Another Bubble . . . and What Could Burst It?
“Indeed, contrary to Kupor’s argument at the Rosewood, it is this later-stage investing—with its shortage of regulation, tremendous envy, and Schadenfreude—that worries many bubble-watchers. “We basically doubled the number of unicorns in the past year and a half,” says Aileen Lee, the founder of Cowboy Ventures, who has herself become a mythic creature in the Valley after coining the term. “But a lot of these are paper unicorns, so their valuations may not be real for a while.” Others, Lee acknowledged, may never see their balance sheets add enough zeros to justify the title. They will be given a new sobriquet: “unicorpse.””
Yesterday, Erin Griffith had a perfect chance to use unicorpse in her article VCs have ‘Dying Unicorn’ lists, but they aren’t sharing them but she missed the layup and went with dying unicorn instead.
“But amid all the unicorns getting their horns, investors have warned of “dead unicorns.” In March, investor Bill Gurley made headlines with his pronouncement that “a complete absence of fear” would lead to dead unicorns this year. Venture capitalist Marc Andreessen warned in a tweetstorm that startups with high burn rates would “vaporize.” Last week Salesforce CEO Marc Benioff also predicted dead unicorns as startups seem to focus more on their valuations than their customers.”
Now, I don’t blame Aileen for the word unicorn. And I credit her for unicorpse, which I expect will be a lot more prevalent in the future. It’s not, in Bilton’s language, schadenfreude on my part. Instead, I believe that by focusing on the concept of a unicorn, we are paying attention to exactly the wrong thing.
I once simultaneously sat on the boards of three public companies that were all worth more than $1 billion. One went bankrupt, one was acquired for $0.14 / share ($40m), and one was acquired for $0.025 / share ($25m). I think you can call two of them as unicorpses and one of them a unicorpse with nothing left but dust where the bones should have been.
Don’t feel bad for me. I once was on the board of a company that had generated lifetime revenue of $1.5m and was acquired by a public company for $280m of stock which, by the time the deal closed, was worth around $1.1 billion. Two years later, the public company (which at one point was worth over $30b) was bankrupt.
None of these companies were ultimately worth $1 billion or more. Each of them stumbled for different reasons, but a lack of obsessive focus on product and customer was a big part of why they vaporized. They assumed, regardless of how much capital they had, that they could raise more. They didn’t focus on building a long term, sustainable business that had a huge protective moat around it. I don’t care how disruptive you are – if you don’t build a moat, someone is going to come disrupt you.
I’m encountering an increasing number of companies with burn rates in the stratosphere. I get uncomfortable when the net burn rate for a company goes above $500k / month. In fast growing companies with a balance sheet > $25m I can stomach a $1m / month net burn. But when I see $2m / month net burn rates, I vomit. And a $4m / month net burn rate, even if you have $100m on your balance sheet, makes me physically ill.
As an investor, would I rather own 30% of a company that is acquired for $300m in cash that had only raised $10m or 2% of a company with a paper value of $1b and $200m of liquidation preferences? As a founder, would you rather own 10% of the company that sold for $300m in cash or 2% of a company with a paper value of $1b and $200m of liquidation preferences? There is a lot more in the calculation of value, especially who gets what, than that $1 billion unicorn thingy.
Let me say it a different way.
There is nothing special or magical about $1 billion valuation. It’s just a number.
I’m not predicting a bubble or anything else. I’m not negative about where we are at in the cycle. I hope to live another 50 years as I think this is going to be the most interesting point in the history of our species up to this point.
But I do think it’d be useful for more founders and investors to ponder unicorpses and spend less of their energy talking about, and trying to become, unicorns, lest you one day find yourself a pile of dusty bones.
Mentors 12/18: Know What You Don’t Know. Say I Don’t Know When You Don’t Know
Techstars Boulder Demo Day is this week. It always marks the true end of summer for me and it’s a reminder that I stalled out on my Techstars Mentor Manifesto series of blog posts.
The last one I wrote was #11: Clearly Commit To Mentor Or Do Not. Either Is Fine. It’s an important life rule – either commit or don’t commit – but choose! Mentor Manifesto #12 is also a good life rule: Know What You Don’t Know. Say I Don’t Know When You Don’t Know.
We all know Mr. Smartest Guy In The Room. I find him insufferable and have nicknamed him Mr. Smartypants. Unfortunately, there are a lot of Mr. Smartypants in my world as he inhabits the bodies of some entrepreneurs and the souls of a lot of investors. Regardless of who he manifests himself in, he’s still tiresome and when there are two of him in the room, watch out.
The best mentors are not Mr. Smartypants. While a great mentor knows a lot and has had plenty of experiences, she’s always learning. The best mentor/mentee relationships are peer relationships, where the mentor learns as much from the mentee as she teaches the mentee. There’s no room in this relationship for Mr. Smartypants.
I know a lot about some things. And I know very little, or nothing about a lot more things. My business and technology experience is deep in software, where even the hardware companies we are investors in (Fitbit, Sphero, Makerbot, Glowforge, littleBits, and some others) are what we like to refer to as “software wrapped in plastic.” At the essence of it all is software and that’s what I know best.
But I don’t know all software. And I especially don’t know vertical markets. We’ve consciously stayed horizontal in our investing, being much more interested in our themes which apply to many different vertical markets. But ask me about a vertical market, whether it be entertainment, real estate, insurance, auto, food, energy, or financial services and I’ll often approach it with a beginners mind.
In some cases I think something generic will apply to a vertical market. But when asked about something structural, even though I’ve had lots of different experiences, read a zillion magazine articles over the years, and might have some opinions, as a mentor I’m quick to say I Don’t Know, unless I’m confident that I do.
When I find myself in an “I Don’t Know” situation as a mentor, I immediately start trying to figure out who I can refer the entrepreneur to who might know something about the situation. And, just because I don’t know doesn’t mean I’m not curious about finding out more. I’ll often stay engaged and hear what the mentor has to say, just so I get the benefit of having more data in my head to play around with in the future.
I say “I don’t know” or some version of it at least daily. How often do you say it?
My idea of a really good afternoon on a three day weekend is to lay on the couch and read a book. Other than a nap in the middle of the experience, that’s what I did today.
I read the Supersymmetry by David Walton. It’s the sequel to Superposition, which I read earlier this year. They are both excellent near term sci-fi in the action/adventure save the world while learning physics genre.
When I read Superposition, I was on a long airplane flight with Amy on our way home from Paris where we went for our Q2 vacation. We were both exhausted when we left for Paris so we mostly slept, read, walked around the city, and ate a little. Superposition was the last book I read on the trip and I liked it a lot, but the activity of re-entry after a week off the grid swept it quickly from my mind.
On September 1st, I got the following email from David Walton.
Mr. Feld,
Just writing to let you know that Supersymmetry, the sequel to Superposition, comes out today. (It follows the story of the two girls, Alessandra and Alessandra, living separate lives 15 years later.) If you would like a promotional copy, I would be happy to send it to you.
I was so psyched that you read and enjoyed Superposition earlier this year. I’m sorry if I seemed to pester you about it at the time–I was just thrilled that you had picked it up and read it and actually *liked* it so quickly.
I went online, purchased a copy, and told David. I realized that I had never written a review of Superposition, which was a miss on my part as I enjoyed it so much. Within a few chapters of Supersymmetry I remembered why David is such a strong writer. He combines action/adventure with sci-fi with strong female protagonists who have an other-worldly backstory. The writing, like that of my favorite sci-fi writers, including William Hertling, Daniel Suarez, and Ramez Naam, could plausibly happen in my lifetime, but it’s a little distant from today so it takes the scientific leap that good sci-fi forces you to take.
What’s special about David’s work is that it is infused with physics. When I was a freshman at MIT, I thought I was pretty good at physics. In high school, I did well in AP Physics, although I only got a 3 on the AP Physics exam so I didn’t place out of it, which ended up being a blessing. MIT makes all freshman take a full year of physics, which for most is 8.01: Classical Mechanics and 8.02: Electricity and Magnetism. I felt like I was doing ok in 8.01 until I was ten minutes into my first exam and realized I had no idea how to answer any of the questions. Two days later I got my grade, which was a 20. Having never gotten a B on anything in Physics before, I did the only rational thing for a 17 year old freshman at MIT to do after getting a 20 on his first test – I went to my room, locked the door, and cried for an hour. The next day at 8.01 recitation I found out that class average was a 32, meaning I got a C, which wasn’t great but worked for the pass/fail grade that all freshman at MIT get to work under. At that moment, my belief that I was good at physics ended and my understanding of the MIT approach of being a daily assault on one’s self esteem began.
So, I have nostalgia for physics, even though I have no expertise with it. Superposition and Supersymmetry do a nice job of explaining some concepts in short bursts, unlike the pages that Neal Stephenson unfurls around physics in Seveneves, which I also loved but will admit to skimming in sections that were either tedious or too heavy for me.
It gives me great joy to discover new writers who I know I’ll be sticking with for a long time. I’m psyched to add David Walton to the list.
One of the most enjoyable things I get to do in my job is to be involved in creating amazingly fun products. If you hang around in our office at Foundry Group you see plenty of Makerbots, Fitbits, an Oblong Mezzanine, an Occipital Structure Sensor, ModRobotics Cubelets, littleBits, 3D Robotics drones, and Spheros.
Now we’ve got some BB-8s (from Sphero) in our office. And if you want one, you can buy one right now.
The story of Sphero and BB-8 makes me smile a huge smile. I’m a massive Star Wars fan and saw the first Star Wars movie in 1977 when I was 11. I had a digital LED Star Wars watch from Texas Instruments that I wore proudly every day. Recently, I’ve been wearing Star Wars Vans. Yoda adorns lots of spaces in my world and “Do or do not, there is no try” is one of my mantras.
Sphero was originally known as Gearbox when it entered Techstars in Boulder in 2010. It’s origin story is summarized in the Techstars Founder Stories series and our journey with Ian Bernstein, Adam Wilson, Paul Berberian, and the team they subsequently assembled has been awesome.
Shortly after we led the seed round the company changed its name to Orbotix. It released its first product – Sphero – a little over a year later and was off to the races.
Last year, Orbotix did an unusual thing. With two successful products under its belt (Sphero and Ollie), the team was working on the next product concept. At the same time, Techstars had partnered with Disney to create the Disney Accelerator. While Orbotix was now a substantial company (with around 50 people), Paul, Ian, and Adam decided to go through the Disney Accelerator to create their next product. They had no idea what it would be, but they just wanted to isolate themselves from the rest of the company and invent the next thing. Paul spent 50% of his time in LA and the other 50% of his time in Boulder. Ian and Adam spent 100% of their time in LA and went through the first Disney Accelerator program.
The story of how BB-8 came out of this has been talked about plenty of times including an article in Wired and this morning on the front page of the Denver Post. It’s a great example of the power of a prepared mind, magical technology, and the Techstars corporate accelerator dynamic.
Today, Orbotix is called Sphero. The latest product from Sphero is BB-8. And, as a Star Wars geek, I couldn’t be happier to have a tiny part in bringing BB-8 to life.
There are two common email conventions in my world that I use many times a day in Gmail. I don’t remember where either of them came from or how much I influenced their use in my little corner of the world, but I see them everywhere now.
The first is +Name. When I add someone to an email thread, I start the email with +Name. For example:
+Mary
Gang – happy to have a meeting. Mary will take care of scheduling it.
Now, why in the world can’t gmail recognize that and automatically add Mary to my To: line? If I needed to do “+Mary Weingartner”, that would be fine. Gmail is supposed to be super smart – it should know my address book (ahem) or even my most recently added Mary’s and just get it done.
The other is bcc: Whenever I want to drop someone from an email chain, I say “to bcc:” For example:
Joe – thanks for the intro. To bcc:
Pauline – tell me more about what you are thinking.
Then, I have to click and drag on some stuff in the address field to move Joe from the To: line to the bcc: line.
Dear Developers Working On Email Clients Of The World: Would you please put a little effort into having the email client either (a) learn my behavior or (b) Add in lots of little tricks that are common, but not standard, conventions?
Lucy Sanders (NCWIT CEO), Sarah Bird (Moz CEO), and I are all participants in the Pioneers in Skirts documentary that is currently fundraising on Kickstarter. Please help us make our $50,000 goal.
I like Memorial Day weekend and Labor Day weekend a lot. They are my bookends for summer and kick off the official “back to school” fall cycle. I realize that kids are back at school already, but even when I was in school I viewed Labor Day weekend as the official market.
I’m noticing an enormous amount of anxiety in the air. When I reflect on what’s causing it, I suspect some of it is the public market gyrations along with the endless discussion around it. Some of it is the Republican Primary circus and the crazy and apparently unwanted popularity (at least by the Republican establishment) of Donald Trump. Some of it might be that it’s just been really hot outside for a while and it’s time for the cooler, softer tones of fall. And some of it might be all of the construction everywhere, which is at a fevered pitch right now.
I’m in a consistent conversation with a lot of entrepreneurs. “Is my burn rate too high?” “Will I be able to raise the next round?” “Are valuations going to go down?” “What should I do about the coming _fill_in_the_blank?”
Fall is coming. I don’t know what the public markets will do, nor do I know what the private markets will do. But the weather, at least in much of the United States, will cool off and the leaves will turn different colors. And, if 49 years of life on this planet is any guide, there will be an emotional shift from summer to fall.
Let your body, soul, and mind reset this weekend. Turn off the electronics. Don’t try to “catch up” before things get crazy. Watch a movie with your sweetie. Eat some ice cream. Sleep late. Go for a long walk in the mountains somewhere. Read a book. Take another nap. Have a long, slow dinner. Play with your dogs. Or do whatever you like to do to relax.
The fall is always intensely busy. Charge up your batteries and get ready for it.