What Leadership Roles at Facebook & YouTube Taught Rushabh Doshi About Building Product Teams
What do I hope happens when I write a blog post? Lots of people to read it? Sure, I guess. But the dream is really smart responses from folks who can help refine or expand my thinking. So after recently revisiting the question about being a product manager without an engineering background, it was delightful to read feedback from two friends.
Then my friend Ben Stern’s (PM at Figma, ex-Dropbox) response
And now, from my friend and former colleague Rushabh Doshi, who was an engineering leader at YouTube, before taking product and engineering roles at Facebook and now Digit. Copy/paste from the email he sent me this morning:
“I love this post.
I think non-technical product managers are awesome and bring a different set of skills and super-powers to the table. I love your advice for non-technical PMs as well. Slight tweaks that I would offer:
1. Be curious. Understand how things really work. Dig, dig, dig until you completely understand the stack. There has never been a better time to be curious — I usually watch experts on YouTube talk about deep topics and gain understanding quickly. Coding is more accessible than ever. Write some code and build some prototypes.
2. Have a super power. The opposite pole of a technologist (who is naturally close to technology) is someone who is very close to understanding the human elements. Non-technical PMs with a background in marketing, user research, design, customer support etc. have a great deal of empathy for the customer and an uncanny ability to put themselves in their customers shoes. If you are one of them, hone and cherish your abilities to develop that super power.
3. Align success. I firmly believe great product teams should measure themselves on ultimate customer impact, regardless of function. PMs should care just as much about shipping bugs, and engineers should care about building products that meaningfully address customer needs. PMs can be the center of this alignment through constant reinforcement.
One thing I would add:
Begin with execution. Execution is the most important thing for early career PMs. I have talked to a number of great PM candidates who cared a lot about “strategy” and working on “the bigger picture.” This is a great aspirational goal and as PMs gain experience, they should be able to pick up things of greater complexity and impact. However, everyone starts with execution, and if you’re early in your career, my one advice is to focus on execution.
Three Tips For Leaders Who Want To Up Their Recruiting Game
Show me the first 20 employees of a startup and I’ll tell you whether it’s going to be successful or not. In my mind there’s no greater indicator of success than the quality and characteristics of the individuals you’re able to bring on board. Success is a signal of two meaningful truths: you have the talent you need to execute your roadmap and A+ people have decided that you are worth working for. When I encounter founders who know how to hire, or founders who are self-aware enough to know it’s an area they want to get better at, it’s a huge plus in our investment decision.
So here are three tips for leaders who want to up their recruiting game:
Know What Excellent Looks Like
It’s very hard to hire something if you don’t know what it looks like. If you’ve never worked alongside a stellar marketer I don’t expect you’ll know how to identify one, let alone attract them. Even worse you’ll probably fall victim to an ‘all hat, no cattle’ candidate who can talk a good game but has zero substance. This is true of every discipline whether it be product, engineering, sales and so on. You need to know what excellent looks like. So ahead of hiring, spend time with a few excellent people in their domains. Ask them what they look for when they hire and how they structure their interview processes. Calibrate well though, if you’re going to be hiring a SDR but are talking with a SVP Sales, make sure you’re asking her about junior folks.
2. Ask Candidates Who Reject You To Name Names
Ok I know this one sounds weird but it works. If you’ve built a rapport with someone but they turn you down because it’s not the right time for them to interview, or they are prioritizing something other than what your company can offer, insist they provide a name of someone else you should talk with about the role. I do this frequently and it has paid off multiple times. You get a warm intro to a candidate who is flattered to be told they are awesome. And it is a great way to expand beyond your own network.
This “strategy” started organically for me during my YouTube years. I was trying to recruit a product manager from Google to transfer over but he told me he’d actually already decided to leave the company to found a startup. After making a brief case that he should reconsider, I pivoted to “well, you’re still on the hook to solve my problem. Who should I talk to instead?” He introduced me to a colleague working in Google’s marketing team that he thought would be an excellent product manager if someone would give him the opportunity. I did and he was!
3. Sell Past The Close
Congrats, the candidate accepted your offer and is very excited to start. Just as soon as they tell their current manager. And let their spouse know about the decision. And takes two weeks off to clear their mind before a new job. Totally normal except every single one of these is an opportunity for them to reconsider and tell you that sorry, but they reconsidered. Managing through these events is essential and needs to be done in a manner that’s consistent with your culture, the candidate’s needs and your hiring practices so there’s not a ‘one size fits all’ answer here but some of the things I’ve advised people to do/seen done:
>> for the “telling the spouse/family” — record a Loom or something introducing yourself and the company for the candidate to play for their partner or family. Send them a bag of company schwag to give out. Buy them dinner because “good conversations should take place over good meals.”
>> for telling the current manager — stay in close contact and prepare the candidate for a counter-offer from their company. Get your investors/advisors to congratulate the candidate on accepting so that it increases their enthusiasm while also increasing the reputational cost of withdrawing. Invite them to a team happy hour or meeting the next day so that they can meet new teammates since they might start grieving the loss of their old ones.
>> for the “break” — let them be and actually restore themselves but figure out some way to get them a surprise schwag bag or gift while they’re vacationing. Give them a “fun” task if they want like telling you what home office/tech equipment they want and get it ordered for them so it shows up Day One. Start their salary/vesting on the first day of the vacation and then let them be off for two weeks (this is worth it in extreme cases where you are really worried about the gap between them accepting and starting).
There are lots of things you can do to up your game as a hiring leader. Making sure you’re great at this is one of the most important things you can do as a founder. Good luck!
One of the areas I get the most cold emails about are career paths into product management, especially for folks without engineering backgrounds. I wrote my thoughts up on this back in 2014 but a lot has changed in the world. More APIs, modularity, microservices and low code. But also growth in new complex areas such as crypto.
Curious from all of you whether my advice still applies?
This Has Been My Favorite Question Of Peers In 2021
“So, do you think your job is to win ‘consensus’ deals or find the ‘non-consensus’ opportunities?” This has been my favorite question to ask fellow seed investors over the last year, and the answers are telling. Some have very strong reactions, dismissing any alternate strategy to their own as imperfect. Others go back and forth in their own mind, realizing that their current execution, even if successful, is at odds with the words coming out of their mouths in response. Like most questions of this sort I don’t believe there’s an absolute correct answer but I do believe — now more than ever — one’s success as a seed VC depends on knowing *your* playbook and running it superbly.
SaaS investor Jason Lemkin noted this the other day in the above tweet. There’s a lot of capital chasing ‘consensus’ deals, but this doesn’t necessarily mean you should avoid them as an investor if you have a legitimate shot at picking and winning well among them. There’s a historically true 2×2 that suggested the real money is in non-consensus opportunities, but it turns out that given the growth is size of outcomes, that “right” and “consensus” is still a fund returner, sometimes many times over.
Several of the seed VCs I respect most, and would put my own money into, have told me they shifted to high ownership and consensus during the last few years. It doesn’t mean they just care about pattern matching or social proof. There are still plenty of ‘hot’ deals they pass on and other investments they make which aren’t necessarily as well understood by the industry at the point at which they invest, but the scale of winners (and the ease with which they have ability to raise ongoing capital), along with increased size of their own funds, have made these firms less reliant on the needle in the haystack.
We’ve also seen a number of startup attributes which used to be considered ‘non-consensus’ become less disqualifying. Location for example. Go back 10 years and a startup outside a major tech hub would be a ‘non-consensus’ investment for most seed funds. So I think part of the flight towards consensus is also a broadening of what consensus looks like in a way that’s good for founders.
How would I describe Homebrew’s answer to this question? I believe we need to win our share of consensus deals in our core verticals (fintech, SaaS/FoW, etc) and when we know the founders already, but not let the volume of consensus dealflow overwhelm our ability to find and back non-consensus startups. One ‘trap’ is once you’ve earned your way into consensus-world, just living there. Unlike some of our peers I don’t think we can be successful deploying this model because our funds are (purposefully) too small to win every shootout. Also it’s a question of where your personal energy and motivation comes from. We get a lot of joy from working with non-consensus founders, even if it can be more effort, take longer, and possess greater funding risk.
Via Screendoor I’ve been looking at a lot of emerging managers from different backgrounds and I’m heartened to see a mix of consensus and non-consensus strategies. It would be wrong for underrepresented VCs to cede the ‘consensus’ deals to the establishment. They can fight and win their place on these cap tables and are doing so.
Consensus vs non-consensus strategies sort of reminds me of concentrated vs ‘spray and pray’ models. There’s a desire sometimes to assume one is fundamentally better or more pure than the other (I mean, spray and pray is really an index strategy, not a dartboard), but in actuality being very good at either model is a winning approach to venture. It’s not knowing which you are, or playing a game you’re not well-suited to win, that’s going to cause you trouble.
How My Attitude Towards Mental Health Changed From My 20s to 30s to 40s
2011 and I was at a low point. Most alarmingly, it wasn’t clear that I could get out of my situation by myself. The mental stress and overwork at my job helped catalyze a physical disability of repetitive strain which created a vicious cycle. The bottoming occurred over the summer when I was supposed to be healing during a sabbatical. Being a proactive problem solver I tossed all sorts of Eastern and Western approaches to diagnosing and solving the pain in my hands and arms. Instead of finding a cure, I was losing trust in my own body’s ability to recoup and imagining a life of marginal productivity. This fed into my failure tiger fear, which was already heightened by the impending birth of my daughter. The beginnings of anxiety and depression convinced me that I needed to abandon my belief that only *I* could help myself and seek a therapist. I’ve now been seeing him for 10 years.
In my 20s I wasn’t prepared to embrace therapy. I’d been exposed to it via friends and family members but generally felt that I could solve my own problems by myself. That unless one’s situation was severe and verging on physical self-harm, therapy was unnecessary for me — I was better off thinking and working my way out of my anxiety. Others, they might need this help, but not me.
In my 30s I occasionally saw a therapist, but used it to treat symptoms rather than root causes. It made me feel better in the moment but I wasn’t ready to embrace the idea that ongoing commitment to analysis was going to be productive. It seemed time-consuming, expensive and transactional. Obviously this person only cared about me because I was paying them, and most of these therapists couldn’t keep up with me anyway. I’d offer my own self-analysis for them, looking to be commended for how intelligent, introspective and articulate I was. This wasn’t help, it was performance.
Then 2011 hit and in my late 30s the emotional infrastructure I’d constructed to protect myself was no longer sufficient. To try and preserve it would, at best, keep me surviving but not the version of husband, father, friend or human which I aspired to become. Although we sometimes have to fall back to a phone call, the best therapy for me happens 1:1 in-person. I know there are a variety of choices today for virtual or distanced therapy, and despite my concerns about the practical stability of these businesses, I’m incredibly glad they are growing and operating to the benefit of their customers.
Within my closest communities it feels as if being attentive to mental health and wellness is largely destigmatized. Even before this post I’ve discussed my own participation frequently and consider it to be an important ongoing commitment. But I’m sure my own experiences don’t necessarily extend universally, maybe not even to everyone reading this post. So if you’re considering therapy for yourself, let me encourage you to do try. And if someone you care about needs some help, support them. And if it’s even just a topic that comes up in discussions among people you know well or not as well, look at it with kind eyes and don’t create a more difficult decision for someone who needs some help. It’s the most human thing we can do.
VCs With Multiple Stage-Specific Funds Are Likely To Rewrite The Existing Etiquette. And What This Means For Founders.
Let’s start out by admitting that the question of ‘competitive conflict’ has always been more of a situational dynamic than industry standard. In some ways it’s ALWAYS to an investor’s benefit to suggest a potential new investment wouldn’t be competitive to an existing portfolio company, and it’s ALWAYS to the current portfolio company’s benefit to suggest it might be.
While a norm of ‘we don’t invest in directly competitive companies’ is likely the median response if you asked a bunch of investors, in truth there’s always an asterisk. Sometimes this applies only to lead investors, and if they consider the investment ‘active’ (eg on the board, still doing their pro rata, etc). Or they’ll give a portfolio startup a window of exclusivity of a few years before considering more companies in the vertical. Maybe restrict the conflict to what a company is currently doing now, not what the founder says is on their roadmap five years down the road. And of course there’s the “unless we’re going to make a lot of money [on the conflicting investment]” asterisk. But in the years since we started Homebrew, I’ve observed the breadth of investor positions to be both more fluid and less restrictive than ever, often to the confusion (and annoyance) of founders. A major driver of this has been the growth of venture firms into cross-stage investing using different funds.
Historically most large venture firms were basic single fund operating vehicles — they raised from their LPs every three years or so, and a firm then invested the capital. Then rinse-wash-repeat. You made initial investments out of the next fund, while making pro rata decisions in the previous fund(s), and each fund had a 10–12 year lifecycle. Then some of these firms began raising their own Growth funds, a mix of extending their pro rata into existing portfolio company’s later rounds but also entering into new investments at later stages of their evolution. Almost every major VC now has at least an “early stage” and “growth/opportunity” vehicle. And most recently, several firms have also created separate substantial seed vehicles to lead those rounds.
How does the expansion of firm mandate change incentives for its individual partners? In some firms the partnership spans one or more of these funds (ie GPs float across the seed and early stage vehicles based upon the investment, not their org chart), while in others, a GP is tied to a specific fund. Some firms are equal partnerships in terms of economics but most have carry tied to a combination of seniority, performance of the fund you’re a partner in, and your own investment outcomes. Every firm has their own logic behind its compensation structure and it’s almost always opaque to founders.
Why do I care about how investors at other firms get paid? Well, because I think it has implications for how our industry rethinks what competitive overlap looks like within a portfolio. Specifically, I’ll posit that the ‘new normal’ is going to be “we don’t make competitive investments within a FUND, but we will make competitive investments within a FIRM.”
Simply, a firm with a seed fund, an early stage fund and a growth fund might choose to have broadly competitive companies spread across each of these vehicles and not consider it a conflict. They will make the case (often credibly) that these companies will be indirect, not direct, competitors, and that there will likely be different GPs working on each deal. This approach will allow GPs in different vehicles to not have their performance handicapped by their partnership. Imagine you’re a Growth GP for a multibillion dollar fund and you couldn’t back a bunch of different fintech companies because your Seed GP colleague made a handful of $4m investments in similar companies just getting started. It’s just unsustainable to run a cross-fund competitive conflict policy at scale.
Now, to get back to my opening line of this post, this will *still* be art more than science. Portfolio founders with lots of power can play their hand to “block” new investments by their lead investors they believe could be competitive down the road. And certain GPs will be more, or less, consistent (some might even say ethical), on working with their colleagues and current portfolio to avoid sticky situations.
So what’s a founder to do? Here’s my advice:
Don’t Overthink This Dynamic Early On: If you’re raising a seed or A round and engaging with a multistage investor, it’s fair to ask them about their conflict policies, etc but I wouldn’t disqualify someone just because they *might* make a competitive investment out of a different fund. I’d just bundle this into the general bucket of “do I trust this investor to be a good partner/co-owner of my company” diligence. If for some reason you really don’t like the idea of a conflict arising then restrict your seed fundraise to firms that don’t have multiple vehicles.
Stay Close To Your GP, And Other GPs At The Firm In Your Vertical: In general, continue to pitch/sell/communicate with your investors. If you’ve taken money from a firm with cross-stage funds, I’d spend time with the GPs who might make competitive investments. The more they are convinced that you will be the winning investment in your space, the less likely they are to compete with you. Of course there’s the risk that you are educating them about a vertical that they’ll then go to market on, but play it as you want. Also never underestimate the personal relationship aspect — let them get to know you so they don’t screw you 🙂
Understand When Your Investor’s Pro Rata Shifts From The Fund They Invested In You From To Their Next Stage Fund: This is subtle but I’ve seen it firsthand. A firm might have a strategy to do an initial check (and potentially first pro rata round) out of its stage specific fund (eg a Series A from its Early Stage fund) but then at a certain point the pro rata decision might pass to the next stage fund (eg the company’s Series A and B done from Early Stage fund but the Series C would be the Growth Fund’s decision). If the sequential manager has a conflicting investment they will use that grounds to not do the pro rata, trying to be consistent with the commitments they made to the founder *they* sponsored. The danger to the founder sponsored by the previous fund is to the outside market it can look like their VC is no longer supporting the company, because we all know, dollars are the strongest vote of confidence an investor has. This can be really tricky for everyone to manage. All I can suggest is conversations in advance and to not let one of your existing VCs lead an inside round right if the next round would be decided by a different partner at their firm. Or if it’s a new investor with multiple funds, to ask this question in advance of when does the pro rata changeover happen. Within a fund and within a firm pro rata discussions are always competitive to one another and always about scarcity of follow-on dollars.
If You Have Leverage, Use It: This is a more complicated strategy which can backfire if you overplay your hand but let’s not ignore the option. I have seen termsheets which include pro rata rights so long as a firm doesn’t make a competitive investment, after which case they lose the pro rata. I have seen Board seats contingent upon a firm not making competitive investments. And other agreements to this effect which are handshakes.
What do we do at Homebrew? Our business is a single stage, single fund strategy so it’s pretty easy: when we lead or co-lead a round that founder is our priority and we defer to their definition of competition for at least the first 3–5 years of the company. That feels right for us and the trust we want to build with the teams we back.
As a co-investor, what I really want from a multi-stage venture fund is just consistent and honest communication regarding their competitive practices, even if their firm biases towards more ruthless behavior. And of course the easiest ‘advice’ to a founder is Don’t Worry About Any of This, Just Win And It’ll Solve Itself, but for me at least, understanding the rules of the game mitigate surprises and misunderstandings. Or at least turn them into subtweets instead of lawsuits.
Don’t Freak Out When Part Of Your Original Hypothesis Was Wrong
If you showed me a bunch of random early stage startups and asked me to select the ones disproportionately likely to be successful, I’d bet on the teams which are able to turn a hypothesis into a test and a test into learnings with the greatest compounding velocity. This is not to be understood as suggesting great startups are the byproduct of sequential A/B tests. No, quite the opposite. But they do know where and when an intuitive insight should be pressure tested by reality. Or they uniquely understand the problem to be solved but use the first year of the company to chart the most effective path through.
And you know what often comes out of these virtuous cycles? Changes. Because that’s what startups do, they change. Adding people. Reconstituting the org chart. Abandoning one customer channel for another. Constantly changing during the early years.
When we fund a company it usually has just three things: a problem to be solved, a customer segment who has that problem and a notion of the product to be built. Then the team takes the funding and ramps up the work. And almost always they come back after a month, or three, or six and say “I think we need to pivot because one of those three things [problem, customer, product] weren’t correct.”
I say, GREAT! And it’s not a pivot. If you’re changing only one of these three aspects it’s definitely not a pivot. If you’re maintaining the problem statement but changing the customer and the product, I still think it’s NOT A PIVOT. A pivot is when you are shifting completely. Moving to a completely different set of problems, customers and product, not merely processing the learnings from your most recent efforts.
So you might ask me, Hunter, even if we buy into your definition, aren’t you being a bit pedantic? I mean who cares at the end of the day how a ‘pivot’ is defined by our industry. And I’d say… TWO REASONS. IT MATTERS FOR TWO REASONS.
Calling normal startup iteration a ‘pivot’ creates a psychological barrier to change
Even though we all work hard to remove any notion of shame or failure from ‘pivoting’ it doesn’t help to over-apply it. I don’t want founders to think that making changes to a roadmap is ‘pivoting’ because true pivots require a different playbook. The small but meaningful alterations to ones’ strategy should be done without delay, deliberation.
Pivots shouldn’t be cavalier decisions but ones which are accompanied by a vote of continued confidence among major investors and cofounders together
True early stage pivots shouldn’t be done cavalierly or just because the startup has some money in the bank and the current plan isn’t working. I’ve seen companies handicap themselves by pivoting into a completely unrelated business that, as a result of the journey, is underfunded, overdiluted and without the right investors for the journey. Sometimes an orderly shutdown (or offer to return capital) and a restart are actually better for everyone involved. More often than not if the investors have faith in the team they’ll agree to play it out. And if they don’t? Well, I’m not sure it benefits the founders to pull along a group of unwilling investors just because the wire transfer has already been completed. I think of pivots as ‘refounding’ where the cofounders should step back and honestly assess their collective interest in a new idea. Sometimes one cofounder will choose to step back because it’s heading in a direction that they’re not as passionate about. That’s fine and the self-awareness should be celebrated, not punished.
Ok, so there are two different types of ‘weakness’ that Lemkin mentions — one has to do with lack of credibility in your cap table (“Can’t Bring You Good Leads For The Next Round”) which I’ll generally lump into the bucket of ‘you have B-tier investors.’ I’m not going to address this issue here because I think it’s largely a binary attribute of an investor and not as often situational — “punching above the weight of your cap table as a CEO” would be a good post, but separate from the point I want to stress.
Instead I want to focus on Jason’s discussion of bridges and pro rata, because it’s an area which is dynamic in every deal and often misunderstood by founders. Let me do some basic level-setting of how it typically works in a venture deal:
A venture fund invests an amount of money into a round. I give you $1m for 10% ownership (to make the math simple). And I probably also have pro rata which simply means the right (but not obligation) to put more capital into your next round equal to my current ownership. If your next round is $10m, and I still own 10% of your company, I would maintain the ability to do $1m of your $10m round.
As a venture fund I might have a strategy which says “for every dollar I invest into companies, I will hold one dollar in reserve for additional financings.” If I have a $100m fund, $50m into initial investments and $50m into follow on. Each fund has its own strategy about reserves, follow on and so forth. There’s no industry standard other than most large multistage firms will be interested in pro rata for their successful companies.
Now here’s where it gets complicated: follow on decisions are highly dynamic. Reserves are fluid concepts based on what companies are coming up for funding when, how they’re doing at the time, the size/stage/terms of the round and so on. No founder should assume their pro rata from insiders is in the bag, let alone a bridge check, only because the cost of being wrong (to the company) is so high. 99.9% of venture funds do not have enough capital to do their full pro rata in every investment for every round subsequent to their initial commitment.
Jason suggests asking direct questions like:
And I agree, those are great questions. The one point I want to emphasize is don’t ask these just when you’re closing the initial round or actively fund raising the next. Instead my recommendation is to ask every ~6 months or so in-between financings. Have a real discussion 1:1 with your major investors about how they’re thinking about this investment.
If you’re on-track to the next financing, you can couch it as “hey, as I start to think about the next round — and knowing sometimes preemptive rounds can happen these days — I want to check in on how you’re thinking about us. If you had opportunity to buy up, would you want to? If I can make sure you have your full pro rata available would you take it? If we’ve got an oversupply of demand, is this the round your firm usually starts stepping back from pro rata?”
If you’re not yet on-track, then it’s a variety of “hey, per our operating plan, I think we can get to the next round milestones but, so I have this in pocket, how does your firm think about inside rounds, especially if we want to raise a little more from current investors to get even further before going to market.”
Healthy founder <> VC relationships should always have open discussions about capital. One way I like to do it to be clear when I’m putting my “Homebrew” hat on versus just advising the company what’s best for them. I’ll give you an example of a conversation I had with a current portfolio company just this week.
It’s a seed stage company that has demand from insiders and new investors to do a ‘top-off’ in order to delay going out for a Series A. Since things are going well, our collective belief is that a few more milestones will be rewarded by the market, so let’s push further. I gave them an offer to do super pro rata at a post money of X (where X is above the seed round post money we previously led) while also offering to do ‘just’ our pro rata if they price above X (since there’s momentum from others to do the round ~10–20% higher than X). When we were talking it through I emphasized that the difference in check size I’d write had nothing to do with difference in confidence in the company or commitment to them as people (we already own close to 15% of the company as their largest outside investor). And I told them, they should probably do the higher price round even if it meant a ‘worse’ deal for us! Why? Because it’s better for the company overall IMO. I rather see the difference in dilution be used to continue hiring amazing team members going forward than add a few more basis points to my ownership. Long term greedy!!!! Now I’m just waiting for confirmation on what they want to do 🙂
Every situation is specific to the company, the investor and the moment in time. I’m sure there are examples where I needed to play ‘hardball’ or provide less flexibility in optionality, but I think it just goes to show that the best outcomes come from real discussions.
Lastly, Jason has a single very practical suggestion on what to do if your cap table is tapped out. I’m not going to repeat it here because you should give him the click 🙂
Thanks Jason for writing one of the posts I know I’ll be sharing with founders!
 Some situational examples do occur though: when a firm (or more specifically a GP at a firm) is rising or falling in stature; when a firm is investing in an industry outside of its wheelhouse and lacks relationships with appropriate downstream investors for the company.
Why The Move to Remote Has Accelerated The Need for New Tools
The first generation of SaaS was about single player workflows and data. The second generation added collaboration (aka multiplayer). And the third generation added ML/AI to reorganize/optimize those workflows based upon the intelligence of the computer, not the habits of the user. Not every industry and not every profession has moved through these generations in sync. Early adopter verticals — such as software development and tech sales — is mostly in Gen 3. Some of the largest markets including construction, health care, finance and agriculture are moving into Gen 1 and 2, with specific toes dipped carefully into 3. And my framework here also applies mostly to the US, with other part of the world ahead and behind the pacing I’ve suggested above.
Homebrew has invested into all three generations of SaaS mentioned here, and continues to do so with the previous 12 months including undisclosed seed rounds into promising teams working on agriculture fintech, health care backoffice automation and salesperson performance. But I also wanted to suggest there’s a coming Gen 4 of SaaS leaning heavily into EQ instead of IQ because I truly believe the Future of Work involves understanding emotions not just data.
When friends ask me to reflect on the impact of 2020–21 on startups one of the observations I shared is how dramatically the urgency increased around conversations that were more about culture, behavior and values than just strategy, financing and product. Especially during the second half of last year the convergence of the COVID pandemic, US political race and societal outrage over George Floyd’s murder, resulted in CEOs confronting a host of situations that weren’t on their roadmap.
In some cases these leaders wanted to be proactive in the moment. Other times it was their teams, customers or reporters probing for their POV. And regardless they wanted to be thoughtful, deliberate and consistent in how they, and their companies, engaged. So my conversations with these CEOs wasn’t about pushing my particular opinion on these matters or rushing them into a conclusion, but rather helping them focus what they were hoping to accomplish with their internal and external positions. I’m proud at the range of outcomes since they were honest and authentic, not performative.
Throughout these months one thing became very clear with all the leaders and managers I spoke with — they didn’t have the software tools to engage and understand their teams, their customers and other constituents at a deep emotional level. They had plenty of communication utilities which made conversations virtual but they didn’t have modern tools built with EQ in mind. So you had “Zoom Fatigue” and burnout and HRIS platforms designed for compliance not engagement. Thankfully I knew there were better options in development. How? Because we’d invested in them 🙂
Over the past 12–18 months another theme had started to coalesce in the Homebrew portfolio — Future of Work tools that were built with a combination of IQ *and* EQ. Gatheround in the teambuilding, education and collaboration space; Humu, smartly bridging the gap between strategy and action for your teams; Ethena for modern compliance training and behavior change; and Assembly in the lowcode HRIS market. Ahead of the extraordinary circumstances of the past year and a half, these founders had intuitively sensed and previously experienced the limitations of Generation 1, 2 and 3 tools. And while I don’t think they all agree with this market positioning, to me they represent the next wave we’re going to see in Future of Work tools, designed with tangible and intangible sense of how people are left feeling by the software they use, not just how productive they were. It’s still very early in this cycle but hybrid and remote work is pulling us forward with new types of communication, virtual HQs, and socialization needs. And software that remembers humans are the endpoints.
Why Their Multibillion Dollar Outcome Flipped The Script
Pre-2014: Insider Rounds Are The Funding of Last Resort
Post-2014: Why Are Insiders Letting This One Get Out?
When WhatsApp took $19 billion and joined Facebook, the industry headlines moved quickly from the buyout itself to Sequoia’s masterful funding strategy of the startup. After publicly leading a Series A, the firm put another $50m+ into the startup in two subsequent insider rounds, neither of which were disclosed publicly prior to the acquisition. Collectively a lot of other VCs closed their laptops after reading the news, put on their Patagonia vests and took a brisk walk down Sand Hill Road while wondering how to deal with this new reality.
What was the big change? A firm had led two successive ventures rounds into a portfolio company. And they were Offensive rounds, not Defensive ones!
Up until this point the idea that your previous round’s investors did the funding on your next round was pretty verboten and when it did happen, it was capital of last resort. Like, the startup couldn’t get a new investor to lead around at terms that everyone liked so insiders decided to do the round themselves — writing the termsheet and supplying some to all of the capital. This was typically a signal of company weakness, not strength. And the investors didn’t like to do it because besides the risk of doubling down on a company instead of spreading the risk to other new investors, it meant repricing the company that you had previously invested in. An insider mark was considered to be a less reliable estimate of actual value than a new investor offering to price the round (so LPs looked sideways at it, etc).
To be clear I’m not saying Sequoia/WhatsApp was the very first time inside rounds occurred that ended up benefitting the investors and the company so the VCs reading this can save their DMs to me about how they actually led an insider round prior to 2014. Nor am I suggesting that Sequoia was the first firm to lead multiple rounds for the same startup. But I am saying it was the biggest and baddest example of the game changing. There’s a reason that for a while after the deal, trying to do an inside round was called “pulling a WhatsApp.”
Now in 2021 we have a very different landscape. The larger multistage funds don’t hesitate to lead back-to-back rounds (or in recent cases like a16z/Clubhouse, back-to-back-to-back). And it’s not just a change in norms and increased fund sizes which has supported this transformation, it’s also the Opportunity/Growth fund phenomena.
Now so many multistage firms also have some sort of growth/late stage vehicle it’s also possible to split an investment over time between those funds. Basically you’re doing the Series A and or B out of the core fund and then the C or D out of the growth fund (more of less, round nomenclature across different situations is less consistent than ever). So the risk/reward profile of the earlier investment is in a fund aimed at those bets, and the theoretically less risky, but also lower returning (on a multiple basis) later stage investment is in its appropriate vehicle. This also often means that although you have the same firm leading multiple rounds it’s a different GP — the early GP prices the first round and the growth GP prices the second one. While it’s still under the same umbrella, you can imagine that these two individuals at least serve as a check and balance on each other. If the growth fund GP is simply marking up the deals of her colleague, to her disadvantage in the growth fund’s returns, she’d be working against herself.
There’s a lot of differences between VC 2021 and VC 2001, and the nature of inside rounds is one significant change that I rarely see discussed structurally. But it’s important!