The Story Behind Haystack’s Investment In Norm AI

In the throes of summer ‘23, our team caught wind of a larger seed round for an AI company led by John Nay. As soon as we had our first interaction, we decided we needed to fight to be in his round. Oftentimes at the pre-seed or seed level, we do need to spend at least some time evaluating the opportunity, founders, and market; in this case, we immediately moved into a different gear to build a relationship with John and convince him to let us along for the ride. We are thrilled he did.

John’s vision for Norm AI is to combine his impressive legal background and exposure to financial services with advancements in AI to build a vertical yet broad industry solution. More specifically, the core of John’s insight was to use regulations (laws that govern various industries) as a blueprint to create AI agents that can help institutions in regulated industries comply with the relevant regulations. It’s a thesis that immediately made sense to us, and the combination of John’s legal research and his experience in financial services fit like a glove.

To see a snippet of this, consider the opening line of Norm AI’s post today:

Over the last 50 years, the U.S. Code of Federal Regulations has more than doubled in its number of restrictive words, from 400,000 to over 1,000,000. As our economy has become more complex, we’ve layered on additional protections for citizens and the environment. But the growth in regulation means compliance has become extremely costly. Even the most earnest and well-resourced organizations struggle to comply with the routine thousand-page regulation, and American citizens have a paperwork burden of more than 10 billion hours a year.

Today, John and the broader Norm AI team come out of stealth today and announce their seed financing. For those of you who know Haystack, you know that for the past decade our entire focus has been set on very early and relatively smaller investment rounds. Of course, occasionally there are exceptions to that rule, and Norm AI is one of them. The spirit of Haystack is to back specific people that we meet along the way, and that usually fits a tight pattern – but 1/ we can’t control exactly “when” we meet captivating people and 2/ we have earned the ability to make exceptions when opportunities present themselves.

John and his team at Norm AI present one such exception. We are also grateful to our friends at Coatue, in particular Vibhor, who entrusted us with an introduction as their lead investor. As I think about Haystack’s evolution over the last decade, while our fund sizes have grown over time, they remain relatively small compared to most of the ecosystem, and that small sizing endows us with a great superpower — the ability to be flexible. John wanted to raise a larger seed round for Norm, one that broke our normal rules — but John’s background, his precision in planning, and his choice of market made it easy for us to break our rules.

When The Tide Goes Out… (Looking Back On Tech Startups And VC In 2023)

It’s that time of year, traveling with family, trying to get mentally prepared for the next year, but alas, there are still a few days left of 2023. As I start to look back on the year that was, I review my notes from the major events of the year and try to find a singular theme that threads together all the forces that ripped through though the tech startup and VC ecosystem. Usually, it takes me a while to land on this unifying theme; for 2023, it was pretty easy.

Looking back on tech startups and venture capital for 2023, it can all be summed up with one famous line from Warren Buffett: “You only learn who has been swimming naked when the tide goes out.” It’s believed Buffett first uttered these words in 1992. Today 30 years later, these few simple words echo loudly.

For many years, it was high tide, and those high tides produced an incredible surge of entrepreneurship, new company formation, and public companies we may take for granted today. As the tide began to flow out in line with unprecedented rapid interest rate hikes from The Federal Reserve, Chairman Jerome Powell warned “There will be pain.” The receding tides left Silicon Valley’s two most “startup and VC friendly banks” insolvent, forcing the Fed to step in, reassure depositors their funds were safe, and brokered the sale of these assets to larger banks.

Interest rates and the change in business regime presented one major tide force, but there were other major forces at work, too.

  • National prosecutors from the DOJ, the SEC, and various state governments aggressively brought fraudulent behavior in the startup tech sector into focus, laying down heavy charges, fines, and eventually prison sentences.
  • Public market investors shed no tears as numerous startups that went IPO in the past few years (especially via SPAC) were pummeled to penny stocks, while private equity patiently waited for some public market price stability before preparing their well-timed buyout offers to clean shop inside companies that executed well on product innovation but less so on efficient business processes.
  • The White House and Congress got much tougher on international business competitive strategy, placing restrictions and even outright bans on certain types of high-tech cross-border transactions, moves that even forced the hands of investment firms with arms in East Asia to sever ties.
  • Last but not least, the tide really went out for large cap M&A prospects — less than a decade ago, Facebook purchased WhatsApp for roughly $20B; fast forward to today, and the DOJ swatted down Adobe’s proposed $20B takeover of Figma, putting a halt to the flow of nearly $30B in proceeds (merger was to be half in Adobe stock, which has shot up post-announcement) headed back to employees, shareholders, and the large underlying institutions that fund the venture capital ecosystem.

If you asked me when 2023 began, I’d have said that any tides that “go out” would be economically driven; now with 2023 behind us, I’ve learned the tidal forces can be diverse in nature — not just economic, but regulatory and political.

There are glimmers of hope for the future of tech startups. The continued rise of generative AI techniques and solutions are creating new opportunities all the way from the end-user to the infrastructure developers who want to build systems for generative AI to be properly deployed and used. Startups like Instacart and Klaviyo demonstrated that startups with base-level metrics “can” go public if they choose to do so. “The Magnificent 7” high-tech public companies soared in 2023, contributing nearly 70% of the total gains of the S&P 500 Index while also contributing significantly to AI tailwinds enjoyed by the startup sector. Depending on your point of view, global instability has turned “defense tech” into startup’s hottest market sector. Startups such as Coinbase, Airbnb, Uber, and DoorDash, among others, showed that not only is there ample room for massive consumer-facing startups, they all weathered the pandemic demand surge and regulatory uncertainty to find themselves in unique positions of strength as 2024 opens up.

The glimmers of hope for the future are, frankly, hard to focus on today with all of the serious distractions around us. Even though the pandemic is behind us, we are still dealing with the economic version of “long-Covid.” There is clearly a new financial regime that’s dominating market narratives, one that anticipates a future of higher rates, tighter liquidity, and significantly lower multiples. Tighter economic, uncertain domestic, and high-temperature geopolitical conditions have contributed to a further erosion of trust, a phenomenon that the startup ecosystem isn’t immune to. Conversations among startup board members that were tense in 2022 shifted into a new gear in 2023, and 2024 will no doubt see a continued march of private companies that will be exposed as swimming without bathing suits.

This is how I’ll remember 2023 in the world of tech startups and venture capital. Lots of upheaval, the tides going out, but new tides will eventually come in. And as I look to 2024, I have to remain optimistic. The founders we seek to back early rarely think about all of the things I’ve analyzed in this post; it just doesn’t occur to them versus their obsession with the thing they love. These are all big distractions, but as early-stage investors, we have to tune them out and focus on the founder, the person who can change the trajectory of the future. And for that optimism, I come back to the safety of Warren Buffett’s legendary wisdom for inspiration with the following quotes smashed together in a hopeful call for the new year. “American magic has always prevailed, and it will do so again… A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful; Uncertainty actually is the friend of the buyer of long-term values; The sillier the market’s behavior, the greater the opportunity for the businesslike investor; and The best way to think about investments is to be in a room with no one else and to just think. If that doesn’t work, nothing else is going to work.”

That all sounds like good advice for 2024, indeed.

The Breakout Tech Company Of 2023

I know readers are not going to love this choice. I apologize in advance. Is the company I’m about to pick below even a startup? What about highlighting the “little guy,” a new startup that’s quietly about to take off from the runway, a young company maybe everyone doesn’t know about yet? Or, “Hey, this isn’t the Heisman Trophy — you can’t win it twice, can you?!” And, who is this author, and how can he sit here for the past decade and just declare such things?

These are all fair questions. Historically, the litmus test for this annual choice has been a journey for me to identify one company of consequence which “broke out” from the insider chatter to more mainstream awareness. This year, as I struggled with how to convey this thought, I went back to a famous saying attributed to a baseball star from a bygone era. As part of the late 1970’s New York Yankees’ Bronx Bombers, Reggie Jackson never shied away from the ruthless NYC sports media. Instead, he welcomed the spotlight. “I’m the straw that stirs the drink,” Jackson famously said. The implication was that Reggie was the star, but more importantly, he set the agenda.

This brings me to this moment, where I select (again) OpenAI for the “Breakout Tech Company of 2023.”

Even as I write this as a startup junkie, a sucker for underdogs, a long-time early-stage investor, this 2023 journey is one that I have struggled with. There are countless startups that have indeed grown quickly over the past few years and are on the verge of scaling. As I debated these choices with friends and colleagues, however, there was never any clear consensus of who fit the bill for 2023. (A silver lining here is that the pump is primed for so many potential breakouts over the next few years.)

As I look back on my notes for 2023, Artificial Intelligence as a theme dominated technology (and policy) headlines, and it was again OpenAI who stirred the drink. In 2022, OpenAI broke out with a product that took off, ChatGPT; in 2023, OpenAI transformed into a  multi-use consumer-enterprise-etc platform. OpenAI’s “Developer Day” was heralded as, depending on your point of view, either a huge enterprise opportunity for developers (APIs, app stores, agents, and more!) or, perhaps, the death knell for scores of once-hopeful venture-fueled early-stage pre-product AI startups whose reasons for being were just demo-dayed away. OpenAI dominated headlines, sucking the oxygen away from many other deserving companies; this enabled the company to further position itself as a legitimate “big tech platform,” where they began to throw some weight around. OpenAI “gets the people going.”

But… Dangers lurk beneath.

While OpenAI has been winning a LOT, other players aren’t sitting around. Scores of technologists from the Google and OpenAI diasporas are hard at work building new and powerful platforms, such as Bard, Anthropic, or Adept, etc. Facebook can’t be forgotten here, with their formidable “Meta Research” organization’s LMaMA open source contribution, which sort of reminds me of Google’s (defensive) strategy with Android and the world of mobile operating systems in the mid-2000’s. It’s not just Facebook though, the world of open source believers (such as Stability, Mistral, and others) believe OpenAI is anything but “open,” betting their keystrokes that developers and enterprise customers will want to have more control of how AI is tuned and deployed within their own ecosystems and/or in front of their clients or consumers. Beyond the closed vs open debate, there’s active work on pushing models and compute further to the edge and on localizing models to specific verticals and/or geographies (for language reasons). There are also a few groups now working on what comes next after transformers, and perhaps we will learn more about them over the next few years.

Beyond different technological, architectural, and geographical considerations, exogenous issues related to AI remain unsettled — will the government over-regulate AI? Can incumbents layer in AI faster than upstarts can displace legacy companies? Could the “round-trip” revenues (and corresponding valuations) from underlying investors who are also customers present accounting challenges? And, with all the money being funneled into AI-related technologies, is the technology itself ultimately deflationary in nature, where the high-value variable costs today (think chips, servers, workloads, storage, compute, etc.) asymptote toward zero over time?

Those are all good questions, and I surely don’t have the answers. Neither does anyone, I’m sure, which is what makes OpenAI the pick for me for 2023. In a world awash in venture capital and interest in the next big thing in technology, there’s a lot of belief, but OpenAI is the player that alters the terrain when they announce a new release or spread their tentacles further into Microsoft, which owns nearly half of OpenAI (the corporate entity). There are a few big tech companies measured by trillion dollar market caps, and OpenAI is already swimming in these open waters, and if things continue for them as they have this year, they could be one of the biggest creatures in the sea. The straw that stirs the drink.

[I would like to thank my colleague Divya Dhulipala and old friend Josh Elman, both of whom provided lots of great fodder for debate on this topic.]

Reflecting On Haystack’s Investment In Figma

I knew at some point I would write this post. I didn’t know exactly when, though recently with all the inside baseball chatter I’m privy to, I knew it would go this way, that Figma would not be acquired by Adobe. There are surely many reasons smart people feel the proposed merger was anti-competitive; and many reasons other smart people believed the deal had merit. I can’t get into that debate here, because I don’t fully understand the intricacies of the FTC and the forces that influence it. There’s also been significant technological (generative artificial intelligence) and financial (macroeconomic conditions, banking crises, and valuation multiple compression) shifts in the 15 months since the original merger was proposed in late September 2022. These shifts provide plausible motives for a deal to break, but I don’t think it will be productive to drift into conspiracies here.

I’ll talk about two things I do feel comfortable with as I’ve lived each. One, Haystack is proud to be an early Figma investor. We are extra fortunate in this case that the particular fund Figma is in has already performed extremely well in terms of realized distributions to our limited partners. We don’t expect any sympathy for ourselves, but we do feel for all shareholders, especially Figma employees. Two, in building Haystack over the last decade from an initial Fund I that was a total of $970,000, I was forced to intimately learn how risk capital moves through the startup ecosystem, and I think sharing that with you all today is more relevant than ever.

So with that, let’s start with that second point first, how money moves through this ecosystem. Large pools of capital — often endowments, foundations, pensions, sovereign wealth funds, asset managers, private families, hospital systems, and on and on — fund investors (like Haystack) to build portfolios of hopeful companies (like Figma was one day). Those large pools of capital understand the risks upfront: Most companies won’t make it (so take a portfolio approach), the winners will follow a power law (you need to catch a piece of the BIG winners to move the needle), and that the path to realizing those returns should be lucky enough to catch a BIG winner in your portfolio is via two main routes: That company goes public via IPO, or that company is acquired by a larger entity for a handsome price (think: Facebook buying WhatsApp for ~$20B). There are hospital systems that have been long-time investors in many of the early-stage investment firms that have exposure to Figma, and they’ll have to wait a bit longer to get liquidity for their shares.

My hypothesis moving forward is that when these large pools of capital (which are incredibly powerful and influential) make the next set of long-term commitments to early-stage capital (which directly affects innovation and the jet fuel for entrepreneurs), they will likely use an adjusted calculus that they need to refocus on two elements: 1/ moving their capital entry point to earlier-stage and lower valuations to control entry price, which allows for a smaller acquisition and liquidity for investors and shareholders; and 2/ making sure the bigger winners are on a path to a public offering, which will likely be valued at lower multiples then the previous eras.

My phone has been buzzing all morning from friends and journalists asking me about what I feel about this given Haystack’s position as a small but early investor in Figma. Now, I knew this new was coming from a few months ago, but I didn’t know when it would be sealed as fate. So, I’ve been preparing myself for it. For the Haystack vintages which hold Figma (across a few vehicles now), those funds are in good shape thankfully and aren’t in need of liquidity. But where my mind and my gut and my heart go to on a day like today is not about today’s news, I instead am transported back to those initial days when I would hang out with Dylan quite often, and I was trying desperately to cut into the world of venture capital, and Dylan was designing his dream mockup in his mind, what would eventually become Figma.

A decade ago, I was trying to get into venture capital. I started Haystack because I didn’t get the jobs I wanted, so friends convinced me to start a small fund as a mini track record to eventually convert into a real job with another firm. But the universe was sending me a message — I had to go it alone. In a similar way, I think that’s what the powers that be today are telling the Figmas and future Figmas of the world: You’ve also got to go it on your own. Deterrence of large M&A is a stated goal of the FTC, and this is a signature win for that initiative as surely other larger companies will think twice before floating the idea of a large-cap merger. If that road is closed off now with a “Warning – Danger” sign, companies that are scaling will have no choice but to go it alone, go through the regulatory work of preparing for IPO, and subjecting their business to at least 6-12 months of public pricing pressures to arrive at what regulators believe to be a fair price.

It may not be fair, but I do believe the universe is sending us messages all the time, whether we choose to hear them or not. The message here is loud and clear: Most of us have to go it alone. Plan accordingly.

Quick Reflections On Seeing Instacart From The Early Days

A bit more than a decade ago, when I was just starting Haystack (a $1M “debut” Fund I), I was a venture partner with Bullpen Capital, juggling lots of consulting roles with a variety of VC firms, and recently became a father, all in the span of a few months. With a small fund checkbook in hand, and as an avid user of Instacart and friend of Apoorva’s, I made to overture to him to let me invest. Graciously, he accommodated me, and I recount that history in this post from late 2013.

Since then, Instacart has been on a journey that saw the on-demand delivery wars (Uber, DoorDash, Sprig, etc.), Amazon buying Whole Foods for $14B (!!!), the demand shock of the pandemic shutdowns, post-pandemic re-opening and the subsequent shifts in consumer behavior, the more recent economic downturn that began toward the end of 2021, and the shift in its executive leadership — all while transforming into an ads business. Those are a lot of big swings of the pendulum over the past decade, going all the way back to their humble yet gritty early days in Y Combinator.

I wanted to write this post as a thank you to Apoorva and Max, especially, in addition to the early Instacart team. Without Instacart as an early calling card for me, I’m not sure Haystack would exist today. This investment was that consequential to me. It was about survival for me at that point in time.

By identifying Instacart early and convincing Apoorva to let me invest a bit, that small gesture quickly gave me a small taste of industry cred I’d long wanted but never received. Instacart quickly raised a Series A, then Series B, and then a Series C, all by industry heavyweights. On a more personal level, as years passed and we had twins (now a household of 5), being involved with Instacart enabled us to transition from a month-to-month lifestyle and finally invest in a home and begin to settle the kids down in school. Just as discovering the app during the 2012 Thanksgiving break was a magical fix, so too was being a small part of the ride so we could finally put down roots in the Bay Area as a family.

So for me, the news of Instacart going public as $CART conjures up mostly a mix of painful and joyous memories. I remember how hard it was to crack into the investing game. I remember how much our household used Instacart as a customer while having our first kid and then twins. Friends around the country know of Instacart, which used to surprise me in the early days. In a way, it helped give me a work identity when I didn’t have anything to hold on to career-wise.

I know there will be lots of haters, fans, and skeptics chiming in about $CART as it goes public today and has its valuation be subject to the whims and gyrations of hedge fund computer algorithms. There will be fans, like me, who appreciate how difficult a business this is to build; there will be haters, who want to see a company falter; and there will be scores of skeptics who don’t believe a company like Instacart can survive in this new economic climate.

I’ll opt to be a fan.

In drafting this post, I was reminded of my youth. I would often accompany my parents to the grocery store. My dad enjoys packing things – luggage, boxes, and so it happened to be, grocery bags. So I would learn to bag the groceries with him while we were checking out. Fast forward to the present, I still bag my groceries when I’m at my local market preparing for a home-cooked meal. [Yes, I still shop in an actual physical local market when I’m setting up to cook an adult meal.] Oftentimes, the checkout clerk will notice I’m bagging quickly and efficiently and ask me “Do you work for Instacart?” I’ve gotten this question perhaps 50 times, to which I always respond, “Yeah, I used to.”

In closing, I would like to thank the founders and early teams, as well as wish the current team the best of luck on the next decade ahead. Congratulations!

Announcing Haystack VII: Same Model, Fresh Funds, And New Era

On behalf of Haystack, I am incredibly proud to make some big announcements this morning.

Before these updates, I wanted to quickly take stock of where Haystack stands after a full decade of investing. Please note, these stats are close approximations that hopefully provide some transparency to founders we may work with in the future. Since 2013, Haystack has made approximately 290 pre-seed or seed-stage investments, of which (after proactively marking down our portfolios in 2022), we have over 60 companies valued at $100M+, 16 companies valued at $1B+, and 36 accretive exits to date. Over the past few years, our median initial check size has stabilized around $700K on a median entry post-money valuation of $15M.

Those are just stats, though. What makes me extra proud is that while our funds have gotten slightly bigger over time (though they’re still relatively small — see below), we haven’t changed our stripes. We look for the same types of founders and participate in the same types of rounds we sought a decade ago. The same model.

Ok, with that historical context, let’s get into the updates…

First, we want to announce we successfully raised a new core seed fund this past spring: Haystack VII. On behalf of our team, thank you to all the founders we are fortunate to work with. Thank you for giving us the opportunity to be your partners on the journey. To our Limited Partners – thank you for collaborating with us, for asking us thought-provoking questions, and for ultimately taking a leap of faith and entrusting us to make decisions. And, thank you to all of our frequent industry collaborators across the seed, Series As, and growth stages, as well as my colleagues through my venture partner role at Lightspeed. Thank you for trusting us, teaching us, mentoring us, and sharing with us in turn. We are incredibly lucky and the future is bright, lit with the optimism of the many founders we get to meet at the earliest stages of their journeys.

Second, please join me in congratulating Divya Dhulipala on her promotion to Principal. Divya fielded a kitchen sink of new tasks and projects thrown her way, attacking each one very quickly, learning on the fly. In less than two years officially at Haystack, she’s grown to show incredible poise, judgment, attention to detail, and an authentic approach to interacting with the startup ecosystem, from founders to Limited Partners and beyond. Congratulations, Divya!

Third, please join me in congratulating Aashay Sanghvi on his promotion to Partner. This is not typical venture industry title inflation, he is making a significant leap in his career, and a leap that he’s wholly earned through the combination of curiosity, attentiveness, and having the right touch with a wide variety of would-be founders. In particular, his detailed work on investments such as Redpanda Data, Buf Technologies, Haus Analytics, LatchBio, and many more distinguish Aashay not just as someone who can identify opportunities, but who can get in front of them, too. Founders and co-investors alike frequently cite his approach.

On a personal level, I feel personally extra lucky that one of my closest, oldest friends (Tommy Leep) originally made the introduction to both Aashay and Ian Hathaway. Thank you Tommy! Aashay’s technical proficiency and the respect he has earned from founders helped accelerate him to this new, important role — a role that I did not imagine would exist, and one that formed organically since he joined in 2019. Aashay is one of those people who knew early in his journey that he wanted to be an investor. Today is a momentous day on that journey for him, and while there’s still many miles to go, please join me in celebrating that milestone for him. Congratulations, Aashay!

So there you have it — Same Model, Fresh Funds, and A New Era begins. Onward!

Seed Market Evolution During A Downturn

The start of 2022 marked a change in financial markets. Since then, many believed risk capital would dry up, early-stage valuations would fall (just like all other valuations). Now that we are nearly two years into this downturn, I wanted to briefly take stock of what actually happened versus what was speculated.

1/ Seed-stage valuations have generally been left-unchanged, and I could argue even they’ve gone up since the beginning of 2022. Looking back now, it makes sense – VC firms have lots of dry powder, and while they may have slowed down relative to 2021, they’re still making investments. Early-stage is perhaps a more attractive stage to deploy smaller dollars these days – a friend remarked everyone wants to gamble, but no one wants to sit at the whale tables just yet.

2/ Angel investors are tightening things up. I’ve been a bit surprised by individual angel investors holding more of a line or just preserving liquidity. This makes sense, too. I’ve seen two responses from the networks of angels we frequently syndicate with — one half simply won’t engage unless a valuation or post-money CAP is at $10M or below; the other half have left the market entirely as they wait for liquidity from their existing assets. Founders are fortunate the pre-seed & seed VC activity has institutionalized over the past decade, because if that hadn’t happened, angel/pre-seed capital would be much harder to raise right now.

3/ Y Combinator has a huge shot in the arm with the installation of Garry Tan. Garry is a designer, engineer, builder, strategies, and systems thinker. It’s already a machine, and I would suspect Garry and his new team will make their engines even more efficient.

4/ Where founders live matters again. It’s not acceptable yet to say this bluntly on Twitter, but in private, many investors remark how they’re enjoying deal evaluation in person (primarily in the Bay Area and NYC), and when possible, they’d prefer to seed companies in those locations specifically.

5/ Where seed investors lives matters a bit less, but still matters. A seed-stage VC relic of the pandemic is that nearly all initial screenings and much of the evaluation happens on video, even when founders live near investors. But while seed stage VCs are quietly tacking to founding teams based in the Bay Area and/or New York, where those seed stage VCs live matters less and less, though one could argue founders may want more local, on-the-ground investors now given how hard future financings have been.

6/ Speaking of future financings, the conversion of these early-stage investments from pre-seed to seed, or seed to Series A (I’ve given up deciphering the nomenclature) has suffered dramatically since the start of 2022. If we take out the AI-hype or momentum deals from 2023, the traditional Series A firms have really slowed down as they’ve digested the portfolio triage that needed to happen while waiting for evidence-based momentum deals to invest in after years of narrative-driven high-priced Series As.

I could go on, but that feels like enough for now. What I’ll maybe add in closing is that the quality of founding teams out there seem to be increasing, and when we meet them, they’re not thinking about interest rates, or overseas conflicts, or public market valuations — all of those things are important, but they’re not really on the radar of today’s technical creators, and perhaps for that reason alone, the analysis above makes sense in hindsight. All that said, there’s enormous pressures on these founders to gather enough positive evidence to keep going and raise more capital. While the ecosystem is still flush “starter capital,” that’s where the party stops. Let’s see what happens.

The Story Behind Haystack’s Investment in Abbey Labs

Haystack is fortunate to be in a position where we work closely with a variety of pre-seed firms, small to large seed funds, and all the big top tier VC funds. We are collaborative by nature, and I’ve always personally felt that the best part of seed investing is that in many cases you can sort of “build” your syndicate along with the founder in a collaborative way. To help drive this, we often organize very small dinners with our closest investor friends at the large VC firms to help founders meet each other. The goal of these dinners is purely social and sharing notes. Usually, it’s very hard to trace a line back to what actually led to a new investment. Until today.

In the Fall of 2022, at one of these dinners, there was assigned seating, so Divya was assigned to one table, and I was toward the corner of one of the other long tables. Arvil was at the end of the table, next to me. We were across from two founders of Chkk. We didn’t know each other before this, and we didn’t realize it was going to be a 3-hour sit-down dinner and nonstop conversation about startups, food, culture, and more. The guys from Chkk were from Pakistan, so we ended up talking about Zareen’s, and then, well, we all organized a trip there with another frequent collaborator, Bilal (he’s the mayor of Zareen’s). And with Arvil, we stayed in touch but never discussed what he was working no. The conversation never naturally went there.

However, during those 3 hours, I got to see Arvil up close, he discussed a wide range of topics, asked sharp questions, and shared some amazing stories from his previous role operating as a high-level PM for Okta from the early days through IPO. I went home thinking, “holy smokes, this guy is incredibly sharp.” It felt like his product insights were not fluffy, but very deep and most-critically, hard-earned. So I made a note and tracked him slowly. Since we didn’t chat about his new thing, I didn’t want to dishonor the great serendipitous dinner conversation we had. On the other hand, I’m hard-wired to pay attention to these moments (for better or worse), and so at some point, Aashay heard about it too, so I sent him a note and intercepted him at just the right time.

Arvil and Jeff (his amazing co-founder) somehow agreed to our overture even though they were deep in conversations with their lead investor, whom they’ve known for a long time. We begged to be part fo the process, and Arvil relented (sorry man), and I think we were able to show our sincere interest in Abbey’s mission, technology approach, and GTM. Long story made short – we were able to invest, and we are thrilled about that opportunity. Thank you Arvil and Jeff.

You can read more about Abbey Labs here with their announcements today. We don’t pontificate about investment theses in these posts, the reality is that we have bought into Abbey’s core insights and have conviction in the problem space. Put simply, Arvil and Jeff are people to keep an eye on.

I woke up this morning feeling very proud to be able to write this post, in the only way I know how. I like that I was able to meet Arvil in an organic manner, and to be part of a wide-ranging discussion over a great meal. In those three hours, I saw everything I need to see to gain conviction in a technical entrepreneur. Months later when we met his co-founder Jeff, we had the same feeling, no surprises there. I am proud that Divya was with me at the dinner and got to meet Arvil (and agreed with my instinct), and that Aashay had his antenna perfectly tuned to the right time for me to reach out. We swarmed as a team and put our best foot forward. I sort of wish every investment we made could follow a similar tracking path. It is so much better to meet folks organically and get to know them as people first. That asymmetric information is not only valuable, but more fun. And so, we at Haystack are very proud to have fought our way to the table, and we are grateful for the opportunity that Abbey Labs has given us. Thank you, and onward!

The Story Behind Haystack’s Investment in Trebellar

Earlier this spring, an old friend of ours, Matt Garratt, was kind enough to refer us to two founders he liked personally but felt things were a bit too early for him to take on the investment. Haystack is fortunate to have built long-term, organic relationships with a variety of institutional VCs at the Series A and B stages, and many of those investors have sent us outstanding people over the years — two that come to mind immediately are Okteto (thank you, Guru!) and Buf (thank you, Amit!). Haystack’s view is that venture is a “people-flow business” — and Matt subscribes to this ethos, too.

The team Matt introduced us to is building Trebellar, which announces their seed round (led by Haystack!) today. We are incredibly proud to be co-leading an investment in Diego and David, the founders of Trebellar, alongside Altcap (close friend Jack Altman and his colleague, Bala), as well OG Haystack friend for life, Tommy from Jetstream.

Trebellar is a software platform built to help companies with various offices and real estate properties better manage all operations related to these physical assets. As we first met the team, we talked to some of our portfolio and specifically their Directors of Real Estate about the scope of this problem. Over the past few years, more and more buildings are outfitted with various sensors (think: internet-connected cameras, new building access control systems, new HVAC systems, etc – it’s a long list), and the data output and derivative insights that could be captured and generated from this proliferation of sensors is a green field area. As we checked out network to test out this concept, they actually asked for introductions — a good sign to further consider an investment.

But, Haystack isn’t just focused on finding new markets or testing customer demand. That’s just a small piece of the puzzle. Ultimately, we are in the “people-flow business,” and the more time we spent chatting with and arguing with and debating with these founders — Diego and David — everything just clicked with ease. These founders are mega scrappy people, and we loved that. They’re focused on the right things — building product, and prospecting customers ruthlessly. They didn’t get distracted by silly things, such as playing a game in their fundraising round. They were just themselves, obsessed product builders who built a LOT of intricate software by themselves, just the two of them.

There’s one final thing — Trebellar today is a happy accident. Perhaps the best part of the story is that when David and Diego started, their original insight was to do this for the home and consumers. Remember Smartthings? That is one hard market to get into. Their friends and advisors shook them a bit until someone suggested “You should do this, but for buildings.” And boom, that birthed Trebellar. Diego and David were marching down the entrepreneurial path, but they were not so path-dependent as to go blind — they kept their eyes open, they listened, they let the world unfold in front of them, and they found much greater opportunity. Perhaps that itself is the definition of entrepreneurship, and we are lucky to be part of their ride.

It’s A Whole New World Of Streaming With Redpanda Data

In the summer of 2019, we met Alex Gallego – a force-of-nature technical entrepreneur with a big idea for the future of data infrastructure and distributed systems. Haystack ended up investing in the seed round of Alex’s company – then called Vectorized – alongside Arif Janmohammed at Lightspeed. That company is now called Redpanda and has evolved into a true market leader in real-time data streaming – and now they announced their $100M Series C yestertoday.

Since we began working with them four years ago under their original name “Vectorized,” Alex and his team have stayed true to their original thesis and vision. Alex understood that the world’s largest companies were beginning the process of moving their data architectures and distributed systems from batch to real-time, but that existing solutions like Apache Kafka were not speedy enough and too expensive to operate, did not scale well, and lacked simplicity and ease-of-use for developers. Redpanda’s vision was to create the alternative engineers deserve. To have a shot at this, the team would require significant engineering resources to build a system that perfected those ideals while delivering speed, reliability, and performance. If they could clear this technical hurdle, the belief was that a large market awaited them.

That was the bet. Fast-forward to today in 2023, Redpanda has multiple product lines that serve large customers across industries such as financial services and companies leveraging data for AI/ML models. They have an exceptional engineering team and a growing GTM organization. The company has raised successive rounds of capital, in small part due to efforts of outside board members Arif from Lightspeed and David “Muni” from GV, as well as Nnamdi Iregbulem from Lightspeed who participates on the board. Alex and his executive team, with the support of the board, have demonstrated a consistent level of cautious optimism, intellectual honesty about what was working (and what wasn’t), and truly long-term support, especially given the Series A and B rounds were done during the height of the pandemic lockdowns. We would like to thank Alex (and the exec team), Arif, and Muni for always welcoming our insights and suggestions, they all treated us like partners and for that we are grateful.

As a brief aside, this is a special time for us at Haystack and this investment presents the long-term vision for what a small-but-mighty investment platform could look like. We have been blessed to invest in every round of the company so far, beginning with their first official commitment. My colleague Aashay picked up on Vectorized very early through his networks. My colleague Divya helped underwrite our Series B investment 16 months ago out of our small companion fund, and both Aashay and Divya led the charge for on this Series C many months ago to put our fund in position to continue investing with our limited partners. I want to give credit to both Aashay and Divya for their steady stewardship of our investment over many challenging years.

Raising a growth round these days is no picnic. As I reflect back on our evolving relationship with Redpanda, I keep coming back to one element – watching Alex grow as a technology executive and overall leader. When we invest in seed, we are ultimately taking a bet on the upward trajectory of the founders in some way. They have to grow and evolve super quickly once they taste the first bites of success. On this more qualitative measure, I can confidently state that the Alex of 2023 is different from the Alex of 2019 we met. Mind you, 2018 Alex was very impressive! But over the past four years, through the pandemic, through the tech bubble, through the banking crisis, and through the major market turn, Alex has evolved more like a prized fighter would, constantly in the gym or running, cutting down his fighting weight, training all throughout the night, and demanding the best from his colleagues, his investors, and himself. To Alex and the team – congrats on this mini-milestone, and we look forward to the next board meeting!



A Brief Note To Our Founders Re: Impact Of Artificial Intelligence

Below is a short note we sent to our portfolio founders yesterday. It’s no secret that “AI” is all the rage in startup technology today, but we felt that most of the discussion on this topic centered around new startups. What about existing startups? Those existing startups can either harness and/or be disrupted by this new wave, so we wanted to explore that in some more depth for our portfolio founders. I’d like to thank my colleague Aashay who should be credited with framing this in greater detail.

=====

Given the current hype-cycle around all forms of AI (large language models, generative media, etc.) right now, we are sharing some perspective with Haystack founders on the current AI landscape and its potential impact on both existing and de novo startups. We believe the current version of AI (primarily due to the advent of large language models) represents a platform shift similar to that of PC, cloud, or mobile before.

With every major technology platform shift, there are legacy companies disrupted, new opportunities for startups & scale-ups, as well as businesses who get caught flat-footed across the enterprise and consumer stack. In recent years, there have been other promises of platform shifts – notably crypto and even AI previously. Mitchell Hashimoto, co-founder of Hashicorp, does a nice job laying out why this time could be different.

Our job as your early-stage investor is to relay information from the broader ecosystem to you, but we want to be clear –  it’s up to you to decide as leaders of your businesses what to do with that information. We are here to chat live anytime about these ideas, so please do not hesitate to reach out to us.

Impact of AI on startups and growth stage companies

These are a few examples of ways AI could impact your current business.

  • Competition entering your category: Expect to see new startups getting funded in your category that have an AI-native twist, bent, or functionality to them. Some will even have early access to different model architectures (see Harvey.ai in legal). Future potential investors evaluating your company, as well as customers looking at vendor options, will pay attention to these shifts.

  • Financing market: As noted, every major VC firm (in every nook & cranny) is focused on this. This can have an impact on your downstream capital raises. See from Sequoia, A16Z, Greylock, among many others. Our belief is that in future VC discussions, they will evaluate founders and existing teams partly-based on their ability to understand how AI can impact their business.

  • Incumbents getting smart: Unlike previous platform shifts, large companies are not ignoring this space. Large companies like Salesforce, Databricks, and Stripe are actively thinking about how to incorporate AI across their product suites and even places where they may have been previously short-sighted.

  • Some companies are completely rearchitecting their products: We know of some mid to growth stage companies who are completely re-architecting and positioning around generative AI or foundation models. Some applications know their offering for end users can be supercharged with AI, and some infrastructure companies know they can be better suited by serving AI use cases. On the very early side, we also see some pre-seed stage founders who were before in the wilderness looking for product-market fit with their original idea now using this wave and their freedom as an opportunity to build something entirely new with AI.

Case studies

These are a few examples of companies that have incorporated AI natively into their existing products at production scale.

  • Notion is the all-in-one workspace for your notes, tasks, wikis, and databases. They recently launched Notion AI which helps users automate tedious tasks and summarize text.

  • Ironclad* is a contract lifecycle management platform used by companies to handle every type of contract workflow. Their AI (in partnership with OpenAI) helps legal teams get through redline faster.

  • Rewatch* offers a private and secure video channel for teams. They can build AI-generated summaries for any video meeting inside of an organization.

There are other companies we know of where this is the active priority for their leadership. A few examples include Palo Alto Networks (one of the largest publicly traded cybersecurity companies). See this tweet from CEO Nikesh Arora. Another example is Navan (fka TripActions) – incorporating AI into their product suite is what the CTO is obsessing over at the moment.

*Denotes Haystack portfolio company.

How does one quickly get smart on the space?

Financial Infrastructure For Small Venture Funds

I’m on a plane today headed to NYC for the week. I’ve refrained from tweeting too much directly about the implosion of Silicon Valley Bank (SVB) and the threat to other regional banks. This is in part because it’s a complicated topic where there are 1,000 experts who understand it better than I do, but it’s also because I probably wouldn’t be able to be on this plane, in this job, and have this career if it weren’t for SVB. I’ll get to more about that at the end of this post.

While I’m not expert on HTM securities and loan-to-deposit duration mismatches (two new terms I’ve just learned about), I do think I’m expert in something that could be helpful to other small venture funds. Like was the case for me, most small venture funds are not sophisticated in the world of finance. Part of what makes AngelList so appealing, in addition to all the of software automation, is that it abstracts away the complexities of running a small fund, cross-fund investing, and cash management. It’s very easy to write a check into a new company, but it’s much more complicated to get the money out, or to distribute shares, and have an overall cash management plan. These managers, like me, are spending all their time with founders, making connections, hearing pitches, and the like — finance only seems to matter if you catch something big.

A number of investor friend and limited partners (LPs) reached out to me over the past few days to get a lay of the land. Most were surprised to hear that despite having many fund-related entities with both SVB and First Republic Bank (who’ve both been terrific partners to us), that we didn’t have much cash in those accounts. Why is that? The main reason is that VC firms actually don’t “hold” lots of cash, because that would mess with the IRR over time. Instead, we “call” capital from the LPs when we need it, and then we immediately wire it out to handle internal operations like payroll or to make investments.

These callers were also surprised to hear that we had accounts across these two banks plus other banks — how did that happen, they asked. It wasn’t a grand strategy on our part, it was simply the result of building Haystack as a bumpy ride. I had to spend years overcoming a backlog of Excel sheets and paperwork that felt like an administrative tidal wave. We created different bank accounts at different firms to build more relationships across the Bay Area but also NYC, and we brought on a real CFO back in 2019 to get ahead of what I viewed were financial operation hurdles on the horizon. So, we ended up with a real CFO, spread out bank accounts, and sophisticated cash management because we were small, unsophisticated, respectful of the complexity venture finance brings, and ultimately we were aware of our limitations in this realm.

This made me think about all the other small funds in the VC market. When they go back to institutional LPs (like endowments, foundations, and other sophisticated pools of capital), they may get more of these questions on financial operations – What is your cash management plan? Do you have a CFO sitting in between your back office and legal firms? If you’re lucky enough to get shares in public companies, who will broker those for you at a small scale? I’ve lived through this pre-pandemic, and let me tell you it is not easy to grok.

There will be more to reflect upon regarding this debacle as time moves on. For now, I am grateful that Haystack’s early days were both successful to be involved in some epic companies, but also that we were naive enough to not try to handle the financial operations ourselves once we began managing institutional capital about 5-6 years ago. We didn’t have a plan, but we knew this wasn’t our sweet spot, and we invested in our team operations to fill this gap. That turned out to be a very good decision, as we were able to shift our focus to being present for our founders versus scrambling internally. I’d like to thank our CFO, our back office, and our legal team for the years of loyalty and service to us. The past few days could’ve been wildly different without them.

I’m also thinking about SVB. I have many close friends who are current or ex-employees. One of my first friends I made in the Valley was a SVB employee. We’ve funded another alum in his new company. Haystack was able to bank a sub scale $1m debut fund with SVB back in 2013, and they helped me set up wires and all the little things in those early days. Haystack started and operates one of the most preeminent private events bringing together early-stage GPs and LPs (this year will be our 7th annual event), and that happened on Day 1 because a friend at SVB said “let’s do it” before I even finished brainstorming the idea with him. I feel incredibly for many friends and alums there. I know very few will find sympathy in stressful times, and that is understandable, but because were fortunate to not have the same stresses over the past few days, I wanted to take a minute and state for the record that it was many people at SVB who quietly enabled Haystack to happen, and that’s not something I want to forget.

The Power Law Of Attention (Looking Back On 2022, Ahead To 2023)

As an unofficial tradition, I attempt to “look back” on the previous year in technology startups and tease out the big themes. Looking back on 2022, I’ll admit I found it harder to step back from the noise of work and family life, to zoom out and take stock of what happened, and to put it into a few words.

I will remember 2022 as the year where “The Power Law Of Attention” dominated our reality in the tech startup world.

In venture capital, early-stage private portfolios lucky enough to generate a return often see the distribution of outcomes form what is popularly-referred to as “The Power Law.” You can read about it elsewhere, but in a nutshell, the rule says the biggest return will be so big it will cover all losses. Put another way, early-stage investors build portfolios with the hope that one (or more) company will be that elusive Power Law winner, driving returns and profits for the fund’s investors.

But this isn’t the only Power Law in our world. Another version of this law that’s been on my mind is what can be called “The Power Law of Attention.” I started thinking about “The Attention Economy” after many years of reading Albert Wenger’s outstanding blog. Albert predicted years ago (in 2015, my lord) that the global economy would transition with a severe dislocation. He writes in 2015:

There have been two fundamental scarcities in human history and we are now moving on to the third attention). Each time the scarcity shifted, due to a new technology, we had a massive dislocation. So yes, this time is the same, scarcity is shifting again and with it we are experiencing another such massive dislocation.

If you haven’t yet, you should subscribe to Albert’s blog. But back to this post… in 2022, it felt like for the first time, the attention economy ruled what tech startup events became the talk of the town. As I reviewed all the major events in this ecosystem in 2022, there were a few that felt like supernovas, true outlier events that were either so big, so consequential, or both, that other notable events or advances in technology and networks didn’t bubble up to our collective consciousness — more on this at the end.

Those of us in the startup tech world, we know what the big stories were — The macro economy went through a drastic regime change (see: Druckenmiller, Howard Marks, etc.). Elon overpaid for Twitter, where the startup tech world convenes, but then went on to lose $200B in net worth in one calendar year. Artificial intelligence was unleashed into the world by a 7yr old startup, right to our fingertips, and it felt like that time 15 years ago when a company in Cupertino put technology at our fingertips. There was another multibillion dollar tech startup acquisition in the face of a falling market. In the less consequential world of venture capital, we saw hedge and crossover funds largely leave the market, we saw unprecedented fraud in what felt like (and hopefully still is) a promising new technology, and we saw an exciting change in leadership at the world’s most successful startup accelerator.

There are countless other big stories from 2022, no doubt. There were too many for me to review, read, and list here. And, there are bright spots, and spots for hope. As someone who naturally defaults to overly analytical thinking, which is prone to pessimism, I’ve spent the past few months building a thematic framework in my head for what the next decade could be like, and to transform the analytical approach into one of opportunity-seeking. The first steps in that process are for me to write about those more, which I now have the energy to do. And my ultimate goal is that in the sharing of those thoughts, they will be further refined and, if I’m lucky, will land on the doorstep of someone out there who shares a similar worldview.

It is not just startup founders who have to look back on 2022 and adapt. Everyone in the tech startup ecosystem needs to adapt. Everyone needs to re-examine their swing. I am trying to rebuild my swing and forgot most of what I’ve learned the past decade. Trying to re-learn. As torrential rains return to the Bay Area, more and more friends are moving back to the Bay Area, despite the region’s clear troubles. More and more layoffs will occur, upending lives but also forcing those to create new opportunities. Somewhere out there is the next Mike Arrington and MG Siegler, hosting meet-ups and writing up a blog or tweetstorm about a cool demo he or she saw. Somewhere out there is a recently laid off tech employee who finally had the inadvertent push to focus on his or her side project, which starts to take off. Somewhere out there are his or her ex-colleagues who will give that person startup capital. Despite its myriad (worsening), the Bay Area does remain the one place I know of where the generational historical culture has been to reinvest proceeds back into the ground in the form of startup investing.

Luckily for our country, that is now happening in other places, too. In the hurricane of change that will unfold in 2023, this is what I’m most excited by. A decade ago, sitting here, I hadn’t made my first investment yet. No one would give me a chance to write a check. I wasn’t a parent yet. The world was finite and time was infinite. A decade later, now things have flipped — time is now finite, but the world is infinite. The flow of interesting people starting companies is going to be incredible to watch, and I am ultimately grateful for the last decade (including 2022), I am grateful for getting to meet folks who will take on a risk and do things that I could never do, and I’m grateful for the chance to have a front-row seat to what a friend describes as “The Greatest Show on Earth.”

The market may have dried up trillions of dollars of capital, but the last decade of social media, lockdowns, and other forces have sapped our attention. There is still lots of money for new ventures out there, but there is much less attention. In this new world of Power Law forces, I will look back at 2022 as a fundamental reset of everything, I’ll discard 80% of what I have learned, and I’ll lean into that feeling 10 years ago, when the future was unwritten, and I got the chance to meet and work with some of the most creative people in the world — new people who are building the next things that will sprout after the rains wash away. That prospect gives me great excitement and great hope.

The Breakout Tech Company Of 2022

Each year, when the summer ends, I begin to think about what I’ll write in this annual “breakout company” post, which has turned into a mini-annual tradition for me here on this blog. Until a few days ago, I kept thinking – just like in 2015-16, I don’t think I’ll be able to declaratively write, “this company is breaking out.” Over the last 15-year bull run, entrepreneurs and VCs all but harvested the consumer spending wallet share, with travel/transport, food/delivery, and nearly everything else imaginable. As a result, the technology sector has, for the past few years, been eagerly awaiting the arrival of the next great platform only to be somewhat disappointed.

That changed this week with a new product release. Each year at this time (well, all year), I text voraciously with my old friend Josh, where we debate this post (and he should get some extra credit here for that). For this year’s pick, Josh summed it up nicely in text: This year’s pick “gives us the most exciting glimpse into the future.”

So with no further ado, The Breakout Tech Company of 2022 is: OpenAI.

Now, is OpenAI technically a tech startup? Isn’t it a foundation, or a capped profit company? Didn’t they raise hundreds of millions of dollars? Frankly, I don’t know how to classify it. It is not a conventional pick (before you send me a text about that), but 2022 wasn’t a conventional year, either. Before we get into it, I wanted to note that honorable mentions are warranted this year, companies such as BeReal (a super fun product), Handshake (quietly becoming next the LinkedIn), Replit (a fascinating vision for the future), Hugging Face or Stability.ai (insane early growth), for instance, were on my mind as candidates, but the spirit of this post is to isolate the newest company that is putting technology into peoples’ hands at the fastest rate – this year, I couldn’t find anything that held up to OpenAI. I don’t want to get into technicalities here this year on this dimension, given there wasn’t a clear, traditional choice, and also the overwhelmingly positive and potentially-game-changing implications to OpenAI’s signature releases this year.

OpenAI was originally formed a few years ago with the intention of investing in engineering and design talent, learning models, compute, and anything else that could help accelerate and usher in a new era of responsible use of artificial intelligence. We won’t get into the debate on the merits or dangers of AI, as that’s for another post — though I’m wholly unqualified to opine on things like TayTweets. (The leader of OpenAI, Sam Altman, needs 1-2 sentences of credit here – after hyper-scaling Y Combinator in a controversial yet, ultimately, directionally-correct move, he jumped to OpenAI in 2019 and has helped lead the organization to this point. That’s an impressive resume.)

Since then, OpenAI has been shipping. Major releases by OpenAI include GPT-3 in June 2020, a machine learning toolset that demonstrated the first glimpse of what learning models could do to generate text. In 2021, OpenAI released Codex, an AI platform that turns natural language into code, a huge advancement of making software development faster and more accessible. Fast-forward to this past fall, OpenAI released Dall-E 2 to incredible fanfare, a deep learning model that generates digital images from natural language descriptions. Dall-E 2 imagines took over social media for days, along with other tools such as Midjourney. During these releases, OpenAI led an investment in Descript, teasing a possible future of audio generated by AI, and ultimately all sorts of media. Then earlier this week, OpenAI released ChatGPT, a dialogue-based AI chat interface for its GPT-3 family of large language models. This release again took over social media in tech circles and harkened back to the craze around bots 5-7 years ago – and frankly prompted Josh and I to finally text me back with “yeah, OpenAI is the breakout.”

The spirit of this tradition is not to identify what will be the next great company. The fact is, we don’t know what happens moving forward. It’s not clear if closed-sourced or open-sourced models win the day. It’s not clear if audiences will ultimately want machine-generated communications, or if regulators will step in. It’s not clear if moats will exist as the compute costs of building and managing these models will stay high or drop. It’s not yet clear if AI-native companies can disrupt and leapfront tech incumbents, as Elad Gil artfully argues; but, it’s also not year clear if incumbents, such as Notion, can more easily “layer in” AI-driven user experiences into its established platform.

In this post, I am trying to isolate one company that placed the most new technologies and/or products in peoples’ hands. The tech/startup sector has been dreaming about the arrival of AI for decades, with the chorus growing louder over the past few years. Like many technological advances, it feels like it’s happening very slowly, and then all of a sudden, it’s here. That’s what OpenAI and others have done to the field of artificial intelligence in 2022. Most players in the startup ecosystem have been eagerly awaiting the arrival of the next great platform, only to be left waiting or running out of funds. In contrast, OpenAI has demonstrated the ability to show what these kind of platforms can do. The use cases are infinite, while the trajectory forward and business models remain wholly uncertain.

It wouldn’t be 2022 without a sober note of warning. It’s now been 10 years that this blog has picked a “breakout.” Let’s look over the past ones – OpenSea from 2021 is today facing major crypto headwinds; Hopin from 2020 is today struggling to stay relevant as the public now mostly rejects online events post-pandemic; Superhuman from 2019 is today likely flat with respect to growth; Airtable from 2018 is today still growing but perhaps will face a big valuation adjustment given public comps; Coinbase from 2017 is today taking a beating in public markets given the icy crypto winter we’re in; there were none in 2015 & 2016 (at the time, in my opinion); Slack from 2014 has since been subsumed by Salesforce though I’d speculate is still growing modestly; Snap from 2013 is today battered in terms of its market cap despite having strong user engagement and revenues; and Stripe from 2012 remains the most dynamic private tech company at scale, but missed its IPO window given the downturn, and could be valued closer to Snowflake upon going public – which is still huge.

The meta point here isn’t to talk about the market troubles here, but rather to point out that while the startups selected annually for this post have broken out, breaking out in and of itself does not ensure longevity and endurance. Technology is moving faster than ever, and while OpenAI is moving really, really fast right now, something else that’s fledgling today with promise may break out to disrupt one or more of these companies next year.

From Easy Money To Hard Conversations

As an early-stage startup investor, this year, 2022, has been marked by one thing: Hard Conversations.

Lots of them. Each conversation is different, but depending on the situation, they fall into one a few buckets. The hardest are with founders who are already in your portfolio. As an investor, you’ve already made a commitment to them beyond just investment dollars. Following this are new investments and relationships, as most early-stage investors seek to maintain their pace through both good and rough times. And finally, hard conversations with other investor friends in the ecosystem about what to expect.

I wanted to briefly lay out the high-level messages in these conversations. None of this will be new or revelatory for those in the startup world, but perhaps the way it’s framed here can help some folks who are sorting it all out.

First, founders and existing investors should by now realize that any additional financings, no matter how large, will need to clear a proper checkpoint — the larger the financing, the more checkpoints to clear. Founders will need to demonstrate clear enterprise value inflection points, and even if they’re achieved, investors may wait until well after those milestones are hit. In the past, founders would get credit for the belief they would hit the milestones — that speculation is no longer rampant.

Second, early-stage founders who do have capital and some runway ahead of them, they need to really preserve that capital. A mentor of mine and experienced VC/operator put it this way: A early-stage startup CEO should at least go through the thought-exercise based on the prompt, “What if we can never raise money again?’ What would one do in that scenario? How would things change? It’s rhetorical, but also now, unfortunately, a fair question to ask.

Third, founders would be wise dual-track an exit path to keep their options open. This should happen much earlier than folks are comfortable with. Potential customers, designer partners, industry collaborators, large companies — any outfit where the founders and startup have a relationship with a larger entity, those are all relationships to cultivate carefully on the off chance they could lead to a deeper partnership or acquisition. For a company reading this today that has runway into 2023/24, starting this in January with a goal of having something happen by end of year is not unreasonable. It’s very very hard, but not impossible.

For an early-stage founder, it can feel like the walls are closing in. And, they are. In previous downturns, startups could still be acquired for modest o great sums; today, these types of transactions feel frozen, and larger-cap acquisitions face regulatory, shareholder, and balance sheet scrutiny. While everyone is anchored on rising interest rates to dampen inflation, it does feel that inflation will be here to stay as a long-term phenomenon given the disruption to and rebuilding of the global supply chain. Profitable companies generating less than $100M of revenue with high margins are less likely to be able to go public, stuck in no-man’s land. Perhaps most daunting, many of the emerging platforms folks have been excited by — crypto, AR/VR or the met averse — feel very far away or, worse, unattainable. A rare bright spot is AI (more on that soon), but it is the early-innings there and the jury’s out on how those technologies monetize given the open source pressure.

I’ve been investing 10 years now. During this time, I will admit it has been hard to often feel “heard” as an investor at the table with many founders. I’ve tried to share what I’ve written above with various founders, and it is not easy for this to land properly oftentimes inside a founders’ head, which is 24/7 consumed by product, customers, colleagues, not to mention stresses that can accumulate on the personal and household side of things. It is understandable, as entrepreneurs likely should not be obsessed with the market as investors are. As investors, the tools we have at our disposal represent a sort of soft power in the best case, to persuade and guide, and to hope the messages eventually sink in with reason and empathy. That’s my sincere hope with this post.

The Story Behind Haystack’s Investment In Okteto

In the summer of 2020, an odd time for sure, my friend and Lightspeed colleague Guru told me about a team he loved but felt was way too early. We took the intro from Guru, and wow am I glad I did. Guru, we owe you some nice wine. That introduction led to the beginning of Haystack’s relationship with the Okteto team, and today they proudly announced their Series A led by another friend, Villi from Two Sigma. You can read all about Okteto on their site and on today’s feature in TechCrunch.

This isn’t a product or tech blog, though. This is the space where I like to reflect on how people come in and our of work lives. The work with Okteto has been a dream scenario, simply put. It starts with the CEO. Ramiro is simply one of the most authentically compassionate tech founders I’ve had the pleasure of working with. And in the battlefield of work, Ramiro has a quiet yet steely resolve to quarterback his team. Co-founders Pablo and Ramon round out what is an incredible technical team tackling some of the thorniest problems in application architecture. Okteto formed based on the founders’ belief that the development process itself needed cloud-native tools to move faster and more efficiently.

Okteto was an investment opportunity that was a bit slower to grow on us. My colleague Aashay also spent time with the team and as we dug in, we both gained confidence in the initial adoption. We struck a deal with Ramiro to lead his round, and we cut back our position slightly to bring in folks like Salil and Lee, good friends with a wealth of experience (and options!) in these types of early companies. That proved to be a great decision, with all of us helping Okteto a little bit get to this stage, and laying the groundwork for Villi to get excited about partnering. it all came together nicely.

There is a lot of work to do for Okteto and the team. It’s still very early on the journey. That said, it is a moment to reflect a bit on how Haystack was able to “get lucky” to see this opportunity — years of relationships and trust, Guru trusting us that we would take care of the opportunity, Aashay digging in and evangelizing it when it wasn’t obvious, Salil and Lee joining efforts and their invaluable guidance, and Ramiro becoming an unofficial team member of Haystack, all leading to another friend, Villi, gaining comfort to join the ride. If only every investment lined up like this.

The Story Behind Haystack’s Investment In Schoolytics

In the summer of 2021, and old friend Eric Ries introduced us to Aaron and Courtney from Schoolytics. I was initially skeptical of the idea — to build a data and metrics platform for all sorts of schools — but in the very first meeting with Aaron, the CEO, my interest was piqued. I’m glad we pulled on the initial thread, because that eventually led to us investing in Schoolytics, which just announced their seed funding this week.

I will admit that initially I was a bit hesitant to go into this market. Most of the education-based startups that have broken out (and believe me, we missed two big ones — Quizlet and Outschool — though we have Cambly which is still going strong) go for a direct-learning model, using technology and platforms to go directly to students and learners. That makes sense and is an exiting category. But what about distributing software to schools, public or private? What about universities, major or community schools? As an investor, those are not the most attractive or exciting buyers to persuade. In order to penetrate these markets like Edmodo or Google has, one needs a rock-solid platform that’s initially free and delivers value immediately — quite a tall order.

Enter Aaron, Courtney, and the Schoolytics team. Aaron and Courtney met while at Chegg, another ed-tech startup that made it to IPO. In our DD, we learned that Courtney recruited and initially managed Aaron, and that she was impressed immediately any Aaron’s product leadership. That was evident in the first pitch with Aaron, no doubt, and what initially gave us belief in making this investment. Then, as we dug further, we realized Courtney herself had secretly collected a PhD in Economics (!!!) before Chegg, and while being a working mom (!!!), is incredibly active in her kids’ schools PTAs. She never mentioned this in her bio or pitch.

Haystack is excited to also co-lead this investment with a long-term friend, Nakul Mandan and his team at Audacious Ventures. Nakul is one of two friends who literally helped will Haystack into existence nine years ago; now as Nakul starts his debut fund, we have been helping him, we hope. We ended up lining up on this investment given the quality of the team (Aaron and Courtney, wow!) and also the momentum in the business, which you can read about here. If you have kids in school (should be many of you!). please do forward this to your schools so that more schools, administrators, and parents can capture better analytics on what is happening inside these important places.

If you’ve been a reader of this blog over the years, hopefully by now you know the pattern here — these investments are in companies, products, and networks, but those are built by people, and we are blessed to get to meet lots of people every day (thank you, Eric, for this one). We select some well, and others don’t work out. We miss a lot. But when things line up with co-investors who are long-term friends and product leaders (and community leaders) who live and practice their craft, it’s simply a pleasure to get a front-row seat when teams like this embark on such meaningful work.

The Story Behind Haystack’s Investment In Databook

In the fall of 2019, as we were opening a new fund (Haystack V), and old friend/mentor of mine Josh Stein pinged me about a deal he was leading in a company called Databook. He and his colleague did a lot of work on the sales intelligence space and asked us to considering joining. We rearranged schedules and brought the team down to Palo Alto for coffee to meet Anand Shah (no relation!), the CEO, in person.

Knowing that we didn’t have a lot of time, we pressed Anand to get to know him, learn about his business, and all the other things we wanted to know. We promised him a decision in 48 hours. This was a more full seed round, as Databook had a product in market with customers and revenue. Anand fit the pattern of the type of founder we like to back — a product-oriented founder who uncovered a secret in their previous role (for Anand, in management consulting) through deep analysis. We offered to take the rest of the round, and that proved to be a good decision.

In the last two years, Anand and the Databook team have carried the product and team to new heights. The team raised a strong Series A during the pandemic, led by Microsoft, which is a feat in and of itself. They’ve added to the core team, executive ranks, and started nabbing some big logos. This all came to a head early in 2022 with Databook receiving a significant amount of investment interest, even in the face of volatile capital markets. The result is today, Databook announces their Series B round led by Bessemer, with DFJ Growth participating. We’d like to congratulate the entire team on this mini-milestone, especially attracting high quality partners in the face of wonky markets.

One of lessons learned in venture is that selling software into the sales department of technology companies is a good lane to explore because the sales orgs do drive revenue and the old line “the VP Sales has a credit card.” The other lesson is that long-term relationships like the one I have with Josh really drive the engine of the Bay Area deal flow. I met Josh over a decade ago. He was a board member at a company I worked for, Swell. I consulted for DFJ for a bit, too. It was always very easy to share opportunities with Josh because he treated founders well and brought a wealth of SaaS experience to those discussions. In this case, Josh shared something back to us, and we are grateful he did.

 

The Market Is The Greatest Critic

Maybe over 10 years ago, I remember a Twitter thread with @cdixon. He was defending startups against critique, citing that journalists and other startup ecosystem players shouldn’t publicly criticize startups because startups are really hard, most of them fail, and it’s the market that delivers the harshest critique. When this thread originally unfolded, I recall disagreeing with Chris, but a decade later, after pouring my heart into some failed startup experiences, it turns out Chris was right.

But, he was talking about private early-stage startups being hammered on social media.

When companies list on public stock exchanges, have thousands of employees, and hefty annual revenues, they are of course no longer early-stage startups. They are also subject to the whims of public market investors, ranging from institutional pools of capital, talking heads on TV and Twitter, sophisticated crossover funds, to celebrity hedge fund magnates. Unlike private investors who have their funds locked up for almost a decade and can only cheer from the sidelines through thick and thin, public companies can attract activist investors one day and lose long-term investors one random morning, sending their stock prices into oscillation or free fall.

I have only been an investor through a bull market. I wrote my first check in 2013. I lived through the GFC in 2008, of course, and felt the pain of that in the job market just finishing graduate School. I moved to SF for the first time right as the dot com bubble burst, but I wasn’t in tech or investing, but I do remember getting most of my furniture and a desk from a dying startup in the Mission, where I lived.

The crash from Nov ’21 to Jan ’22 (and maybe more?) is the first crash I’ve experienced as an investor. Yes, it is a crash, for those who may not want to hear such language. The percentage share of value destroyed, primarily in “tech,” rivals that of the dot com crash over two decades ago. While I’m not an experienced market prognosticator, the current crash we are living through feels like more of a massive re-rating of pricing and valuations, given that these companies do actually have network scale business models and wide user adoption and engagement, across consumer and enterprise. Like many private investors, I spent a good part of the last week just talking with friends, learning from them, and listening. Here’s what stuck out to me:

Public market investors pulled money out for a variety of reasons. End of the year drawdown. Fear of inflation. Anticipation of interest rate increases. The beginning of the end of the “Covid Trade.” Stocks that once seem to define a new world changed by a virus — Zoom and Peloton — came crashing back to earth. There are other victims, too many to list here. Just look at Robinhood, or Toast, or any other high flying tech company, save for Facebook, Microsoft, Google, and Apple.

For me, when the dust settles, and the market comes back — and it will come back, no doubt — here’s my the big takeaway in my mind: Companies big and small will be examined through the lens of growth narratives driven by product diversity. It’s no longer good enough to just handle online storage, or to just facilitate online meetings, or to just empower consumers to freely trade securities. Public investors and quantum computers who can vote with their feet every millisecond are likely going to reallocate their money into companies that demonstrate the vision and execution to not only acquire assets like Instagram and WhatsApp, but also key infrastructure like Parse and Onavo; or assets like Slack and Tableau; or assets like Minecraft, LinkedIn, and Activision. The public markets will likely reward those companies who can diversify their product lines into messaging, analytics, gaming, and more — those special companies and business leaders who continue to bundle value into their platforms.

Lo and behold, I am not a public investor. Well, I did buy a bunch of tech names on my list this past week, but those are for long-term holds and a feeble attempt to correct misses I suffered in the private markets. So I have to digest this take-away and see what it means for me as a very early-stage private investor. When I invest, it’s often just a few people, tinkering. There’s no way to know what will happen. Those kids have to get the product right. Their timing needs to be right. They have to stay together and fight just to have a chance. For the nine years I’ve been investing, the money has been easy. Follow-on investors have bought the growth story, have given entrepreneurs the benefit of the doubt. I still think they will, but the best Series A/B and growth investors will look for more than just top-line momentum. They will be affected by this crash, too. They will likely have some version of the same conclusion I’ve arrived at. A point-solution is great and can work. You can go public on it. But to suffer the slings and arrows and be durable, the markets — the ultimate critic — will ask for more. 

Reflecting on Haystack’s Investment In Cognito

Nearly 8 years ago, when I was on the verge of finishing Haystack Fund I, I was introduced to a tall, lanky kid who was dropping out of Stanford. I was living in downtown Palo Alto at the time, so took him out to Fraiche for frozen yogurt. He was a very active participant in the Stanford Bitcoin Club, and I had a few friends in that group.

He and his classmate Alain were working on a ID verification system for KYC for companies who were experimenting with digital currencies, mainly Bitcoin at the time. In that initial fund, Haystack had some familiarity with Bitcoin. I invested in friend Vinny Lingham’s company, Gyft, which had a clever hack around providing a way for users internationally to diversify their digital assets. While not a “web3” company then, Gyft may have been one of the first legit “crypto exits” as it sold to First Data. Back then, one BTC was about $450.

These founders, John and Alain, were working on what was then called Blockscore. They raised a small amount, then went to YC, raised a bit more – never more than around $2M in the life of the company. They were really quiet, earnest kids running a small company and found lanes for revenue quickly. The team worked out of a small office behind some condos in Menlo Park. They never cared about hitting the fundraising trail, or getting any press or coverage. Some key employees left, and then came back. They received some acquisition interest over the years, but never anything that made them stray from the course.

Fast-forward to the end of 2021. BlockScore had changed their name earlier to Cognito, and were doing very well. Profitable. Still quiet. And larger companies began to take notice. Earlier this week, it was announced Plaid would acquire Cognito and the team for over $250M. Remember, these kids only raised about $2M. They didn’t get caught up in all the noise around them. LPs ask me about how long does it take for seed funds to return. I typically guide them to brace themselves for 7-10 years. Blockscore took 8 years, right in that range. I missed out on the chance to invest in Plaid’s Series B back in 2015, so we are now blessed with a return *and* stock in Plaid. Over the years, it’s been a pleasure to be a small river guide to John and Alain, and I know they cared deeply about their colleagues, their investors, and doing the right thing. Congrats to you all and the team, and best of luck on the next stage of the journey!