I’m not saying the bull run is over, but just in case…

Like everyone else who watches the news, we too have heard about the yield curve inverting, raising the question, “Is this finally the end of a ten year expansion?” Also like everyone, we don’t know. What we do know is that there is a greater level of risk to the economy than there was 6 months, 12 months or 18 months ago.

What has changed? Ignoring politics (really), tariffs and tighter immigration threaten to stifle two major engines of continued growth domestically – namely consumption and talent availability. Meanwhile, the global economy is slowing due to normal late cycle dynamics, the arrival of emerging economies to a highly “developed” state, as well as greater systemic drag from the budding of protectionist policies and rogue nations. In the tech economy, some (not entirely unexpected) cracks are appearing with WeWork struggling to IPO and Uber and Lyft on long stock price declines following their IPOs. Changing investor expectations resulting from these events befalling tech’s favorite children will no doubt trickle down into mid-stage and early-stage investing.

We’ve thought much about what this could mean for our portfolio companies and how we help prepare them to weather any dip. Our approach is to look at increasing macro risk through three lenses: Customers, Capital and Acquirers.

Customers: Our companies are not immune to belt tightening among their own (mostly B2B) customers, domestically or globally. Many of our portfolio companies serve large global enterprises, so even slowdowns in non-U.S. regions can have an impact on their metrics such as a higher cost of customer acquisition (CAC) – fewer customers in the market with budget to buy, so it’s harder and costlier to find them; and lower lifetime value (LTV) – customers are more likely to cut or reduce spending. Of course, this “LTV to CAC ratio” is a key software-as-a-service indicator. Under circumstances where there is pressure on the top and inflation on the bottom, we advise our companies to focus heavily on customer success and retention and to be less aggressive on sales team hiring and burn to maintain efficient growth.

Capital: The common retort to a potential economic downturn’s effect on startup fundraising is, “Hey, VC funds have so much money. They have to invest it.” While it’s true that venture capital funds raised more than $130B in 2018, surpassing the 2000 dot-com peak, that same comparison reminds us not to take levels of “dry powder” for granted. As we saw in the dot-com collapse, in a downward market, dry powder can stay on the sidelines or focus inward on existing portfolios, reducing the number and levels of new company financings. We certainly expect our best companies to maintain access to capital, but the bar will go up for those in the middle. Given this, we are advising our companies to raise capital (within reason) while the getting is good. Indeed, our best companies all have very strong balance sheets that could last several years or more if needed.

Acquirers: Just like investor capital can stay on the sidelines, corporate and PE acquirer money can too, despite the abundance of both. In a downward environment, exit horizons are likely to extend – all the more reason to encourage companies to bolster their balance sheets and prepare for hyper-efficient growth if needed.

Especially in a changing environment, startups serve themselves well by understanding the investors from whom they are trying to raise capital. How an venture investors look at a possible downturn will depend on their own fundraising cycle. Investors at the tail end of an investing period will pull back quickly, reserving more capital for existing investments and worrying about their own fundraising plans. Investors with fresh powder will have a heightened preference for efficient growth and will likely take their time in deployment to time-average the possible effects of falling entry prices and because their own fundraising cycles will extend as well. Things will simply go slower.

We are neither sounding the alarm nor plugging our ears, just staying attuned to our markets and prepared to adjust if necessary.

Inside the inside round

I’ve had two conversations about inside rounds in as many days – one with a portfolio company and another with a company outside of our portfolio. Both are entrepreneurs that I admire, have known for years and with whom I can be honest. These conversations made me realize that entrepreneurs have little window into the psyche of investors when it comes to inside rounds. So here is how we VCs (or at least this one) looks at it:

There are good inside rounds, and there are bad inside rounds. (more on the use of “bad” below)

Good inside rounds are when things are going so well that existing investors want to increase their ownership by maximizing their check size and not maximizing price.

These rounds can happen at any stage, from post-seed through D. Sequoia has been known to do this often, other “multi-stage” funds are developing similar histories.

It’s obvious why an investor would want to do this, but why would an entrepreneur be willing to accept an inside term sheet – perhaps at a lower price then in a market process – when things are going well? After all, if things are going so well, wouldn’t other funds be willing to bid up the price, likely diluting the entrepreneur less?

Most of the time, yes. But fundraising the right way takes time, especially if you have not consistently built relationships over time that can quickly be called in for term sheets. So the hungry inside VC says to the entrepreneur “Hey, there’s so much going on in the business, let’s just set a fair price and get this done quickly, so we don’t get distracted.” I have said those words before. It’s not an unreasonable position, but it should always be for the entrepreneur to decide. I have also said those words. 

Good inside rounds are becoming more popular as multi-stage venture funds grow larger and enjoy a decade of strong track records in their rear view. These trends mean funds want to get more money to work when they see something going well and have less need for external valuation markups to prove things are working to their limited partners.

Hunter walk sums this trend up nicely in a sardonic tweet:

Bad inside rounds are when a company doesn’t have the story to raise money from a new external lead.

“Bad” is a strong word, used here for simple juxtaposition and effect. Such rounds don’t always mean the company is doing “badly”, just that progress is either difficult to judge from the outside or the post-money of the last round needs time and progress to be “grown into”, either due to a miss on plan or a shift in market pricing. Occasionally inside rounds occur only for lack of planning – a company ran out of money much more quickly than expected, before having time to go to the market to raise. There are also marginal cases, where perhaps a company has a good story, but not a great one. It can probably raise, but not from an attractive investing partner or without spending many months being distracted from growing the business.

Here’s the frustrating thing about inside rounds for entrepreneurs: In the good state, you can’t beat your insiders off with a stick. In a bad state, they may not return your calls. How annoying. What’s up with that?

In simple terms, investors want a return. If the market is telling them the company can’t attract capital from outside investors, they are thinking one or all of several things: (1) this company isn’t a great place to put money, (2) even if I think the company is good, if we fund it further and then still can’t raise new money later, that doesn’t help, (3) what do other investors see that I’m not seeing?

That said, most investors are willing to fund a company with a moderately sized inside round (call it 30-50%+ of the prior round) if the following conditions are met:

  • The company has made tangible progress, and…
  • The management team gets along with each other and the board, or…
  • There is a(n) acquirer(s) lurking around

But here’s the catch. You usually receive only one “get out of jail free” card before the discussion shifts to a sale or shutdown instead of a second inside round. And, there’s a catch to the catch: an inside round is, of course, not “free”. Inside rounds are usually flat in valuation at best and therefore very dilutive to founders. So let’s call your one inside round a last resort, a Wild Card.

Given the above, here are general rules for how to think about inside rounds as an entrepreneur. 

In the good case:

Be true to yourself on whether you want to spend the time checking external options. Good inside investors will respect that.

If you decide to take a “good” inside round, remember that if things don’t go well, there may be revisionist history on how the “good” inside round is viewed by your investors, reducing the likelihood of another inside round later. Fresh blood has its benefits.

In the bad case:

If you are on the margin between being able to raise externally and needing to do an inside round, raise externally if you can. Save your Wild Card.

If you’re going to raise an inside round, make sure it provides a full 18 months of runway. There won’t be another, so leave yourself time to make real progress on metrics… and time for an escape ramp for exit if needed.

Good luck!

Okay, so what’s the number?

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.

Seed, speed, and we’re still here: my first decade in venture

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.

SaaS: How will your 10th sale be 10 times easier than your first?

There was a period early on when we called ourselves a SaaS fund, playing just slightly on the “me too” side of the biggest trend of the 2000s, the saasification of software. We have since honed our message, but in those earliest of days, being a SaaS entrepreneur or investor was differentiating.

Fast forward more than a decade, and SaaS is not a differentiator for companies or investors. It remains a terrific business model, but while there are increasingly a lot of good SaaS companies, there are decreasingly many great SaaS companies.

Why? There is ferocious competition when selling to customers. While customers now expect SaaS – versus the early days of educating – there is deafening noise and precious few green spaces or verticals. SaaS is no longer differentiating for another reason. While modern dev tools and the cloud make it cheap to start a SaaS company (or any tech company), SaaS companies are expensive to scale. It turns out the only thing better for scaling than getting paid consistently over time is being paid upfront! With SaaS, investors fund now what customers pay back later, and that leads to large liquidation preferences on cap tables. Thus, even good SaaS companies often struggle under this weight, yielding disappointing returns for founders, employees and investors.

So what is the key to a great SaaS company? It’s pretty simple… but hard to achieve. In a great SaaS company, the 10th sale is 10 times easier than the first, and the 100th sale is 10 times easier than the 10th. This concept applies to almost any SaaS company, but here I focus specifically on enterprise.

Hard questions are frustrating, and nothing is as hard in SaaS as answering “How will your 10th sale be 10x easier than the first, and the 100th 10x easier than the 10th?” Several entrepreneurs have given me a knitted frown in response to this question recently (among other reasons :-<).

Sounds nuts, right? Well, this effect can manifest in two distinct ways (for now holding everything else constant).

  • First sale of $100K took 20 months in cycle time, 10th sale of $100K takes two months
  • First sale of $100K took 20 months, 10th sale at $1M takes the same time.

The second mode above is more common, but both are possible and describe a like economic reality. As we know, sales cycle time is a proxy for CAC in enterprise SaaS. SaaS companies that can achieve this base-10 exponential sales ease effect are rare. We are lucky to have one in our portfolio – FourKites.

Does that mean a company with this characteristic actually grows base-10 exponentially on the same burn? Well, no, and that is why this effect is so needed. Here are all the reasons why most SaaS companies become less efficient over time and cannot even grow linearly on the same burn, holding inherent sales ease constant:

  • Your 1st sales person is never as good as the founders at selling
  • Your 10th sales person is never as good as your 1st at selling
  • Half of the sales people you hire won’t work out
  • Your first non-founding employee worked 10 hour days; your 50th works 9 to 5 (ish)
  • Office politics themselves grow exponentially with employee count, consuming time
  • It’s bring your dog to work day, and everyone is playing with a puppy
  • Churn can fundamentally limit growth because of math
  • Competitors catch up or otherwise muddy the waters
  • You get the point

Even holding sales ease constant, a linear growth SaaS company will often asymptote at the same burn because of these, especially churn. The only way to maintain exponential growth is to have a sales ease effect that greatly outweighs this drag.

So how can you find this effect? There are a few obvious (but hard) ways:

Network effects: FourKites benefits from extreme network effects – it is software that tracks the location of long haul trucks for shippers. The supply chains they serve comprise a complex multi-part network of shippers, trucking companies and retailers. When they sell a new shipper, the shipper brings new trucking companies and retailers. Those trucking companies and retailers then bring more shippers. And so on.

Virality: Box, Dropbox, Slack. Need I say more?

De Facto Standardism: In a way, Epic has achieved this in the Hospital EMR world. “Nobody ever got fired for going with IBM.” Replace “IBM” with “Epic”. Veeva has done the same in pharma CRM and systems. The common theme between the two in reaching a de facto standardism is a vertical focus. Within a vertical, there is a resonance of brand and usership that can lead to standardization relatively quickly.

So ask yourself, what is your answer to making your 10th sale 10x easier than the first?