Shots On Goal

The politically-correct line to use when making a startup investment is that it’s based on “conviction.” As an investor, in order to make the investment, you have so much belief in the founding team, or the idea, or the category, or the traction, or some combination of the aforementioned, that you are hereby convicted to make that investment. I am sure some investors in specific cases are struck by conviction as if it were a bolt of lightning; but, I am more certain those instances are not the normal course of action. As someone once remarked to me about a startup investment — that one should feel equal parts excitement and terror in making that investment, or otherwise the investment itself may not be interesting enough.

Once investors reach some level of security in their firm, they can play for upside. They do not need to increase their chances of finding something great in an optimization funnel. “Shots on goal” diminishes in importance. But, for most investors at the beginning of their career — and especially newer micro-funds of today which have scraped together $1M or maybe a bit more, the concept of “Shots On Goal” is absolutely critical.

These new investors need enough “Shots On Goal” in order to (in their mind) give themselves a chance to find one, maybe two, stellar investments in the lot. Of course, this randomness is most intense for those who invest at the early stages. There is simply no way to know the shape of a company or financial outcome when the earliest investments are made. Having enough “shots” is important because, at a primal level, newer fund managers or investors within firms need to demonstrate the ability to find a few good deals to parlay into the next fund or as evidence for promotion.

There is a cost, though.

Increasing “Shots On Goal” comes at the expense of concentration. As most early-stage investors eventually realize, obtaining and maintaining (or even increasing) ownership in a basket of investments is of utmost importance. The theory goes as follows — 1/ most startups don’t make it, no matter how smart the team and/or noble the effort; and 2/ given the high loss ratios of early-stage portfolios, and given that most portfolios follow a power law curve, an investor building a portfolio needs enough shots to find those 1-2 companies which will drive the returns. Therefore, investors care a lot about ownership, should a portfolio company be acquired or go public — maintaining high ownership can help smooth the harshness of the loss ratio in the event of a large exit.

As an aside, “Shots On Goal” can help newer managers by increasing the likelihood they can demonstrate “interim metrics” in the absence of real returns. I know this because I did it myself, not fully appreciating the fallacy of the concept. As a new investor, it can be exciting to co-invest with a great partner and/or to have a premier fund follow a deal you’re in; or for a company you’ve backed to raise a huge amount of money. While the company will ultimately be judged by its underlying metrics, newer investors need enough shots on goal in order to increase the surface area for these interim metrics to emerge.

But, a funny thing happens as an investor matures. They start to slowly realize that those interim metrics don’t mean much. They’re the vanity metrics of investing. And, as life unfolds, as folks get older, as people get married, have children, begin to limit their new relationships, those investors realize taking more shots on goals comes at a cost of not just concentration, but also of becoming a slave to those false metrics. To be clear, newer investors need the shots on goal to have a chance to catch fire, but over time, the way to generate returns is via concentration, by having conviction, and by taking on more portfolio risk.

I’m writing this now because the concept of “Shots On Goal” has come up more and more in my chats with newer managers. The reality is that shots are important early because you need to increase your probability that you can catch something great. Then, over time, the number of shots will likely decrease — partly due to life, and partly because you will realize that’s how you ultimately get paid. And, most critical, it is how you preserve the time and bandwidth to build a deeper relationship with the founding teams you back.

Those teams you back… those teams, if you select wisely, do not have “Shots On Goal.” They don’t have side funds or side hustles. The company you backed is their one shot on goal.

While you may have 15-20 eggs in your basket, they do not. Sure, most won’t work out, and as the investor, you have hopefully built a portfolio of uncorrelated investments that somewhat insulate you from potential collapse. But, the startups do not have this luxury — so while the concept of “Shots On Goal” is important to consider, it is not as important as what I’m going to write here — that while we may get paid because of the 1-2 successes in a portfolio, our reputations as investors solely rests on how we handle the relationships with the remainder of the portfolio. Some shots do not go into the goal. Some players only get once chance to kick the ball into the goal. For those folk, when an investor can, we must help pick them up and help them get into position to take another shot on goal, in whatever share or form that may be.

Misconceptions About The Path To Get Here

This is squarely a very personal post, and I will try to keep it short and sweet. As a disclaimer, I do not intend this post to be read and/or interpreted as talking down to anyone or being disrespectful. Yet, I need to make this point clearly because I hear it a lot directed at me, and I think it leads others to drawing the wrong lessons and conclusions from my experience. With all that, here the few misconceptions I hear often lately:

1/ “Twitter must help you make investments.” NOPE. I have been using Twitter heavily now for over 12 years. It is how I navigate across the web. In the past decade, it has become an unofficial system of reputation and social record in the startup tech ecosystem. But, having an active and engaged Twitter presence has nearly zero impact on how investment opportunities come to me. Founders I want to work with do not care one bit about what happens on Twitter. Rather, the medium helps me share ideas, meet other folks (many friendships have been started on Twitter), and learn from others. Taking out the act of making investments, I do feel Twitter is critical for most startup investors, and participating in the network in a genuine way takes time, investment, and giving back as much as you take. A subject for another post, perhaps.

2/ “You used writing and content to enter the VC sector.” NOPE. While I was working in various startups, I would write because I was interested in a variety of topics. The act of writing helped me understand the new worlds around me. It just so happened that over time lots of LPs and VCs would subscribe to my work; then I would email with them; then I would meet them; then I consulted with a few; and then I thought one of them would surely hire me. That did not happen. Yet, I have people coming to me (or recommended to talk to me) about using writing as a wedge into VC. My response back is that one should write if there are interested in the craft, but thinking that writing a post or sending a tweet can be a strategy for getting into an investment career is simply not realistic.

3/ “You made great early investments, and you must know what you’re doing.” NOPE. In the first two Haystack funds, there was tremendous success, but there was no way to know at the time what the shape of these companies would be. Absolutely no way. What I did do, however, was focus on relationships and people. I built relationships on Twitter for many years. Then I forged them in real life. And then I tried to help tons of people, and tons of people helped me. I can’t think of another ecosystem in the world where super smart and experienced folks will meet you and guide you. I would have 30+ of these types of meetings a week for long time while I was struggling to find my way. But the only way to get really going is to get into the game with a small foot in the door, and then you have to get lucky and show enough value to get invited into the room to learn by osmosis. It can’t be engineered, in my opinion. It’s not fair that it isn’t open to everyone, but helping out others constantly is a good way to increase the amount of opportunities that may come your way.

In the last year, I’ve had lots of people knock on my door asking for advice about getting into venture. It is a humbling thing now to have someone knock on my door. And when they come inside, often I hear some or all of these misconceptions about the path to get there by looking back at what I did. But the story isn’t this way in reality. Twitter won’t help you get into VC or get better at making investments — neither will writing a blog post — and neither will being seen as an expert or company builder or operator or fill-in-the-blank. The only thing one can control is the goodwill they put into world, how they handle the people they meet, how they help others, and how to monitor the serendipity of the Bay Area ecosystem to notice the point at which it may tip in your favor.

Truebridge Capital Fireside Chat On VC in 2020 with Keith Rabois

Everyone in the tech ecosystem knows of Keith Rabois, or online just as @rabois on Twitter. Like many others, I’ve had the fortune to spend a lot of time learning from (and debating) Keith. You can search some of the old tech chats we did back on YouTube. I feel as if I know most of what he thinks about the VC industry by now — yet, last night, he was in a fireside chat with Truebridge’s Mel Williams, and their discussion teased out new angles on VC that felt entirely new. I wanted to *briefly* share with you all the few tidbits that have stuck with me the day after. Note, these are listed in no particular order along with a bit of my commentary:

1/ The early stage is when a startup is a “liquid form of concrete” – Keith gently warned professional VCs of getting involved too late in a company reduces the ability to course-correct. Eventually, the company hardens, or becomes “concrete.” But for an active investor who wants to take an early-lead role, seed is the place to play. Note, Keith defined “seed” as the first meaningful capital a company raises — not the pre-seed, per se, but the first time a few million are aggregated from people who are not your friends or bosses.

2/ There are challenges to doing seed within a larger platform VC fund — Keith breaks down these challenges as (1) opportunity cost of time; and (2) the signal risk for both the company and the fund. On the fund side, he guides larger funds who do seed rounds to be mindful of the conversion rate to larger checks because one $50M check in a scaling company that’s doing well can cover a lot of seeds.

3/ What’s changed in seed market over last 15 years? Keith answered this one quickly: (1) valuations off the charts at seed, sees no immediate change there; (2) explosion of seed funds, says he gets one deck a week for a new seed fund (he’s only invested about 15 personally over last decade); and (3) Series A and platform funds are investing in talent earlier. All this said, many seeds are not competitive despite what you see or hear in the market.

4/ Osmosis is most critical for learning VC — he said for junior folks in the room, those who are developing into check-writing VCs over time — there are two critical things to keep in mind: (1) You need to be in partner debates to learn, and it takes time. Osmosis is how knowledge is transferred. (2) A vital skill for junior VCs to master is knowing what to flag for a senior GP. Those who don’t learn how to sort and flag key issues with judgment will never have a chance. [Aside, on point #1, I feel very fortunate that for my entire investing career to date, I’ve been able to sit inside weekly partner meetings at Bullpen, then GGV, and now at Lightspeed for the past two years.]

5/ Seed investing is like the Major League Baseball draft — In the NBA, the top picks are known to be the best talent usually. In MLB, most are drafted out of high school and quite often the evaluators miss talent. This is like seed investing. It’s ok to have mistakes, part of the game. Now comes the great insight from Keith — biggest mistakes looking back were choosing not to take a first meeting. In a world of thousands of startups and finite time, this is a very hard problem to solve — who to pick to meet in real life.

6/ A huge benefit of Founders Fund not having partner meetings — they can meet more companies. Founders Fund partners meet once a month for an hour. So, Keith says on a monthly basis on Mondays, he has 8 more hours per Monday than his competition, or 40 hours more per month, not even counting all the other meetings VCs at most funds are dragged into.

7/ And finally, Y Combinator — this was very interesting. Keith has seeded or invested in many YC companies. Yet, as a founder-driven investor, as YC has scaled in size and demo day is more of a production, he can’t get to know the founders, so in those cases, at a big fund like Founders Fund which can write a $100M check later, he prefers to wait. This is absolutely what many other funds say privately about YC, and thanks to Keith for putting it out there.

The VC Industry Norms Which Changed Over The Past Decade

Having spent time around and then in the world of VC in the Bay Area during the last decade, I’ve been reflecting on how different norms in the industry have changed. At the start of 2010, there was some unwritten VC industry conventions that have been tested, challenged, and upended in the last decade. I also want to be clear that there are other things that should (hopefully) change in the VC industry. That is for another post. In this post, I want to focus on what has been accepted over the past decade. So, what specifically has changed for Bay Area VC firms?

Acceptance that leading VC franchises can’t just invest in their backyard. I recall many Sand Hill firms stating a preference or requirement to invest only in the Bay Area. To be fair, not all of them held this view and many of them were investing nationally earlier, but as we flip over to 2020, there is a general acceptance among Bay Area VC partnerships that they need to be able to invest across the country, not just NYC and LA or Seattle.

Acceptance that leading VC franchises needed to be multi-stage and global. The AUM of many VC funds has increased dramatically. Depending on where you sit, it makes sense or is a recipe for disaster. To me, it makes sense, because “tech” is no longer a vertical – it’s seeping into every sector horizontally. Firms like Sequoia, Accel, Lightspeed (where I am a venture partner), Bessemer, have franchises their brand in other key entrepreneurial geographies; firms like GGV (where I used to be a venture partner) have a dual-country strategy in place from day one; and other firms have opened satellite offices in NYC, or send partners weekly to LA and Seattle. Beyond location, these firms accepted they need to view their access to talent like Facebook or Google would — for certain entrepreneurial talent, price didn’t matter as much as access does, so they’ll invest earlier (seed) and raise funds later to go big into winners and/or defend their best positions.

Acceptance of lower ownership thresholds in the best companies. I don’t have the data, but I’d bet the “minimum ownership” requirements VC funds started 2010 with have gone down dramatically. This impacts portfolio construction and possibly returns, though on the flip side, end-markets are larger and outcomes can be greater — look at Datadog, for instance.

Acceptance that leading companies expect some level of platform services. No doubt, a16z changed the game here. While I don’t think founders expect a SWAT team to show up and build their startup with them, they do expect some high-leverage support in business development, executive recruiting, and capital formation. VC firms have had to respond to this competitive dynamic by evolving their own operational model, which is not a strong suit of most VC partnerships. This also eats into the time and fee income those partnerships generated. While no one would cry for them over this (nor should they), it is now accepted as table-stakes for a top flight VC franchise.

Acceptance that firms and partners need to actively market themselves. While VCs have blogged and tweeted often before 2010, some still resisted being too forward with their point of view. What a difference a decade makes! Today, Twitter feels like it’s oxygen for VCs; firms spend thousands even millions on their websites, content strategies, marketing departments, events teams, PR workshops, and so forth. We even have folks who used Twitter to help raise their first funds and put them in business.

Acceptance that they face legitimate competition from the below and above. There are too many startups to keep track of. There are too many angels, accelerators, scouts, and seed funds who are giving them checks early, potentially diverting deal flow. There are larger firms who were traditionally only focused on growth who realize the power of holding early equity in tech and are coming down-market, even to the seed stage. It’s 360-degree competition, and that’s the new world VC firms live in.

Moving forward, in the next decade, my belief is the value set which entrepreneurs look for in VCs will change. In a previous era, it may have been more about familiarity or the perceived knowledge an investor held. Recently, the awareness a large VC brand can confer on a startup is coveted by some. In the future, I believe founders will be drawn to investors who market certain values that align with their own worldview and/or aspirations. That could be as broad as “sharing economy” funds, or as specific as investing in solutions to combat climate change. If I’m right, the next thing investors will need to accept is this — that they’ll be valued by the market for what they believe, and how they convey it — they will not be valued what they know or claim to know.

Quickly Unpacking Visa’s $5.3B Acquisition Of Plaid

Earlier today, the news leaked that Visa was to acquire fintech startup Plaid for $5.3B. Plaid is known within the startup and VC community as a strong company, but it is also a relatively quiet company in terms of its own PR and social media chatter. Startup exits are rare, and as the number of startups increase, large exits will become even more rare percentage-wise. So, when a major public financial services company plunks down over $5B to acquire an asset, everyone in startup land takes notice. Windfall events are almost required to extend one’s lifespan in the Bay Area these days, and this acquisition certainly qualified as one for those involved. It’s late tonight and this armchair correspondent hasn’t eaten dinner yet, so let’s briefly unpack the key takeaways from this event:

1/ The FinTech is already red-hot. Now it’s scorching. By now, folks realize how hot the “fintech” sector is. Arguably, after the rise of Facebook and social networking, fintech has been the biggest consumer and enterprise trend within startups — consider hyper growth companies ranging from Square to Coinbase, from Robinhood to LendingClub, from Affirm to Faire (Lightspeed portfolio companies), and so many more. FinTech valuations have already been on the rise in private markets, most recently with breakouts like Chime, and we should expect that trend only to intensify given this exit size. Consider recently PayPal paid $4B for Honey; Prudential bought Assurance for $3.5B; and Fidelity paying $35B for Worldpay.

2/ API FTW. There are folks within the startup world who know this secret as obvious, but it is not as widely-accepted. How could Twilio become a public company with an API-driven business model? Could Stripe grow that big with its architecture? As we have too many browser tabs open and are inundated with more SaaS applications, it would only make sense that going a bit deeper in the stack and empowering developers to build the next suite of solutions, as well as doing the heavy lifting of building thousands of integrations to help add value (much like Slack did for its platform). Plaid fit into this category broadly, and timed things perfectly as more and more fintech companies would use their services to help onboard their own users.

3/ Strategic fit trumps financials. I saw a tweet lamenting the acquisition price of Plaid as “crazy” because it was 35x revenue. What the journalist doesn’t appreciate is that as the private markets have expanded and given companies like Plaid more runway to stay private longer, it affords these companies the chance to maximize their value in this manner. The value of Plaid is totally different: Consider a platform which connects fintech developers, financial institutions, and consumers. That’s valuable. Visa values Plaid more (or to keep out of the hands of competitors) than public market investors might, and startups and their investors have and will continue to take advantage of that dynamic. For a company like Visa, owning Plaid gives them even more surface area to tap into new transaction streams.

4/ Lightning strikes twice for Spark GP. A small point and not central to the story, but this appears to be the second company where Spark Capital’s Santo Politi was on the board as an early investor that’s generated a multi-billion exit (previous one was Oculus to Facebook). To get one deal like this in a VC career is statistically almost impossible — to get two in a few years is a dream.

5/ The Haves And The Have-Nots. We ended 2019 with questionable performance from new public tech companies, and we’ve started 2020 with very public layoffs announced at big private startups. Influential folks are warning others on Twitter about the tide going out. This bull run can’t last forever. But, then there’s Plaid. The others were have-nots. They did not have enough runway or enough strategic value. The startup was also relatively capital efficient, raising less than 10% in venture capital of the final exit value it received from Visa. Plaid may have looked at that environment, looked at their cap table (which includes Visa, MasterCard, and Goldman Sachs, among others) and smartly whispered to them about what it would take to join forces with another company — and given their strategic value, their API-first strategy, the weight of the fintech sector, and the smart minds around the table — they engineered an incredible exit with impeccable timing.

Why Seed Funds Have Scaled

For those following this blog and the seed market over the past decade, you may have noticed that every year, we see increases across the board — more investors, newer funds, and funds that get larger. Much has been written about the fact that traditional seed stage funds have grown in size and dollars under management. Here, I wanted to step back and consider “why” this has happened from my vantage point. If you’re reading this looking for data and hard numbers, charts, and footnotes, you’ll be disappointed. Rather, this short blog is filled only with my own observations from being in the middle of the evolving seed market since 2013. So, with that Disclaimer, here are the main reasons seed stage firms have grown in size over the past decade, along with some risks and opportunities these conditions create:

1/ Catching Ambition – When some seed stage funds started, perhaps they didn’t know what their fund would turn into. Some are gone now, and some caught fire and the creators decided they wanted to grow into an investment firm, not just a fund. This is sort like when a tinkerer builds something for a few years but then it starts to work maybe 2-3 years later and they decide their want to intensify their approach to building around it.

2/ Financial Considerations – When investment firms grow, so do fees. But, I do not think this crop of seed funds is entirely motivated by more fees, but rather it’s industrial situations (which I’ll explain more below) that’s driving this. As valuations have gone up early, the cost of ownership has also risen, and in an early-stage fund where the loss ratio is likely to be much higher, high ownership has been increasingly important to these funds. Getting that ownership is one thing (and it costs more), but then defending it with reserves in future rounds is also increasingly important and another reason these funds have scaled up (usually with opportunity or overage vehicles).

3/ Industrial Atmosphere – I like to say that “tech” over the last decade went from being perceived as a vertical sector to now being horizontal, where tech has or will permeate most if not all industries. As a result, the venture industry has exploded — either to meet that opportunity, or because of low interest rates, or both. Over the past decade, many newer LPs (those who back VC funds) have entered the market, and as those LPs get more comfortable with their GPs, they may also want to put more money to work with them, especially when they get a taste of early stage returns. At the same time, the classic Series A funds and Sand Hill Road institutions have scaled up into the billions, creating more space at the early stage for seed firms to theoretically straddle the seed and Series A stages. There are also newer angels and new funds created almost weekly, so raising more capital as a seed fund can be a weapon to win deals.

4/ Social Forces – As seed stage funds grow and mature, the GPs grow and mature too. Seed funds often co-lead deal with another fund they enjoy working with. If their friends are growing, they may want to, as well. If it used to be traditional for each fund in a seed deal to co-lead with a $750K check 5-7 years ago, but now the check required for the same ownership level is now $1.5-2M per firm, funds may want to grow so they can keep co-investing with their peer group. Also, as investors themselves age, they may want to increase their ownership in a round as a reflection for what they feel they bring to the table, and they may want to concentrate their relationships in fewer, stronger opportunities — much like one may do in life with friendships, too.

These are the main four reasons behind *why* seed funds have grown in size over the last decade. With any change, these forces present risks and opportunities. The opportunity ahead is clear — more fees, more ability to own and defend that ownership, and having a storefront for pre-seed, seed, and Series A deal participation. In the right company, that can be life changing. There are risks, of course — new investors and funds are entering the market with smaller funds, novel Twitter strategies, and a hunger and desire to get ahead of the best founders. They may not only intercept the deals seed funds should be doing, but then may pass them along to the larger institutional funds, who are also happy to write a seed stage check, bypassing the traditional market. If the 2010’s were about the institutionalization of seed funds, I believe the next decade ahead will be a test of who can stake out their territory as these forces rise from the bottom and cram down from the top.

Time Diversity In VC Portfolios

A topic that’s been on my mind a lot in 2019 is “time diversity” in venture capital funds. There’s more about this topic all over the web, but the basic gist is — when building a VC portfolio, many investors prefer to have some “time diversity” baked into the mix because 1) prices can fluctuate and a longer time period can increase the odds that a portfolio is built when prices are lower and 2) it can help the investors “pace” their initial capital deployment and reduce the risk of investing too quickly and too loosely.

From what I’ve gathered from LPs and VC mentors, in previous eras, the initial deployment period of a VC fund (not including reserves for follow-ons, etc.) used to be around 5 years. Today, it’s rare to find a 5-year fund. I know of one. I can name a few 4-year funds on one hand. Three years seems to be a standard and acceptable period today. That said, some of the very best funds are doing two-year fund cycles. These are firms that have returned capital at scale.

This topic can trigger some heated debate. There are valid points on both sides. For those firms which have a strong foundation and history of returns, one could argue they’ve earned the right to judge the investment climate and march forward. On top of this, technology is no longer a vertical sector — it is entirely horizontal and spreading outward into global markets and new industries. On the other hand, those portfolios may not catch lower prices in certain vintages or potentially be investing so quickly, the bar for what makes an investment could go down. And, the more funds that are raised, the more fees VCs can collect, which are contractually guaranteed in limited partner agreements.Only time will tell which approach is best or optimal.

When I started Haystack, I had no idea about any of this. I only learned about this as a concept maybe in 2017. I’d speculate that most VCs actually don’t think about this topic. So, I spent years trying to learn from other VCs. Here are the initial deployment periods for the Haystack franchise: Fund I (1.5 years); Fund II (1 year); Fund III (2 years); Fund IV (2 years); now just opened Fund V (targeting 2.5-3 years).

What I learned from talking to mentors — mainly would single out Mike Maples here, who really hammered on this topic with me, as well as Fred Wilson and Roger Ehrenberg — is that for me as an investor, pushing the fund to increase time diversity would be a good thing. That doesn’t mean Haystack needs to be a 4-year fund or longer, but it also doesn’t mean that what’s best for me is what others should do. I think the key point is — folks managing third-party capital should go on their own journey to learn this topic and figure out what the best flight plan is for their own fund and LPs. Like portfolio construction, simply the act of thinking deeply about it, coming up with a plan, and sticking to it has been very valuable to me and something I think about now daily.

Looking Ahead, Predictions For 2020

With a bit of reluctance, I share this forthcoming “Predictions For 2020” post with you. Initially, I wasn’t going to write one because I figured it is hard to know what will happen even with lots of thought applied, and that it may not be valuable to you as a reader — despite the fact my Predictions for 2019 post was pretty spot-on (but 2018 was not!). But then I talked to a mentor who reminded me this blog usually was and should still be a medium for me to think out loud, and that this act of constantly thinking should be valuable to at least me. So, with that caveat, here we go…

As 2020 is nearly around the corner, what’s on my mind? What am I preparing for in my little world of technology, startups, and venture capital?

The Venture Capital Ecosystem: The public markets are soaring. Private markets are bigger than ever. There is so much dry powder alone in the Bay Area (well over $50B contractually committed to funds), it’s hard to see that just drying up overnight. In my role as an early-stage investor, I can’t worry about what will happen in public markets, and there is so much capital in the private markets, it means that 2020 is setup to just be a continuation of what 2019 was — and that means a bifurcation of seed rounds, with some seed rounds being very competitive pre-product Series A rounds, and other rounds being smaller, more on the fringe, perhaps out of the Bay Area. The entire seed market is wholly different from when I sent the first Haystack wire in March 2013, and with every fund comes a new game to learn to play.

The Technology Economy: Technology is proliferating into new sectors, new geographies. End-user markets are truly global and can support multiple $10B+ companies. But, consumer investing is getting harder because the cost of acquiring, engaging, and retaining those users has tipped over to a point of no immediate return. I operate as if this trend will simply continue until “the next thing” comes along after the web and mobile. I do not see that happening in 2020. Perhaps the first taste we’ll get of that is in a few years with Apple’s AR glasses, but who knows. I do see newer generations of founders focusing on larger problems with their startups — healthcare, climate, and the like. I see fewer folks coming through on crypto, so while that sector has cooled, there are real dedicated VC funds that focus exclusively in this area, which is great for LPs and founders alike. I appreciate the vision and the ambition and I do sincerely hope these efforts pan out, so I eagerly await to see what will come of these in the years to come.

The Political Economy: I actually believe the current President will be convicted by the Senate and removed from office. I have been following the proceedings and evidence, and the corroboration is overwhelming. My hunch is The Speaker Of The House will hold articles long enough to ensure the 2020 State Of The Union address is not delivered before a trial can be concluded. I also believe more information will come out that will force the current Senate majority to break ranks. No matter the outcome here, I believe the Republican Party will be in a strong position to win the November 2020 general election given the electoral college map, the tech-fueled economy, the Republican Party’s methods, media, and organizational tactics , and the numerous, incongruous, warring factions within the Democratic Party.

Predictions For Me, On The Personal Side: Well, this is more of a “resolutions” section of what I hope will happen in 2020. This is the first year where Haystack funds have so much dry powder ahead of them, I can focus my work time entirely on selecting and helping portfolio companies. It’s been a nearly 10-year slog since I moved back to the Bay Area in 2011 and meandered my way into the world of venture capital. That period of life was extremely frustrating in those early days, and it was incredibly hard to earn the trust of institutional LPs to eventually build a VC fund. Along the way, that hard work and patience was met with incredible luck. I sometimes worry if I tapped the “well of luck” too early. Now, the fund is a real steward of capital and needs to play a slower and longer-term game. The first phases of this video game have been about luck, survival, being nimble, moving quickly — now as 2020 is around the corner, I feel rested enough to vigorously apply the lessons of investing and fund management I’ve picked up in the last decade, to welcome risk in the companies we invest in, but also to move a bit more slowly in terms of capital deployment, reserves, and opening new funds. I also hope to get back to my roots and write more here, as I did when I started this new career — and I hope you’ll stick around to read what I have to say. Happy New Year to you and yours!

Looking Back On Tech, Startups, And VC In 2019

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

And, with that warning, I offer to you what I believe to be the big, consequential forces driving trends in the startup and investing ecosystem of 2019, written in ascending order of importance and magnitude…

4/ The Trillion-Dollar Network Effect
In 2018, both Apple & Amazon crossed the trillion-dollar market cap benchmark. In 2019, Microsoft hit that milestone, and Google isn’t far behind. And if you are long on Instagram, WhatsApp, and Facebook itself, it’s not entirely impossible for Facebook to get there one day as well. These companies exemplify the compounding network effects, lock-in, and lopsided economics that accrue to technologies generally and software specifically. These combined effects have helped open new markets, new geographies, and new economic opportunities for people worldwide; they’ve also drawn the ire of privacy advocates, aspiring politicians, and the airwaves on social media and the traditional media at-large. The genie is out of the bottle – technology is proliferating worldwide, relatively new web and mobile users could use Slack, or Zoom, or pick-any-service on a daily basis, often paying for it. Technology also levies a deflationary effect, which I’ll address more below. The result is more startups, more money and firms to fund it, and an increasing belief that access to technology-related equity (either as a founder, employee, or investor) must become increasingly democratized or rebalanced as a result of the compounding effects at scale we are now witnessing.

3/ The Streaming Media Effect
This past year marked the year that every single media content company put their chips on the “streaming media” block on the roulette board. Odds in roulette are 35-1 to hit, and in this analogy, roulette seems like a better game to play. Netflix is obviously the trend-setter here, with Spotify as the formidable upstart. Once the big companies realized this, Amazon has been stuffing more streaming content inside its offerings for Prime members; Apple has attempted to combine its iTunes library with a TV service that’s moving in this direction, perhaps with iTunes (honestly, I can’t quite follow what Apple is doing here, so if you know, please tell me!); Google has the juggernaut YouTube, which it could take in many directions; Facebook has Live but mainly InstagramTV, which has high upside potential depending on how it evolves; and there’s HBO, which is a smaller company but has an unreal track record of constantly creating hit shows and movies, to the point where they can command their own dedicated audience subscriptions.

Traditional media companies who have benefitted from predictable audience behavior began scrambling — putting company resources “all-in” on streaming, trying to emulate what the most interesting company in the mix is doing. Disney rolled out “Disney+” to showcase its incredible catalog of content, movies, and characters. I don’t know how many of these companies will be able to make streaming work — just getting the tech and streaming-from-server part is very hard. But, add to that asking customers for more money, fighting for content rights, and spending money to both acquire and retain users on mobile could be a recipe for burning cash quickly.(Podcasts are also growing in popularity, in minutes listened — but I still contend they’re difficult to monetize given current industry dynamics. This is a hill I may die on even though I love podcasts!) [Honorable mention for 2019 consumer behavior trends: Vaping, going meatless, making “green” choices.]

2/ The Global Culture Clash And Bull Markets Effect
Pick your economic term — Maybe it’s Quantitative Easing, which has made it too easy to borrow cash? Or, maybe the back-and-forth of the U.S. trade war with China, which has hurt domestic manufacturing and farmers? Or, the burgeoning private markets, which now fuel private companies with so much cash there’s been a new push to go for “Direct Listings” as companies become publicly-traded, allowing more shareholders to trade freely quicker without traditional lock-up periods? Or, it’s perhaps the conundrum of the U.S. economy, simultaneously booming at all-time highs with low unemployment yet with a sizable portion of the electorate unable to own a house, save properly, or cover basic expenses? Within the U.S., this has led the country to an unusual space, where a significant portion of the electorate would like to see its leader removed from office, and an equally significant portion who disagree strongly. On the corporate side, companies like Amazon encountered political resistance to building a second HQ. Facebook tried to build a crypto-alliance with Libra, but that seems to have fell flat out of the gate; at the same time, the Chinese government counter-intuitively signaled their interest in using blockchain technologies in a centralized manner for state operations. The NBA faced player and sponsor pressure for a team General Manager who showed solidarity for a political rival of China’s on social media, while the NBA makes a lot of money in China. That’s the politics. In terms of the economy, while it can always be improved, we will have to see how eager or hesitant voters or sponsors are to make a big change. By the time I write this post looking back on 2020, we will hopefully have a clearer picture of what direction the country is heading — but for now, this has all resulted in an easy-money environment for technology, startups, and the firms that fund them. The good times for tech and startups are rolling and many smart observers don’t see how or if it will ever revert back again.

1/ The WeWork + SoftBank Effect
Last year, I wrote about the shine potentially coming off the Softbank Effect. While larger VC funds have been raised because of this effect, 2019 was the year where the temperature changed dramatically — largely trigged by the near-collapse of WeWork. The collapse was so public, so discussed in social media, and so large that it is already in production for a film rendition. The WeWork story is rich for many reasons — the brand is ubiquitous within tech and startup circles, as many aspiring entrepreneurs and early employees have either camped out in one, taken a meeting in one, or rented space there. “Co-working Spaces” as a global phenomenon took off this decade in-step with the rise of tech startups themselves, and WeWork was on its way to becoming the landlord of record. Despite this opportunity, WeWork seemed to attract private investment which valued the business in highly questionable ways; didn’t exert strong enough board oversight; and enabled a founder who clearly exhibited exorbitant tendencies, lighting investment cash on fire for far-flung plans or personal comfort.

Before Labor Day, this company was barreling toward a fall IPO — eventually, it’s valuation was slashed over 70%, thousands of employees were shown the door, building owners wondered if they’d be holding defaulted leases, and the outgoing CEO walked away a multibillionaire. Whether fair or not, the company quickly came to embody what could go wrong with excessive capital and hubris, painting tech and startups with its dirty brush. I believe this event was wholly uncorrelated to any traditional technology company (Zoom and Slack went public and seem to be doing fine!), but perception is reality, and the reality now is that one, software-enabled companies will never fetch valuations like software driven companies do; and two, it will be hard for Softbank to get into the cap tables of the very best companies given the current situation. As SoftBank threw its weight around, many large VC firms have scaled up their assets and new growth firms have as well, so that when they have a winner, they can continue to back it and work to block out capital partners, too. It seems fitting that the most popular media events of the year — the new Star Wars movie, Game of Thrones ending, and Succession surging — all in some theatrical way tie in to the story of WeWork and SoftBank.

[I’d like thank my colleagues Ian and Aashay for keeping notes throughout the year to help me write this post over the break. It’s hard to remember all that happened in tech in one year, and recency bias is a real thing. If you’d like to read previous posts on Looking Back on 2018 or 2017, I’ve linked to them by clicking on the year.]

Why B2B Marketplaces Are Red-Hot

People will often ask me, “So, what are the big tech trends right now?” In 2020, I gave 1.5 answers to that question. The obvious trend in startups (which has been going on for a year or two) is the idea of the “prosumer as the new consumer.” After Facebook and Snap, the next crop of startups that have taken off look a bit different — work productivity tools like Slack and Zoom, in particular, that have consumer product sensibilities but the ability to scale to enterprise-scale deployments. I’ve discussed some of these specific trends and properties in recent pieces on Superhuman and last year on Airtable, which are worth quickly scanning again for reference.

In addition to this trend, in 2019 I’ve noticed another one — a growing interest among VCs in B2B marketplaces.

Let me state upfront that the idea of B2B marketplaces is not new. Folks have talked about this model for decades. Yet in 2019, there seemed to be a renewed interest in these models from a venture perspective, and I will briefly detail below *why* I believe those conditions have come together recently. This has led to some very competitive financing rounds, which from afar is a signal various groups see the market potential of these models. In particular, I would highlight three red-hot companies in particular: Choco, Rekki, and Faire (disclosure: Faire is a Lightspeed portfolio company). These are examples of high-growth B2B marketplaces that earned competitive financing rounds — of course, there are others, these are not the only ones!

So, what makes these types of startups both possible and hot today?

1/ Consumer feels dry: I can’t prove this but simply based on how our deal flow has changed and frankly what is getting funded by the top institutional funds, consumer is increasingly harder to get right. I have a lot of respect for founders and investors who focus in these areas and try to go big. It has been brutal in recent years.  As a result, I believe more founders are looking at variations on b2b models, and now more of those happen to be marketplaces. (Many of these founders generationally have been conditioned to the see the benefits of online/mobile marketplaces in their own lives, so it would make sense to want to apply this model to other problem areas or opportunities they discover.)

2/ Global markets and the Slack & Zoom effect: As I recently wrote about re: Superhuman, global mobile phone penetration has opened up markets 10x to 100x bigger than what previous generations could imagine. I often catch myself saying “You know, everyone in Malaysia could be on Slack and Zoom.” It’s kind of a wild statement, but also entirely plausible. As these productivity tools spread, so too do ideas about how to better architect industries using software and networks. For instance, Rekki is in Europe and Faire is expanding through North America.

3/ Generational change and adoption: Building on some points above, we now see buyers & users in these industries who are themselves digitally-native who are motivated to bring efficiencies to traditional industries. Additionally, this new crop of builders are bringing a sophisticated level of product design expertise (some from consumer-facing companies and products) to these newer marketplace models. That sophistication is critical because every piece of the stack — from the database, payment rails, and all the way to the actual user experience — has to be crafted with precision in order to lure and convince users to adopt these new workflows.

4/ Software- and fintech enablement: This is a topic on its own that warrants more investigation. At a high level, these new companies are using various techniques — such as giving away free software to attract and onboard supply; or using financial products like lending or factoring to monetize the GMV flowing through the system rather than taking a percentage rake. These entrepreneurs are able to build off of advances in SaaS and fintech technologies to help enter these new markets.

At Haystack, we are looking at a lot of companies that meet these criteria. We really like models like this and aspire to write more on this topic and make more investments in these new models and industries.

The Breakout Tech Company Of 2019

It’s that time of year, where I — as a committee of one judge, but now in consultation with my Haystack colleagues Ian and Aashay — select one startup in the tech ecosystem that “broke out” and has the makings of an even larger outcome should things continue to go right. As a little tradition on this blog, I’ve singled out companies starting in 2012 with Stripe; there was Snap back in 2013; Slack in 2014 (after prematurely saying there wasn’t one); took a break in 2015-16, as I wasn’t inspired to select one then; in 2017 it was Coinbase; and last year, 2018, it was Airtable.

I’ll cut to the chase because things are busy, I haven’t time to blog for a while and, frankly, I’m rusty. This year is a bit different as I will select one “breakout” tech company, but whereas in previous years it was obvious to pick — that was not the case this year. At the end of the post, I’ll have an “Honorable Mention” section, but please do not expect that section to be here as standard operating procedure.

And with that, I present to you The Breakout Tech Company Of 2019: Superhuman.

Why did Superhuman get the nod?

1/ Prosumer Is The New Consumer: This trend gained momentum in 2018, but reached warp speed in 2019. As social platforms grow in power, acquiring consumer attention and wallet-share grows increasingly competitive and expensive. While that consumer window was no longer opening, individual consumers began discovering new software tools to make themselves more productive. They then, in turn, brought that software into their small businesses, their sub-groups within companies, and provided the kindling of distribution within work-related networks. Superhuman embodies this trend. Email is a tool nearly everyone uses daily, across devices, from their personal to work life — obviously. Recently this year, not only did the word-of-mouth for Superhuman noticeably increase (the company has been crafty at getting tech/social influencers on its cap table), I began to hear droves of employees at larger companies located far away from the Bay Area’s echo chamber say that switching over to Superhuman provided them with leverage and time back. This is not to say that Superhuman doesn’t face its own scaling and product challenges — they certainly do — but given the pervasiveness of email and the pain associated with it, the company has most definitely created a productivity experience with consumer-like sensibilities.

2/ Luxury Productivity SaaS: Another benefit to entrepreneurs of “prosumer being the new consumer” is that these customers have a willingness to pay for better software products. There are many reasons for this. Better software can make work feel fun. It can save time. It can be accounted for as a business expense. It exploits social networks and reputations at work for using the most cutting-edge tools. Most impressive about this trend, like Airtable from last year, these companies have demonstrated many people will pay single- to double-digits monthly subscriptions to use the software. Coming from an ethos where most information is free and that Google’s offerings are good enough for most users, growing markets and shifting generational preferences make this type of consumer business model possible.

3/ Unbundling G-Suite: Speaking of Google, we have yet another company breaking out by improving upon what G-Suite offers for free. Airtable takes on Google Sheets and Excel, and now Superhuman creates a faster, slicker interface for disaffected Gmail users who are willing to pay $30 a month. If you’re bullish on this product, there’s a world in which Superhuman moves from email to offering products for calendars and contacts, and it is entirely possible if those products are met with the same fandom, they could charge $100 a month for the Superhuman bundle.

4/ Competitive Financings: As is the case with most breakouts, there was a competitive financing for the company in 2019, ultimately led by a16z. That is not to say this matters at the end of the day, but it adds to the buzz and intrigue for any fledgling company to breakout from its initial fans into more mainstream discussions.

5/ Zoom, Slack, And Enormous Global Addressable Markets: Looking out to 2020, with Slack and Zoom out as public companies, it is not hard to see a world in which users around the world will want to invest in a better and faster email experience for themselves. This was not the case just a decade ago. With mobile growth and globalization and new generations coming online who are entirely digitally-native, the total addressable market for a product like Superhuman is simply much larger than we can imagine today.

For these reasons, Superhuman is the company which broke out from early-adopter echo chambers into the broader discussion. This year was difficult to select just one, however. Companies like Brex, Figma, and Notion deserve considerable honorable mentions as breakout candidates, too. Brex is one of the fastest-growing SaaS businesses ever created, and still quite young as a company; Figma has exploded in usage, to the point where I’ve randomly met engineers and designers at very large companies who mention without prompting that their entire organizations are moving to Figma ((disclosure: Haystack is an investor in Figma); and Notion, which is a brilliant reinvention of document creation and database management (disclosure: Haystack runs almost entirely on Notion). 2019, despite its mega-financings, and the news around Softbank’s Vision Fund, still proved to be a fertile year for breakout stories like Notion, Brex, Figma — and of course — Superhuman.

Quickly Unpacking Google’s Acquisition Of Fitbit

Usually these M&A posts involve a private startup being purchased, but this past week, we witnessed a different type of deal — Google acquired Fitbit, which had been a public company for nearly four years. Fitbit was started in a previous startup era, raised about $65M in venture capital, went public in 2015, and reached heights of over a $4B market cap.

1/ High End And Low End Disruption – Fitbit ended up owning nearly one quarter of the wearables market. If you’re selling cars, that would be amazing; unfortunately in digital wristwear, that is a relatively new market, and Apple’s rate of product innovation with Watch (new series launched this fall) ended up taking over one third of the market at higher price points and margins. On the other end, Xiaomi’s Mi Band sold for a fraction of the cost, putting pricing pressure on Fitbit’s potential user base. For Fitbit to even maintain that percentage in the face of the Apple freight train is remarkable.

2/ Consolidating Hardware And Time – Another watch-enthusiast brand — Pebble — was unceremoniously folded into Fitbit after launching in 2012 to rabid fanfare. Pebble was one of the first-movers in the category, creating loyal fans and producing real innovation in the frontier days of this space. Ultimately, the company couldn’t make it, sold to Fitbit, and a piece of the consumer industry consolidated. Now with Fitbit (and bits of Pebble) rolled into Google’s orbit, we will soon likely see technology from all three companies fused into new products and services rolled out by Google.

3/ Looming Ecosystem Wars – I use my Apple Watch every day. For those who haven’t experienced this, it may sound trite but it is really helpful with lots of little things — a glance for a key alert or text, adjusting volume in the house, and being around the home and keeping my phone in the home office while I’m outside or playing with the kids. Google’s set up with Android and any watch connection likely doesn’t offer the same level of seamless connectivity. Adopting Fitbit’s loyal audience of users and tying in Google Mobile Services (GMS), Google Assistant, other AI services forthcoming from Google (or laid out in the company’s recent announcements around ‘Ambient Computing.’) This is especially true given how far behind AndroidWear or whatever it is called is relative to the competition.

4/ Data Aggregation, The Wrist Interface, And Google Mobile Services – Building off the ecosystem argument, one of the biggest appeals of investing in the Android/Google ecosystem is the ability to get fully integrated Google Mobile Services (GMS), such as turn-by-turn navigation, on the phone. Now, imagination a new interface on your wrist which can not only collect more data for Google (though there are some potential hurdles here), but can also use that data to anticipate services to push to you. Higher-level, one could imagine Google leveraging this rich, sensitive user-data to help with Verily and/or DeepMind efforts.

5/ Tilt Your Wrist And Pour One Out For A True Survivor – Despite difficult headwinds, Fitbit still logged $1.5B in revenues (with 100M devices sold, about 25% still in use). That’s really impressive considering who they are competing against. Say what you want about Pebble or Fitbit, but those of companies survived much longer than should have, considering others who tried and failed, such as Jawbone, Basis Science, Misfit, Lark, Mio Global, Microsoft Band. Consumer hardware is tough — after a bunch of home/IoT exits like Nest, Ring, and Dropcam, it’s hard to see what makes the cut, especially in this post-WeWork environment.

Checking In With The Market And Rorschach Tests

Hi everyone. I’m at an offsite down in southern California. Yesterday, I briefly tweeted something that was on my mind (during a break at the offsite) just to get it out of my head. I didn’t check Twitter for hours after that, and then got a private message that went something like, “Hey, man, you may want to blog about a topic like this rather than tweeting it.” Whoops!

The tweet in question went like this: “Independent of runway, it’s important for a startup to fundraise every 12-24 months, to “check in w/ the market.” The act of convincing a new investor to get conviction & set a price is a healthy checkpoint for all parties – founders, early employees & existing investors.”

It turns out, a *lot* of people on Twitter really disagree with this. To be fair, I probably should’ve blogged about this vs tweeting it, but I didn’t see it as controversial or emotional content, it was literally just a through-away thought that’s been on my mind. I was surprised to read some folks commentary on Twitter (folks I like and respect) who said the tweet was “catastrophic” or made them feel “sick.” I didn’t really see the tweet or the subject matter as so charged. I’m glad I didn’t publish the tweet in my drafts folder about killing baby bunny rabbits!

We can debate the merits of the tweet until we are all blue in the face. I don’t think that will help folks (or myself) come to terms with what the reality is. So, instead, after sleeping on it, I think the tweet was more of an inadvertent Rorschach test: A Rorschach test is a psychological test in which subjects’ perceptions of inkblots are recorded and then analyzed using psychological interpretation, complex algorithms, or both. Some psychologists use this test to examine a person’s personality characteristics and emotional functioning.

In reading through all the replies and dunks, it was fascinating to me to see and feel the distrust and disdain for venture capital investors. I felt a lot of frustration seeping through the replies, frustration for the distraction a fundraise can cause, frustration toward looking for VCs as validation (versus focusing on customers), frustration in the perception that an investor just wants markups to earn credibility and raise subsequent funds, frustration toward a culture of raising money from lenders (like VCs) versus tuning a product and business to become profitable.

There’s another conversation for us to have about the tweet in question, but maybe we need some time to lapse before we go there. At least with the investors I often co-invest with or who follow our deals, I don’t really encounter the behaviors cited above in the reactions. Often what I see is that a fundraise process can actually help an early-stage team (who doesn’t yet have enough customers, for instance) get organized and marshall their resources. That doesn’t mean folks should raise huge amounts ahead of plan, or that they should allocate all their time to this, or that they shouldn’t focus on customer relationships. It was a surprise to me, but some words in that tweet really triggered a reaction like a Rorschach test is designed to do. While it was not intended to be such a test, the replies are a gift, I am grateful folks actually care to read what I write/think, and I will reflect on this topic more and the underlying psychology of why so many folks reacted in this manner. Again, thank you for reading and back to the offsite.

Trimming The Hedges, Planning For A Rainy Day

At the end of 2016, folks in the startup tech ecosystem looked toward 2017’s impending “uncertainty.” Then at the end of 2017, the same worry about 2018; rinse and repeat last year, looking toward 2019. Yet, looking back, not much changed — there’s more money than every in the early-stage ecosystem, bigger financing rounds, large private pre-IPO growth rounds, and much more.

So, will the end of this year be any different, as we look to 2020? Pundits and Twitterati will likely cite the same issues that we faced entering into 2017, 2018, and 2019 — political uncertainty, trade uncertainty, and so forth. However, I have picked up on some disparate signals over the past week which lead me to believe, while we live in a perpetual loop uncertainty, there are some self-imposed changes coming across the startup tech ecosystem in the Bay Area. I call this “trimming hedges” and “planning for a rainy day” mentality. The yard looks fine, but folks are trimming the hedges to make sure they’re neater and tidier, and they’re planning for inclement weather to appear at some point.

There are many little signals to stitch together. Heads of recruiting at talent firms and at large pre-IPO companies have hinted their 2020 hiring plans may freeze or be cut back; leaders at institutional VC funds are waiting for 2019’s IPO class (which has been great) to end lock-up periods and are planning to amp up portfolio activity for the next year, which means investment pace may slow a bit (a good thing); and

One could argue there are 101 reasons for all of this sentiment, and they’d be right. But I’ll just focus on what I believe is the trigger: Chatter about The Vision Fund (TFV). Whether it will be successful or not, the gossip and chatter generated by TVF has had a long-term and out-sized effect on the startup/tech ecosystem — scaling startups took on hundreds of millions (and even billions) in private investment and other VC funds began scaling in response (partly defensively to protect their winners).

While recent events in a few portfolio companies are still anecdotal, the difference this time is the attention given to these events and the size of the positions. Just like optimism can compound on itself, so too can hesitation and a bent toward slightly more conservative cash and planning management. I’m not saying that next year will actually be different — I have no idea. But, what I am saying is, the leaders of recruiting firms, VC firms, and pre-IPO companies are grabbing their clippers to tidy up the yard and most certainly planning for that rainy day.

Accelerators And Seed Deal Flow

Those of us in the early-stage tech ecosystem by now well know that saying “there are a LOT of seed and new startups” is a gross understatement. It feels like a tsunami of deal flow, and for me, I’ve outlined how I pay attention to inbound flow in terms of what gets priority. And one of the sources of that flow are the new accelerators (I’m lumping incubators, accelerators, etc. all together) combined with the culture of “demo days,” in-person gatherings where angels and professional investors collide with entrepreneurs.

Before we dive into this, let me say (1) I know a lot of people personally who run these accelerators and consider them friends (and darn good people); and (2) I know there will be a bunch of founders who will say “Hey, well, I met some great investors this way, so it can work.” And, surely, it “can” work.

Yesterday, I tweeted this: I get emails from friends @ accelerators, asking me what kind of co’s I’m interested in, or to watch online demo day (no), etc. I just now respond w/ “Anyone who wants to meet me should just ping me directly w/ their PDF deck & a short note.” Startups, don’t outsource your BD.

I got a few emails from friends asking if my tweet was in response to them. It wasn’t directed at anyone. And yet, it really applies to everyone. When I stepped back from the online discussion, it made me think about what I would do if I were running an accelerator (maybe I should?) to solve this issue. Here’s what came to mind:

1/ Standardize Formats: There are some accelerators will will coach their startups to use Google Slides, or to create YouTube videos, or to use link-sharing sites, etc. Simply asking folks to use  a standard format like PDF would make a world of difference.

2/ Pitch Deck Design: There’s a robust debate about slide decks. We won’t get into that here. What I will say is many institutional investors require them, and fair or not, most investors view the pitch deck as a proxy for how the founders will present to customers. I don’t mean to say decks should be overly designed and polished — but they should be clear and substantive. Investing in resources to help founders hone this skill would be valuable.

3/ Pitch Communications: My personal belief is that if someone wants to be a founder, one of the many skills they’ll need to learn (unless they have a cofounder who does this) is to create, build, and maintain relationships with investors. Now, in different geographies or generations, folks may not have the ability to do that as easily as one could in the Bay Area, for instance. If I were running an accelerator in the Midwest, let’s say for example, I’d focus on training the current batch on how to identify and pick suitable investors, and how to send them a short, personalized email with the pitch deck. Today, what happens is the accelerator just sends over a huge list to the investors or the founders carpet-bomb investors with form or canned emails. I’d guess none of these are effective.

4/ Are Demo Days The Right Model? Just one person’s opinion, but I don’t think so. Having an event and a date everyone drives toward provides good peer pressure and a forcing function to get things done. Yet, if the purpose is to woo investors to these, I think there are too many to attend. Doing them online removes the critical in-person touch that’s required (in my opinion) to assess at the early stages. I don’t know what the solution is, but Demo Days feel like they belong to a previous era.

5/ Who Is On The Hook? An accelerator that can help a founder raise more capital would be a huge value-add. But, how possible is that in reality? Ultimately, the buck stops with the founder. Part of being a founder is simply about being able to finance the operation. Accelerators are a great forum and venue for these lessons to be taught and learned. Maybe an accelerator should take lower cap table ownership unless they deliver investors who convert? I don’t know what the right answer is, but anything is worth a shot. However, that doesn’t mean founders in those programs should assume their accelerator will help them land financing.

But being on the receiving end of this deal flow, what I can say is that because there are so many accelerators now, because formats aren’t standardized, because folks aren’t personalizing their outreach communications, and because there’s a total tsunami of seed deals flooding the market, the net result is most of these outreach attempts don’t convert positively. And while accelerators can always do more to beef up their education and training (all noble efforts), it is ultimately up to the founder to make connection and to make that sale. It’s not a function that can abdicated or outsourced — rather, it has to be owned wholly by the founder. And for my friends at these accelerators, I’m happy to help share my two cents and provide any feedback if that’s useful.

New Podcast Episode On The Twenty Minute VC

The third interview I’ve done on Harry Stebbings‘ “Twenty Minute VC” was just released. You can listen to it here. Frankly, I am surprised by the response to it. This particular podcast covered quite an arcane topic — how to learn how to manage investment funds. It’s a topic of personal interest to me as I’m living it in real-time and trying to learn, but now reflecting on the response, perhaps the reaction makes sense — there are over 1,000 private funds “in market” and perhaps another 250-500 folks who are actively thinking about creating one. That flood of new managers (and hopefuls) will hopefully embark on the journey I am on, and let me just say, it is not easy to learn.

I’ve written a bit about my journey to learn fund management techniques here on this blog, such as these posts, which I’d recommend to any new or aspiring manager: (1) The Long Haul Of Building A Venture Capital Firm, which touches on what I’ve learned from sitting inside the partnership meetings over years at GGV Capital and Lightspeed, in particular a podcast Harry cut with one of Lightspeed’s founders, Barry Eggers; (2) Fund Investing Versus Fund Management, which explains how writing checks is easy, but managing a fund (and across funds) is quite complex and takes years to learn; and (3) VC Firm Creation Versus VC Firm Building, which showcases how Susa Ventures (as one example) sets the bar of how to create an investment “firm” with long-term ambitions. I will keep writing on this topic as issues come up, and I am slowly putting together a more evergreen resource on “Fund Management” that I hope to publish when I have more time. I am doing this informally on a weekly basis for the many funds I advise, and I think it would be useful to put all of this information in one place and maybe even lead a course on this subject. Again, when I have time.

Finally, I want to end with one important point for those who enjoyed the podcast. For those starting new funds and wanting to run their own firms, those are worthwhile goals and dreams. Doing that well certainly requires good to great fund management techniques. And, it will take a long time to learn and master those. You may augment this by bringing on talent to your firm, but you will need more assets and a budget to grow your team with non-investment partners. And, even if you do all this, it may not be enough to run the parlay on your subsequent funds.

Fund management is necessary eventually, but it is not sufficient.

What matters most when one starts is: Are you in good companies? Being in good or great companies is really the only thing that’s required when a new fund starts. Being new managers, investors in those funds know that results are years away, so they will look to other proxies to assess quality — who does this person co-invest with, who follows their deals, how much money do those companies raise, and what is the strength of the underlying companies themselves? So, fund management is important, but mastering it doesn’t really matter unless you can get into good companies early (and you need to max your shots on goals to get this done) — that’s the jet fuel that gives you the lift to get off the runway in the first place. Fund management is more about getting to cruising altitude, avoiding turbulence, and trying to have an efficient flight path. Wishing you all a smooth flight!

The Story Behind Our Investment In Humble Dot

About a year ago, a friend told us about this new work app they were using. Didn’t think much about it. Then, the same thing happened a few days later. It’s just the Bay Area echo chamber at work. And then finally, a few weeks later, their usage started to spike, and a real investment round came together, and we scrambled, triangulated, and spent a bunch of time with Will and Macgill, the original creators of Humble Dot.

And, we became small investors in the company.

Humble Dot resonates because everyone who works has opinions about meetings. Too many meetings, inefficient meetings, meetings get too big, and so forth. Humble Dot started off with a simple way for workers to briefly update their teams and bosses using their interface. Now as Humble Dot expands its user base and offerings, they’re announcing “Workflows,” a new feature rollout on the platform to empower workers. Workflows presents Humble Dot users the ability to take their experience and make it fit to other typical types of work interactions that occur on a weekly or monthly basis.

Stepping back from the deluge of new work and productivity apps, 2019 almost feels like the year of the “Slack and Zoom Effect.” Well-designed, consumer-friendly software that initially is free to use, and charges a bit when more of your team uses it, and then can scale out to a full enterprise platform if the product-market fit is right. Over the last two years, we’ve seen incredible momentum with Airtable; we’ve seen the investment market heat up for apps like Notion (which we use to run Haystack); low/no code tooling solutions like Retool; open-source companies like GitLab and Hashicorp become breaching whales (not unicorns); and newer companies like Linear, Charthop, and others capture the imagination of end-users at work and investors alike.

What Slack and Zoom have demonstrated is that with bottoms-up freemium-to-enterprise grade software adoption, the total addressable market is literally the entire world. I like to jokingly say “everyone in Malaysia could use Zoom daily” but it’s really true. Humble Dot is one promising startup rising with these tailwinds behind them, and as true product creators at heart, it’s exciting to see the team focus on product-led growth in a quest for their own product-market fit.

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.