Category: Entrepreneurship
After all these years, I’m still a heavy RSS user. Every morning I click on my Daily folder in Chrome, open it up, and spend whatever time I feel like on it. The vast majority of what I read is in Feedly and includes my VC Collection as well as a bunch of other stuff. It’s almost entirely tech related, as I stay away from mainstream media during the week (e.g. no CNN, no CNBC, no NYT, no WSJ, no USA Today, no … well – you get the idea) since I view all this stuff as an intellectual distraction (and much of it is just entertainment anyway, and I’d rather read a book.)
This morning I came across a number of interesting things that created some intellectual dissonance in my brain since they came from different perspectives. I’d categorize it as the collision between optimist and pessimist, startup and already started up, and offense vs. defense. However, they all shared one thing in common – the message and thoughts were clear.
Let’s start with Tim Cook’s remarkable Message to Our Customers around the San Bernardino case and the need for encryption. My first reaction was wow, my second reaction was to read it again slowly, and my third reaction was to clap quietly in the darkness of my office. I then went on an exploration of the web to understand the All Writs Act of 1789 which is what the FBI is using to justify an expansion of its authority. I love the last two paragraphs as they reflect how I feel.
“We are challenging the FBI’s demands with the deepest respect for American democracy and a love of our country. We believe it would be in the best interest of everyone to step back and consider the implications.
While we believe the FBI’s intentions are good, it would be wrong for the government to force us to build a backdoor into our products. And ultimately, we fear that this demand would undermine the very freedoms and liberty our government is meant to protect.”
Thank you Tim Cook and Apple for starting my day out with something deeply relevant to our near term, and long term, future in a digital age.
Shortly after I came across Danielle Morrill’s post Surviving Whatever Comes Next and Heidi Roizen’s post Dear Startups: Here’s How to Stay Alive. I’m an investor in Danielle’s company Mattermark and was partners with Heidi at Mobius Venture Capital. I have deep respect for each of them, think they are excellent writers, and thought there were plenty of actionable items in each of their posts, unlike many of the things people I’ve seen in the last few weeks about how the technology / startup world is ending.
Unlike the sentiment I’ve been hearing in the background about deal pace slowing down (not directly – no one is saying it – but lots of folks are signaling it through body language and clearly hedging about what they are actually thinking because they aren’t sure yet), our deal pace at Foundry Group is unchanged. Since we started in 2007, we’ve done around ten new investments per year. I expect in 2016 we’ll do about ten new investments, in 2017 we’ll do about ten new investments, in 2018 we’ll do about ten new investments – you get the picture. We have a deeply held belief that to maximize the value and opportunity in a VC fund, investment pace should be consistent over a very long period of time. We did about ten investments in 2007, 2008, and 2009 – which, if I remember correctly, is a period of time referred to as the Global Financial Crisis. Hmmm …
So it was fun to see my partner Seth’s post titled Welcome to Foundry on the same morning as Danielle and Heidi’s posts. That started the intellectual dissonance in my brain. If you want to see what Seth sends every company he joins the board of after we make an investment in, it’s a good read. It also clearly expresses how we approach working with companies the day after we become an investor.
I then read Ian Hathaway‘s great article for the Brookings Institute titled Accelerating growth: Startup accelerator programs in the United States. There are a few people doing real research of the impact of Accelerators and Ian’s work is outstanding. If you are interested in accelerators, how they work, how they impact company creation, and what trajectory they are on, read this article slowly. It’s got a bonus video interview with me embedded in it.
I’ll end with Joanne Wilson’s post #DianeProject. Joanne shared a bunch of info about the #DianeProject with me when we were together in LA two weeks ago. While I don’t know Kathyrn Finney, I now know of her and her platform Digital Undivided. I strongly recommend that you pay $0.99 (like I just did) to get a copy of the report The Real Unicorns of Tech: Black Women Founders, #ProjectDiane. The data is shocking, and there is an incredible paragraph buried deep within it.
“A small pool of angel and venture investors fund a majority of Black women Founders. For those in the $100,000-$1 million funding range, a majority of their funders were local accelerator programs and small venture firms (under $10 million in management). One angel investor, Joanne Wilson and Gotham Gal Ventures, has invested in three of the 11 companies that raised over $1 million. On the traditional venture rm side, Kapor Capital and Comcast’s Catalyst Fund have invested in at least two of the Black woman-led startups in the $1 million club. Wilson, Kapor, and Comcast often invest together, aka “co-invest”, in companies, thus increasing the amount of funding a company receives.”
So – was that more interesting than CNN or CNBC?
A few weeks ago I noticed my post How Can This Be A Billion Dollar Company? getting a surprising number of new Twitter shares. Since I wrote it in the summer of 2014, it must have been picked up somewhere and hit a new chord. I wish I had titled it what was in my mind when I wrote it, which was “How Can This Be A Billion Dollar Company and other bullshit VCs ask early stage companies” – that would have been more fun to see in my Twitter feed.
I took the weekend off, spent time with friends, had an awesome Valentine’s dinner with Amy, and read Barry Eisler’s newest book The God’s Eye View (excellent – five stars – I love everything Barry Eisler.)
While going through my daily reading this morning, I came across a bunch of posts talking about how the sky was falling, Silicon Valley was in turmoil, financing was drying up everywhere, and all the unicorns were doomed.
Whatever.
In the midst of all the very predictable noise, much of it not really saying anything particularly insightful, were three posts by friends that I thought were extremely useful and very relevant. I encourage you to read each of them slowly and think about both what the writer is saying and what it means for you and your company.
Let’s start with Mark Solon’s Some Gray Haired Insights For New Investors. Buried deep within in a nice reminder of one of my fundamental beliefs.
“I remember a series of conversations I had with Brad Feld in 2008 about his perspective on investing through various parts of economic cycles. Brad was (and is) resolute in his belief that creating outsized returns in the venture industry demands ignoring the macro environment as it relates to investment pace.”
Mark says plenty of other things, along with walking us through some dynamics in 2008 around the macro, startups, and the global thermonuclear financial freakout that was occurring.
Ok – let’s move on to Mark Suster’s What Most People Don’t Understand About How Startup Companies are Valued. Mark also has a nice call out to me that helps explain why he writes posts list this one.
“When I started blogging it was because I was inspired by Brad Feld. When I was an entrepreneur there was no public information about how term sheets worked or how investors thought. Brad was openly writing about this and it felt like he was giving the VC playbook away for free! I always wanted to work with Brad for this reason so I started blogging because I figured if transparency worked for Brad I would try the same approach. Nearly EVERY smart VC I know has been talking privately for the past two years about how ridiculous valuations in private markets have gotten and how a reckoning was coming. Most prefer not to say this publicly for two reasons: 1) they have an entire portfolio of startups, many of whom are raising capital and 2) they prefer not to be attacked publicly or seem “anti entrepreneur.” But I promise you they’ve been saying it privately. So my talking up over the years is more trying to shine transparency on what we’re already saying in private rooms.”
Mark is on a monstrously awesome blogging roll right now. This post, along with the last N that he has written, have been outstanding. While I don’t agree with everything Mark says, it’s super important context for what is going on.
And then Alex Iskold, who runs Techstars New York, reminds us why this is a particularly good time to create a startup.
When you are done reading those three posts (and – if you haven’t – go read them – seriously – it’s worth the time) you should sit quietly for five minutes. Take a very deep breath. Figure out what you can actually impact today, and then go do it. And shut out all the rest of the noise.
When I was in LA last week, I had breakfast with Nick Grouf. We’ve been friends for 20 years and, while we don’t see each other often, it’s the kind of friendship that immediately lets you talk about deep, interesting things with almost zero foreplay.
At a small Coffee Bean coffee shop in Hollywood, with a music track from our childhood playing over and over again (I’ll spare you the track so it doesn’t get stuck in your head also), we ended up in a discussion about sources of insecurities.
Nick made the assertion that unless you fundamentally don’t feel safe on this planet (e.g. you experienced death of a child or were raped as a kid), there are two primary sources of insecurities.
Either:
- You don’t feel lovable or
- You feel like a fraud
We then went through a list of people we knew and tried to come up with another primary source of insecurity. Nick was clear that his source of insecurity is that he doesn’t feel lovable. We quickly were able to label a few of our good friends this way. The second – you feel like a fraud – is widely understood and expressed through the startup community as imposter syndrome. We bounced around this for a little while and then went on to the next topic.
But, this stuck with me. While I’ve never struggled with either of these, like all other humans I know, I definitely have some insecurities.
As I pondered this, I came up with the notion that my insecurities are driven by my feeling of being overly responsible for things, especially those I am not responsible for, and cannot impact in any way. This was one of the sources of my first major depression in my 20s and over the years has resulted in multiple situations where I’m completely worn myself out trying to “fix things” that were broken.
At 50, I’ve mostly let go of this. I rarely find myself in a situation where I feel like I’m being overly responsible for something I shouldn’t be, or cannot impact. I also rarely feel insecure anymore, although I attribute that more to me working on the issue, rather than just aging out of the emotion.
There’s a cliche in business that you should always try to surround yourself with people who are smarter and more capable than you are. I’ve never felt like it was a very nuanced cliche, as different people have very different strengths and weaknesses and the “more capable” person is going to be very context specific.
As we were talking about sources of insecurities and this cliche came up, Nick made a different suggestion which I hope is either a cliche or will become one. It’s that when you are in a foxhole in battle, you want the person with the strongest arm to throw out the grenade.
Ponder whether one of these sources of insecurities apply to you. I’d love to hear if you think there are other fundamental sources of insecurities. And, when you are next sitting with your team (regardless of your role), observe whether the person with the strongest arm is throwing the grenade out of the foxhole.
I was at a fascinating dinner with a bunch of founders and investors last night. Until I was 35, I was often the youngest guy in the room. While this was a seasoned crowd, much of the experience – both around creating companies and funding companies – started around the mid-2000s. As someone who has been doing this since the late 1980s (I started my first company in 1987) I definitely felt like one of the old guys in the room.
At some point, the conversation turned to the current state of things in the broad entrepreneurial ecosystem – both company-side and investor-side. It rambled around for a while but kept locking down on specific issues around the current state of financings and exits, alignment between founders/investors/acquirers, cultural norms that were front and center in today’s startup communities, and a bunch of other issues that tied back to the wonderful Game of Thrones line “winter is coming.”
Throughout the evening, I was regularly reminded of my favorite BSG quote. “All of this has happened before, and all of it will happen again.”
Another one of my favorite quotes is the one attributed to Mark Twain, “History does not repeat itself, but it rhymes.” Phil Weiser, Dean of the CU Law School and a good friend, often pulls this one out to remind us to look to the past to understand the future.
While we’ve been in a particular strong part of the startup / entrepreneurship cycle for the past four years, many people are nervous, talking about it, reacting to it, and getting confused, frustrated, and scared by what is going on. Others are in total denial of reality, which never works out well in the long run. Whether you follow the BSG theology or subscribe to Mark Twain, or are somewhere in-between, you recognize the value of understanding the past to exist in the present and deal with the future.
I came out of dinner with about 20 topics for blog posts, many which reflect on lessons I’ve learned multiple times over the past 30 years, which can be applied to today, and tomorrow, and the next few years, regardless of what actually happens. Until last night I wasn’t particularly motivated to blog around this stuff, but the discussion, and people in the room, really stimulated me to put some energy into this. So I plan to.
But remember, all of this has happened before, and all of it will happen again. So if you are impatient, I encourage you to go look at posts from me, Fred Wilson, and David Hornik from 2004 – 2007 for a taste of what I would characterize of “the re-emergence from winter.”
Or at least on the blogs and in the mainstream media. It’s kind of amazing to me how two shitty weeks in the public markets can impact how every one thinks and talks about things.
I know the early presidential campaign is impacting this. The amount of vitriol, hatred, and fear that is coming out of the mouths of the various people running for president always surprises me. I know it shouldn’t, but it does.
As 2016 kicks into gear, I have simple advice for founders that I offer up every time things get noisy – in either direction (good or bad).
Focus on what you can impact. Tune out the noise. Concentrate on things that matter. Have a long term view.
I know it’s simple. And I know it’s hard, because it’s the distraction that creeps into every conversation. It’s the discomfort of an uncertain future that lurks around every corner. And when it gets amplified and whipped into a frenzy, it seduces you to focus on the wrong things.
As Yoda likes to say, “Calm you shall keep and carry on you must.”
Welcome to 2016. We’ve already heard lots of predictions about the late stage financing market, tech IPOs, and what is going to happen to unicorns this year. And it’s only Monday, January 4th.
Remember that these are predictions. No one really has a clue. And a year is a long time.
My simple advice for 2016 is “control your destiny.” There are lots of different ways to control your destiny. It’s dependent on the stage you are at, the size of your company, and the configuration of your investor base.
Here’s an example from an email exchange I had this morning with the CEO of an early stage company that has growing revenue and a small team.
Founder: “So far we’ve raised $1.2mm and our revenues for 2016 will eclipse that. (All software licenses sold, no services). With status quo, we can become profitable, but grow slowly. I can burn faster, and grow faster, but risk not being able to raise money. There are network effects and winning the market is important. If my end goal is to ultimately win the market and not stay a “nice little business” is there any rule of thumb for how much to burn versus keep in the coffers? Is it better to burn out, or fade away?”
Me: 1. How much cash do you have in the bank? 2. How much are you burning a month?
Founder: 1. $250K actual cash. $250K in A/R. 2. $65k / month
Me: Get profitable so you are self-sustaining. Then raise more money.
Founder: Thanks! I think you are right. Love to know your reasoning.
Me: Control your future. It makes fundraising much easier.
I’ve got plenty of different examples for different situations and stages. Look for more examples like this in the future. If there are specific cases you are looking for feedback on, feel free to leave them in the comments.
Of all the podcast interviews I’ve done over the years, I think the one I recently did with Jerry Colonna on his Reboot podcast series is my favorite.
In the podcast show notes, Jerry links to a fun post by Fred Wilson titled Sixteen Years Ago (which is now 19 years ago…) We’ve known each other for a very long time and I treasure Jerry as one of my best friends on this planet.
Enjoy the week. Hopefully this will provide some thoughts as well as some fuel for you. And, if you aren’t a regular listener to the Reboot podcast, I encourage you to subscribe to it as a source of deep insights from Jerry every few weeks. There are 25 episodes so far since Jerry started it with his gang in September 2014 – I’ve listened to and benefited from every one of them.
There is a cliche in the financial world that has been around forever.
“Two things drive decisions: Greed and Fear”
For the past few years, we’ve been a zone where greed has been dominating. Every now and then a little fear creeps in and then gets squished into the corner by chants of “things are different this time” and “that’s just PTSD from the Internet bubble.”
Recently, the fear seems to be sticking around. There are plenty of people trying to kick it away, shake it off, or ignore it. But it lingers. And the smell of it gets stronger.
I had an exchange with a CEO the other day who was at an event in the bay area and commented on the attendees at the event. The telling line was:
They’ve never read the RIP Good Times deck, they don’t remember the Bin 38 fiasco, they think it’s the first go round.
I once again rolled out my favorite BSG line.
All this has happened before and all of it will happen again.
I’m a strong believer that you can build great companies in time of both greed and fear. But you have to be paying attention and operating under the right assumptions. You don’t have to believe history repeats itself, but you should accept that history rhymes. And one big rhyme is that the shift from greed to fear happens much faster than the shift from fear to greed.
If you are a founder running a high growth, VC backed company, here are a few questions to ask your investors today.
- What is the maximum amount of monthly net burn you are comfortable with for us right now?
- Based on our current course and speed, we run out of money in X months. If we can’t find a new lead investor, will you write us a check? How much and on what terms?
- If companies start failing left and right, do you think it will impact us in a meaningful way (either good or bad)? If yes, how?
There are no correct answers to these questions but they’ll give you a sense of how your investors are thinking along the greed – fear spectrum. You get bonus points if you ask the investor to walk you through what they were doing the last time things shifted from greed to fear and to tell you stories about things that went well for them, went poorly, and what they learned.
Don’t be afraid to explore what could happen well before it does. Our history rhymes with the famous John Galt quote “Nobody stays here by faking reality in any manner whatever.”
We’ve seen several M&A deals collapse unexpectedly in the past two months. Each was at the signed LOI stage. There was no warning or evidence of an issue until the moment the CEO got the phone call from the acquirer saying the deal was off. In both cases, the explanation was vague.
I’ve also seen several financings fail to close recently. Two of them were late stage financings that were pulled by the investor at the last second. One of these investors is highly visible for doing late stage deals. The other was an investor I didn’t know much about. The explanation I heard from the founder in each case was again vague.
In contrast, we closed a deal in two weeks last month. The person on the other side was willing to give us a lower price in exchange for “deal certainty”, explicit words that she used. We are very pleased with the deal and the price and appreciated that our reputation for just getting it done resulting in a significantly lower price. Deal certainty has always been important to me and I expect it’ll become even more important in the next year.
You will be seeing a lot more deals that don’t get closed after the handshake, verbal agreement, or even a signed non-binding LOI. This is natural in this part of the cycle, when prices feel high to investors, there is a lot of competition for deals, and a goal of some investors and acquirers is to get an LOI or term sheet signed with an exclusivity period in order to give them time to make a decision.
There are also a lot of unsophisticated buyers and investors out there. They generally don’t value deal certainty, especially if they come from other industries where lots of deals fall apart.
At this stage, it’s very important that the founders, whether they are selling their company or raising money, know the experience of the buyer or investor. You need to know their process. You need to know their investors, especially if it’s a private company buying another private company. Understand the history of their deal execution. Ask about, and understand the process from LOI / term sheet to close.
Basically, don’t be naive. There are lots of investors and acquirers out there who have low to medium deal certainty. There are others how have high deal certainty. Do your work and know who you are dealing with before you engage in the process for real.