Month: June 2019

I often have conversations with founders that go as follows:

Me: That sounds like terrific progress with customers and revenue, how does churn look?

Founder CEO: A number of our customers are upselling very quickly and they all love the product.

Me: Excellent, and how does that net out in churn?

Founder CEO: We also think our product works a bit differently than most SaaS products. 

Me: Okay, I’m sorry to be pedantic [I use that word] but what is the churn number?

Yeah, VCs are like toddlers. If you don’t give us what we want, we will keep asking for it. 

So what’s wrong with this conversation? Before you conclude that I was “asking too soon” and that the founder is simply demurring politely from being probed for numbers too early in our relationship, let’s assume that we have already been sharing data and the founder is comfortable with telling me details about her/his business. Assuming that, the problem with this conversation is that in my mind I’m thinking that s/he either (1) doesn’t know the number, (2) doesn’t know the number is important or (3) thinks the number looks bad and (4) is therefore worried about telling me.

None of these four possibilities bodes well for the entrepreneur raising money. Let’s parse it out:

1. Doesn’t know the number: At an early stage, a CEO should know every key metric for their business as well as understand how and why each is changing.
2. Doesn’t know the number is important: Every CEO should know what KPIs apply to their business. Of course, these are different by business model: SaaS, e-commerce, marketplace, etc… More on this below.
3. Thinks the number looks bad: If it’s not bad, then telling me will prove that. If it is bad, sometimes that’s just the reality, and we will both learn a lot from discussing why. Remember, early stage investors are accustomed to imperfect businesses.
4. Is therefore worried about telling me: *Most* investors like to work with entrepreneurs that are transparent – with good news and bad alike. While perhaps it’s understandable to be putting on the best face you can for potential investors, remember that all of these investor pitches are simply dress rehearsals (in both directions) for your first post-financing board meeting together. You are certainly going to want to be transparent at that point.

You’ll note that the founder in the dialogue above says something we hear on occasion to explain away metrics: “our [pick one: SaaS, ecommerce, marketplace] startup works differently than most.” There are rare cases where that is true and so a standard metric or threshold for “best in class” doesn’t apply, but most of the time there’s nothing different or special about the economic model… except that it’s not working, at least yet. And that’s okay. We are early stage investors; we get our hands dirty; we pick the entrails off the floor and help make sausage. 

Indeed, for these reasons and others, I cherish that building relationships with entrepreneurs is not  just about getting to the number – that’s not my point. I want to hear the context, how it fits your big picture and ultimately your vision… for sure! But investors do need to know the number, know that you know it’s important and believe you are transparent.

December will mark a decade for me in venture. I didn’t start full-time, but it was nearly ten years ago that I landed an internship with a small fund in Chicago and “screened” my first startup story. I was a first-year business school student with a flip phone. A year later when I graduated, only one of my classmates went into venture full-time. It wasn’t I. After being an angel for several years further with my partner, Ira, we parlayed investing from a profession to an occupation in 2012.

On a personal basis, this run is unique for me against my prior three decades where people, places and engagements came and went in vignettes of 2-4 years. Now I have the pleasure of having known and worked with many of the same people – both entrepreneurs and investors – for ten years. Viewing the arc from original financial crisis to current 3.5% unemployment and from the launch of A16Z to the IPO fireworks of 2019, here are the changes that most impress upon me:

• Seed: Ten years ago, seed investing was the uncouth cousin of venture capital, led by a group of pioneering angels and incubators, like Jeff Clavier and YC, who seeded for passion and intrigue, not management fees and prestige. That worked out nicely. Today, funds less than $100M represent about half of the partnerships being formed, and the data show that Seed may be the last refuge in venture for outsized returns. Later stages are unambiguously competitive with capital.

• Speed: As summer approaches, entrepreneurs joke about us VCs taking the next two months off. In my earliest days as an investor, I saw some of that. No more. Entrepreneurs don’t slow down, and neither do (or can) we. There is more capital now, and there is no excuse for lazy money! On the startup side a decade ago, it wasn’t uncommon to see a struggling startup plod along for 3 or 4 years, still trying to raise that first round past angels. The forces of creative destruction are far swifter now. Companies form and then grow or bust much faster. Here in the mid-continent that is a measure of two positively increasing factors – the willingness to take risk (and accept failure) and a growing opportunity cost for founders and employees. Both good things.

• FAANG: While Facebook, Amazon, Apple, Netflix and Google were all around ten years ago, they neither collectively represented >10% of public market caps nor greater than 3% of US GDP as they do now. Neither were they the menacing overlord of the tech ecosystems where our startups play. Since then, entrepreneurs and investors alike have repeatedly bet on innovating in their ecosystems, only to be (repeatedly) burned. This is a looming risk to future innovation that we worried less about “back then”, and it shouldn’t be lost on us that today Facebook may just have done the same again in crypto.

• #metoo and beyond: As have most industries, venture has received its pro rata comeuppance for the under-representation and inequitable treatment of women, minorities and other constituents. Some progress has been made, but there is plenty more work for all of us to do.

• It’s not just the valley now: 10 years ago, few believed you could build big companies outside of Silicon Valley. Now there are many examples – Grubhub, Shopify, Duo, Fieldglass, etc – and valley investors want in. Whether here in the Midwest, Texas, the Southeast, or Mountain West all the big venture funds are paying attention, hopping airplanes and writing checks. The valley’s cup truly runneth over, and that is game changing for entrepreneurs and us seed investors.

…yet some things don’t change. Despite two rounds of sirens foretelling the end of venture, we are still here! First the JOBS Act’s crowdfunding and then crypto ICOs were going to put us out of business. It turns out there’s more to what investors do and what entrepreneurs want than quick cash from strangers. Thank goodness.

So what’s ahead? As we dawn on the 2020s, our team has been thinking more about this. Next post.