Apocalypse Later

In March the consensus among venture investors – especially ones who had witnessed the .com boom, financial crisis, or both – was that dark times were ahead. Sequoia and others quickly warned their portfolios to significantly cut expenses in expectation that demand would disappear, in most cases regardless of industry or business model type. We did too. 

Now almost six months later, the new narrative is that things didn’t turn out as badly as we thought. As evidence, startup financings remained relatively robust in Q2 and into Q3, there has not been a second wave of tech layoffs (and hiring has even restarted) and most companies are seeing a return of demand, albeit often at a muted level.

So did everyone overreact in March? I don’t think so. On the one hand, returning demand is a great thing, on the other hand, there are signs of a structural disequilibrium between main street, public stocks and the startup/venture market. There is also a foreboding sense of complacency with truncating cash runways in many venture portfolio companies.

Main street, public markets and venture/startup markets are interdependent, more now than ever given ubiquitous reliance on software, internet and technology across the economy. This was much less so the case in 2000, or even 2008. Today the link is tight:

Main Street: Main Street is hurting. Literally. Wade through the pile of Amazon and Instacart deliveries at your door and take but a few steps to realize small business, restaurants and many services through every city and town are in the shit. While government stimulus has helped – and we can likely expect more – it only puts food on the table and doesn’t yield the confidence consumers need to drive demand. Many startups sell to main street consumers or to the businesses that sell to them, so demand in most industries is undeniably muted.

Public Stocks: It is said that main street is today and the stock market is tomorrow, and this explains why employment can be down 600 basis points in 6 months while stocks return to previous highs over the same period. Okay, if that’s true then we might ask, “will the future (2021, 2022) be as good as 2018 and 2019?” That seems unlikely. Even if we had a vaccine today, the rest of demand and employment recovery is likely to take years, as it usually does following a recession. I am not a market timer, but right now it feels like the market is over-handicapping a quick vaccine and recovery.

So where does the venture/startup world fit in? In the end, public markets represent both a major input and output to the venture/startup model. Most funds invest money from institutional investors who hold a bulk of their holdings in public stock. When those go up, institutional investors “allocate” more to venture; when public stocks go down, those investors “allocate” less to venture. The public markets are also a major exit path for startups, both through direct IPO and M&A to public companies. When the markets drop, both paths deteriorate. So if the market drops again, which seems likely, there will be less money going into venture funds and fewer paths to exit for startups (or at least at lower exit multiples).

Admittedly, the above cycle is incredibly “macro” and “on average”, while startups and venture funds live by the power law. If you’re lucky enough to be a “COVID bump” startup or to have a few in your portfolio, that is terrific. However, the majority of startups are now growing slowly (in venture terms), chewing through the limited runway they worked hard to extend in March and April. This is what I refer to as the ticking time bomb of venture and startups. These runways expire en masse between late 2020 and mid 2021. 

As happened in March and April when VCs focused inwards, I anticipate a recurrence of inward preoccupation when this corpus of slower growing startups become “workouts”. Entrepreneurs and investors will have to pick winners and losers. This will lead to much fallout in existing portfolios but perhaps also a muting in excitement for funding new startups – at least for some time. (It will also be a good time for strong startups to buy weakened competitors and win their customers.)

You can’t be a VC without being an optimist, and I do believe tech is performing and will come through the other side of COVID stronger than ever. But we need to remember that everything is linked, and the current disequilibrium may yield to more pain in the short term.

Bootstrapping 2020

Crowdfunding, ICOs and COVID. What do these have in common? All three have at one point or another been described as a deathblow to venture. Venture has and will survive all three of these. While we’re in the early innings of the pandemic, an initial freeze in venture has thawed, even if at a more tempered cadence. VCs are screaming on twitter that they’re open for business, and even we have a signed TS with a company right now, so we can scream too.

But should startups take venture in 2020? That is a more complex question. Paul Graham’s much cited and seminal piece Startup = Growth is a great reminder of what venture capital is for: to fund rapid, steep growth. The cost of venture capital is high. Often cited as a 20-30% APR – a reasonable approximation for the average cost of capital for “successful” VC funds – the true cost to an entrepreneur who succeeds can be as high as 100% APR or more. Remember, if you succeed wildly, you have to cover the costs of your VCs’ failures.  Now, if that’s the case, you are probably much richer than the VC in the end, so it was worth it. Now back to the growth…

Raise your hand if you have rapid, steep growth in 2020. Uh huh. Most startups will have a terrible 2020 in startup = growth terms. We expect the majority of our companies to fall between a -25% decline (for some consumer and B2B transactional businesses) to a +50% (for stickier SaaS businesses). We are also lucky to have a few “COVID bump” outliers. More on that below.

When you’re swimming, it’s good to know where the rest of your pod is. Here is how we see the growth profile of startups in normal times and in 2020. Don’t get caught up on exact numbers, business model etc. This is meant to be illustrative:

In normal times, we see lots of startups growing 25 to 100% annually. Few of these get funded unless they have bulky ARR (say 5M and above), in which case they oftend find a “growth” investor with the right appetite.  Then there is a decreasing tail towards and above 200% annual growth. Most venture deals get done in this range with “hot” deals above 200% growth. 

In 2020, this distribution has shifted left, roughly centered around 0% growth, maybe slightly above. Then there is a long desert to a small second mode of “COVID bump” companies, where the hot deals are getting done now. These tend to be in e-commerce, virtual care, remote collaboration, online education… you know, the obvious. They get a lot of buzz and are exciting, but most of the announcements you see are companies receiving supported from insiders.

Venture capital is not for survival. It is very expensive if things work out later, so if you’re in the middle of the pack now, do your best to avoid taking venture until you emerge on the other side. Barring the fortune of being in the COVID bump – where pouring gas on the fire makes sense – I’m convinced that the best companies and happiest founders will be the ones who bootstrapped through 2020.

Preparing your startup for COVID19

Below is a letter we shared with our portfolio companies with tactical ways to prepare for the worst and hope for the best with respect to COVID19. Other startups may find this useful too.


Dear HPVP Portfolio Leaders,

With COVID19 an increasing reality both for public health and business, we know that each of you is considering how best to lead your company in protecting you employees, families and customers and ensuring resilience of your venture through a potential downturn and into a recovery.

Our portfolio company teams vary significantly in experience level. For some of you, this shock may not be the first you have weathered. It is for others. Regardless, each of us benefits from a thoughtful and planful approach to the potential challenges ahead. Below is a set of resources and considerations in charting (1) how to help protect the communities you lead and (2) how to protect your company to weather what may be ahead. While we all hope for the best, we must also plan for the downside. We will be in touch with you individually to see how we can help.


(1)    Protecting your community, people and theirs:

There is a growing chorus of questions related to employee and family travel, professional and social gatherings and proper hygiene in the face of COVID19.

Remember that in times of uncertainty, your actions and leadership are even more closely watched and mimicked by employees than in normal times. Also consider that while many startup employees appear “young and healthy”, employees may have conditions that they keep private, and “healthy” employees may otherwise come in contact with loved ones, community members and customers who are at higher risk from the virus.

We are not doctors, and most of you aren’t either, so we recommend following the guidance of public resources on what you should do. There are resources available from the CDC on down to municipal government; HPVP has been most attentive to the City of Chicago’s recommendations. We outline these in some detail with additional thoughts on events and domestic travel at the end of this email. Since you’ve heard much of it before, we’ll now shift focus to your companies.

(2)    Protecting your company:

Sequoia Capital published a letter they sent to their companies last week. The letter outlined how startups can anticipate and weather the effects of potential drop in demand, supply chain disruption and cancelled meetings and events. We highly recommend reading their letter and offer additional thoughts below:

Cash is king:

Almost all of our companies burn cash in favor of growth. When met with strong economic headwinds, the growth per cash burn ratio will decline (even to zero). Meanwhile the cost of that capital you are burning goes way up  – it gets harder for startups to raise capital. While VCs have raised historic amounts of capital in recent years, we may see more of it to stay on the sidelines as VCs’ own fundraising cycles lengthen. In short, if you planned on raising capital this year out of need, assume that it may be difficult to do so.

If you can’t count on fundraising or revenue for cash, the only thing left is expenses. We are not recommending our companies cut yet – pending learning more about COVID19’s impact in the next few months – but delaying hiring except for the most clear ROI cases is prudent (for example a project manager to run a large signed contract rollout versus just another sales person).

We should all be watching closely over the next few months with regard to further hiring or cuts pending feedback from sales in Q1 and early Q2.

If this sustains, it will affect everyone:

There are always arguments about what industries and business models will be affected the most in an economic shock. Certainly there are some that will be affected more by COVID19 than others (hospitality, travel, etc), but our position is that all startups will be affected. Even companies that don’t travel for sales – e-commerce, inside sales, marketplaces  – are all likely to be impacted. In a contractive environment, everyone contracts at one level or another.

Make sure your customers are very happy:

In tough times, resilience and stability – after extending runway – comes from keeping customers happy. Delaying price increases, allowing contract extensions or downsizing contracts if customers themselves are downsizing can go a long way in saving a customer that might otherwise be lost. Remember, they are facing the same headwinds you are.

Exercise flexibility in your teams to ensure continuity:

Seattle has seen large tech companies (MSFT, GOOG, FB, etc) ask or require employees to work from home. In several cases, these actions followed the diagnosis of an employee. Other examples were purely proactive to reduce risk of spread  – actions that are, in fact, in advance of CDC and local health departments’ recommendations for only high risk individuals to remain home. This shows us that an explicit or societally implicit expectation that companies shift to remote work could happen at any time or anywhere. We know of several companies “practicing” remote work by rotating 20% of their team each day to work from home over a week. This allows them to exercise “remote” muscles and ensure adequate tools and processes at home should they be needed.

Perhaps the biggest need for team flexibility relates to employees managing childcare if schools selectively or broadly close. Reduced or adjusted work hours may be necessary to accommodate school closures amongst your employee base. It would be a good idea to recommend that your employees begin to plan for this contingency and for them to know you have their back to reduce anxiety.

Make no little plans:

Our most tangible recommendation is to put a plan together over the next few days to address how you are approaching COVID19 with your team, customers and 2020 plan. A good plan would answer these simple questions:

  • What have you communicated to your employees, and how are you preparing them for a potential broad isolation scenario?
  • What actions are you taking now with respect to previously planned hiring?
  • What signals are you closely tracking over the next 4 to 8 weeks as leading indicators of demand softness?
  • What actions would you take in 8 weeks based on different outcomes of those leading indicators?
  • How much runway do you have now… and assuming no growth plus aggressive cost management in Q2?

You will probably want to share this plan with your board or perhaps have a board call; you never know where you might hear a good idea.

**** Recommendations from Chicago Health Department****

Explicit recommendations include:

  • Practice exceptional hygiene and social distancing: stay home when sick, wash hands frequently, and avoid handshakes
  • International travelers from Level 3 advisory countries (China, Iran, Italy, South Korea per the CDC) should self-quarantine at home for 14 days; International travelers from Level 2 advisory countries (Japan per the CDC) are not yet advised to self-quarantine but should monitor their health closely

What is less explicit in guidance from most public sources is what to do about domestic travel and gatherings/events. Of course, this is a big question for many of you who travel for sales and either hold or attend conferences. We are seeing more and more public events and conferences be cancelled. This began with large international conferences, then large ones hosted in the US and now seems to be expanding to more regional conferences in the US. It seems prudent at this point not to hold large events. Whether that is justified from a public health perspective is not ours to say, but expect that attendance will wane until there is more uncertainty about COVID19’s spread. Better to do things virtually. Likewise, with many conferences cancelled and many customer companies limiting visitor access, there are increasingly fewer reasons to travel domestically. A final policy on domestic travel is yours to make. At this point, HPVP has bagged all non-essential travel. You can see what other tech companies are doing here.

Talent Talent

We announced recently that HPVP is hiring a Head of Talent to focus on hiring and people processes in our portfolio as well as to expand our talent network for portfolio hiring needs.

We are excited about this step for HPVP in formalizing a function that has become an important part of how we help our companies grow. It is no surprise that in its most nascent stage, a startup isn’t much more than the people that comprise it – an amalgamation of their ideas, experiences, network, leadership ability and executional prowess. This is to say that startups are as much or more about people (talent) than anything else.

Our experiences have taught us that there is no single “right” kind of founder. We’ve seen young teams and more mature teams alike found and grow great companies – though a common trait of industry expertise has been notable in our successful teams. We have also seen consistently that there is a right way to build a team to scale a company and many wrong ways: hiring friends, micromanaging, skimping on senior hires for too many cheaper juniors, etc.  All of our teams at one time or another benefit from an outside perspective on organizational design, attracting talent and retaining it.

In our view, the right way to build a team means systematically establishing company functions as a company scales past certain milestones and hiring experienced or emerging leaders to head those functions. For example, we know that an enterprise SaaS company probably doesn’t need a VP of Sales (and probably can’t get a good one) until it passes $3M in recurring revenue. Until then, the best enterprise SaaS companies have CEO or co-founder led evangelical sales trajectories. For an SMB SaaS company, you want to hire a VP of Sales between $1M and $2M to scale a more mechanized sales process of smaller deals. As another example, a SaaS company doesn’t need a Chief Marketing Officer before $10M in ARR (a Director or VP will do), but after $10M, a deeply experienced CMO is the first or second most important hire to get right. We have learned many of these heuristics the hard way – hand-in-hand with our teams – and it is now time for a Head of Talent to encode and share them systematically with our companies and beyond.

Beyond organization design and talent management, once the correct open role is identified, a company needs to find and attract great candidates for it. Our investing team has historically spent 10% to 20% of it’s time meeting with talent in our geographies that could be a fit for our companies as they scale. We have sourced one, two or more of the “C or VP level” leaders at many of our scaling companies. Indeed, as a geographically focused fund, the development of a geographically overlapped talent network is one of the ways we think we have and can add the most value at our companies. It is a differentiator for us versus other peer funds without a geographic focus and also makes us a good partner to the later stage coastal funds who invest in our companies after we do.

Our investing team members will continue to meet with top talent, but our Head of Talent will expand these efforts and formalize a process to track the best talent in our geographies. As we patiently seek the right person for this role, we welcome introductions to experienced talent leaders with deep experience in scaling startups and a passion for helping more. Thank you.

Everyone is busy

It’s a Thursday at noon, and I am done with my meetings for the day.  It’s a Thursday at noon, and I am not busy. It’s a Thursday at noon, and I am happy about not being busy today. So there.

I’ve had a few really nice weekends in January that were quiet – not busy – and when sharing my weekend’s events with peers on Monday by saying “I didn’t do much,” I got funny looks as if to say, “is everything okay?”

Many see busyness as a virtue and a status symbol. While the characteristic is often associated with people of greater impact, status or intellect, it is as much true that busyness befalls people who are disorganized, over-committed or unable to prioritize. Neither perspective is necessarily true. The answer depends less on the state and more on the individual person and their job function.

I use the word “befalls” above intentionally. If you ask most busy people in the moment if they like being so busy, they will answer negatively or at least demure. Few truly enjoy it. So what gives?

It turns our that busyness as a status symbol is a recent phenomenon. In Joe Pinsker’s Atlantic article identifying busyness as a status symbol, there is an insightful exploration of the origins of busyness. In short, busyness used to be a curse of the poor. If you had less, you had to work more. If you had more, you displayed your status by working less. In economic terms, little wealth meant your labor needed to sustain you, while great wealth meant your capital could do the work for you.  Today the opposite is true. We now see many wealthy and successful people pushing both their labor and capital to the extreme, while many unfairly dismiss the poor as “lazy”. This has engendered a set of heuristics in society that reinforce busyness as a virtue. As they say, “if you want to get something done, give it to a busy person.”

Aside from personal and life preferences (do you see your family, talk to your friends, pursue hobbies?), it turns out that whether busyness is actually productive as a work style is very dependent on the type of job you occupy. Cal Newport’s Deep Work explores this question in detail. He defines two extreme personas, the successful company executive versus the highly productive academic. Newport posits that the company executive is a “decision machine”, making high velocity decisions based on summary data from trusted team members and deep experience. The best executives make lots of good decisions quickly, either in parallel or in rapid successions of meetings. They are busy in the traditional sense and should be.

On the other hand, Newport finds that the most productive academics (as measured by published articles and citations) are the ones who lock themselves in their office, ignore email and work on one problem for days, weeks, months straight – a behavior that would solicit a lot of “what the hell are they doing in there?” from anyone but other academics. They are not “busy” by today’s definition, but both roles can create a lot of value in society.

As an investor, I often ask myself where I should fall on the spectrum. In one way, the job of pursuing and meeting entrepreneurs for potential investment is a high throughput “busy” process of emails, calls and meetings. On the other hand, venture returns are made when you make a non-consensus bet that turns out right. To do this requires assimilation of ideas through reading and talking to others… as well as thinking. It requires unstructured time. I find it is in these calm times that I find the confidence in our very ambiguous investing stage to make decision on where and where not to invest (or to collect my thoughts in a long term blog post!). Indeed, the likes of Oprah and Buffet are known to carve out time for similar purposes with a “five hour rule”, one hour a day each week day. See how I slyly added myself to a list with Oprah and Buffet? 😊

Don’t get me wrong, there is a lot to do. And because of technology and constant connectedness, we can do more through more of the day and more of the week. I am as guilty as the next person of rescheduling meetings, pushing calls or acting distracted all in the name of being busy. When I get on the phone with an entrepreneur and apologize for being late or rescheduling, they often say “no problem, I know you’re busy.” My response is that I know they are busy too, and busyness is not an excuse. It’s a choice.