When It’s Over & Helpful Boards[Jared Hecht/GroupMe, Fundera] – Two more great posts from one of my favorite founder bloggers right now. The former is about deciding to sell your company and the emotional journey accompanying the pragmatic one.
After selling groupme I once had a VC tell me he didn’t know if I had the courage to build a great company since we sold so quickly. These stories and interactions compound and create an illusion of the characteristics we are supposed to have and the iconic people we are supposed to emulate.
But fuck that. My take is so long as you always value and treat your team, investors and customers well, you’re okay. And if you can make everyone money along the way all the better. When you know you know.
‘Helpful Boards’ is self-descriptive, and contains many of his own personal experiences with Board members who helped him be a better CEO. Several specific characteristics of good Board members and Board dynamics. I’d suggest any founder with investors on their Board (or who plan to have them later in their startup’s lifecycle) read this one and use it as a discussion piece if needed.
Scott [Feldman] told me during a board meeting that I was going to run the business [Fundera] into the ground and bankrupt it, and that it’s value was approximately jack shit. I hated him for it, but he was just providing honesty and tough love. I learned a lot from that experience, and finally familiarized myself with terms like trailing twelve months revenue and ebitda margins. He had the courage to tell the truth and that changed the trajectory of the business.
The Irreplaceable but Toxic Employee [Jason Lemkin/SaaStr] – My counsel is not to tolerate it. This is different than someone who is prickly or still improving their ‘people skills.’ Jason also recommends against it – relating his own experiences as a CEO – but understands that occasionally it’s a reality, and in those cases, “Sometimes, still hire them. But … only 1 of them. Only 1. And start working on their replacement the day they start.”
[NP]TechCrunch plays a really interesting role in the tech business ecosystem, particularly the startup ecosystem. It is, in many ways, the publication of record for startups. It’s just the most important thing. A lot of coverage in TechCrunch is very trade publication-y; here’s some news that is happening in our industry. And then it also has Disrupt, where there’s a competitive element and showing up on that stage and doing well is really important.
How do you balance TechCrunch’s role? Because that always felt very difficult to do standalone journalism but then also be so deeply enmeshed in the industry as one of its most important elements.
[MP] One of my pithy sayings, which my writers will probably groan if they listen to this podcast — which I don’t advise they do, they’ve heard all this before — but one of my pithy sayings is that TechCrunch needs to stand close enough to the fire to feel the heat but not close enough to be hypnotized by the flames.
According to the laws of aerodynamics a bumblebee shouldn’t be able to fly, but no one told it, so it does. This oft-repeated fact is, well, absolutely incorrect, but serves as a nice metaphor for ambitious startups. Probabilities suggest they should fail, but, hey, why not succeed? And experiencing an outlier company – as a founder, as a team member, as an investor – is an absolutely incomparable professional thrill. People love to tell these stories and share lessons learned. But what happens when startups fall short of these milestones. What happen when they fail?
Well, they shut down and that’s a natural part of the ecosystem we have in tech. Hopefully it was a ‘smart failure’ [good idea, interesting product, ambitious team], which isn’t less painful in the moment but does allow its participants to accrue some knowledge and relationships to increase the probability next time around. For a venture capitalist failure is part of our job in ways both abstract and material. You know that a portfolio will include a number of wonderful people who didn’t get to work on their company for as long as they hoped. And you try to change the odds for the companies you back – we describe Homebrew sometimes as a force multiplier which tries to increase the probability and velocity of your success – even if the combined best efforts don’t guarantee outcomes. So we put some work into those as well, helping the teams move forward.
Part of that is mechanical, and a few years back we published “Winding Down Your Company” as part of Homebrew’s resource library. But lately I’ve heard stories from friends of wind downs which fell short of some other considerations, so wanted to make a case for a few constituencies beyond founders and creditors/investors who are typically prioritized in these discussions. This isn’t a purity test – I’ve been a party to processes which fell short of these goals.
When a startup fails you should also care about:
A. Team. Duh. But beyond whatever can be done with cash on hand to provide a severance, or other softer benefits, a healthy wind down will accomplish two other goals: it’ll keep the employee interested in working at startups going forward, and second, it’ll preserve the relationship between the founders and their team. The former matters to me because we rely upon the crazy true believers who repeatedly want to work on early stage startups, and I don’t want to burn them. The latter matter to me as one of the final things we can do for CEOs – and I’m 10x more likely to push for this when it’s a leader who has sacrificed for the team repeatedly, operated the whole time in good faith, and so on. I want their reputation to be strengthened by how they handled the wind down.
B. SMB Accounts Payable. Goodness do I cringe when I read that some startup closed and screwed a bunch of small business owners who won’t be able to recover money owed to them. Startup risks pushed to populations who aren’t aware or prepared to take on those risks is a blind spot of our ‘software eats the world’ phase. Because of venture funding models startups are often able to push risk on to suppliers faster than say, a cash flow constrained customer might. I’m thinking about the examples of a “deliver meals to the office” business that flames out and owes hundreds of thousands of dollars to suppliers. What also sucks is that you’re making it harder on the next startup which pitches those same SMBs if they’ve been burned multiple times before. There’s not a magic wand here but my hope is that we approach these issues ethically in addition to legally.
C. Patients aka Customers. I’ve written before about the specific care which needs to be given to patients of mental health, addiction recovery, and other health care startups. When your startup disappears those folks get kicked to the curb if there isn’t an orderly handoff to another provider and/or enough notice before service disruption.
I’ve got so much respect and admiration for the founders and teams who build companies. It’s a privilege and a joy to spend my days working in support of them. Since we intend to do it for the rest of our lives, it means I’ll be around failure for decades more. And I wouldn’t have it any other way, but just as we can Build Better, we can also Fail Better, which means accounting for the impact beyond the largest shareholders.
Do you know the parable of the Blind Men and the Elephant? The lessons of one’s subjective truth being espoused as an absolute one based on their own experiences carries beyond zoology. So when I tell you what I’m seeing in venture financing these days if you disagree with me, it might just be that we’re touching different parts of the elephant.
Like parenting a toddler coming off a sugar high, the last 18 months of startup activity has been marked largely by tears, shrieks, and occasional throwing of toys. And while I’m quite optimistic about the coming years, we’re not yet through the pain for many existing companies navigating the transition from a hypergrowth market to one which rewards a different style of operating. Haystack’s Semil Shah wrote up his POV on what this has all meant for the seed market and one point in particular caught my eye. Semil asserts,
Seed-stage valuations have generally been left-unchanged, and I could argue even they’ve gone up since the beginning of 2022. Looking back now, it makes sense – VC firms have lots of dry powder, and while they may have slowed down relative to 2021, they’re still making investments. Early-stage is perhaps a more attractive stage to deploy smaller dollars these days – a friend remarked everyone wants to gamble, but no one wants to sit at the whale tables just yet.
I think he and I are touching the same region, but different parts, of the elephant, so here’s where we differ (and all of this is “AI Startups excepted” obviously).
A. Valuations for the Top Decile of Seed Startups Have Fallen Less YoY While the Second Decile Have Been Hit Harder. I’m defining Top 10% and Second 10% as “degree to which their founders, markets, and milestones pattern-match for the average seed investor.” This is obviously imperfect and to truly segment quality would take 10+ years. But think of this as equivalent to average salary of Top 10 picks in the NBA draft vs picks 11-20. I’m saying that 11-20 were hit harder by the downturn where as before they were often evaluated similarly by the venture community and rewarded commensurately. Whereas at peak of the boom, picks 1-20 were often raising the same (or substantially similar) rounds.
Why are the Top 10% less impacted? Well, the obvious reason is they look like better risk/reward opportunities, but I think it’s also because generally the better brand name firms are doing the Top 10% deals. They have stable capital bases, care less about the difference between a few hundred thousand dollars in entry price, and so on. So to continue my NBA example, let’s say you basically only had Big Market Teams making the top draft picks – salaries would be higher right because they could pay more (no player salary cap in venture 🙂 ).
Reminder: I’m not saying the Top 10% of seed startups are, startup for startup, better than the Next 10% – that gets figured out later.
B. It’s Changing Venture Portfolio Models Towards Concentration, Not Just Dry Powder/Gambling. Gotta own enough of your winners. Nothing is more true in venture but this math got a bit perverted during ZIRP. When $20B outcomes occur everyone on the cap table eats well. When it’s $2B, you better have gotten your ownership. It’s just math. Funds, especially new ones, who believed otherwise are now preaching greater ‘concentration’ and at seed, this creates a floor on valuations. Why? Because you start to care more about basis points than the cost to get those basis points. In order to get your 5%, 10%, 15% target you’re willing to increase round size and valuation a bit to make the math work for the founders and any other investors they want to include.
Curious what part of the seed market elephant you’ve been touching and where you agree/disagree
How Pop Stars Turned NPR’s ‘Tiny Desk’ Into Authenticity Theater [Adlan Jackson/New York Times] – As Stefon might say, music’s hottest club is called Tiny Desk. And it has everything. Gwar, Taylor Swift, Juvenile. NPR’s Tiny Desk has always been wonderful across its 15 years, but is having a specific post-pandemic resurgence driven by some amazingly eclectic performers and, in my opinVC ion, the glee of seeing lots of people packed into a small space.
Chile’s Shantytowns Are a Last Resort — and Growing Fast [Eduardo Thomson/Bloomberg] – Historically sitting here in the US we’d expect to read stories like this about places distant from our own country. And while Thomson’s article discusses Chile, I do wonder if we’re likely to see more of this globally, including domestically. It’s an extension of the semi-permanent tent cities and car/RV/trailer parking hubs. A cocktail of climate change, inequality, rising housing costs and over-regulation preventing new builds ends up with clusters of people seeking some sort of shelter and community.
These tomas are growing at a dizzying rate all around Chile. A dearth of affordable housing, unemployment, migratory waves, and even discrimination, are leaving many without better options. The number of families living in shantytowns jumped 39% between 2020 and 2021, to almost 114,000, according to the latest from housing nonprofit Techo Chile.
VC (Probably) Isn’t Right For You [Chris Neumann/Panache Ventures] – Find me someone who can perfectly discern at a company’s beginning whether it’s ‘right’ for venture capital, and I’ll show you the world’s most successful investor. So while Chris’ premise is 100% accurate, it’s also often true only in hindsight for many companies. His real call-to-action here though is to help entrepreneurs know there are other sources of capital/models for building out there which aren’t VC-dependent. That I can get behind. I also believe our industry could improve the ways we help a company get off the venture curve if it turns out that they’re not going to succeed, but that’s a more complicated topic.
Jimmy Buffett, 1946 – 2023 [NYTimes Obituary] – My first tattoo came in 1991. A parrot on the inside of my left ankle. A parrot in reference to Jimmy Buffett’s fandom, and the interior because it was for me, not for others. My onramp to Margaritaville came in the 1980s as a pre-teen, my best friend’s lawless uncle playing us Songs You Know By Heart in his convertible. Jimmy had a smaller fan community those days – so small that when his albums first started being reissued on compact disc they needed to put TWO on a single disc in order to incentivize purchase – but we two joined it quickly. What followed were several decades of concerts, Buffett-inspired adventures, and even a few encounters with the man himself. Thank You Jimmy 🫡🦜
I judge the health of the creator economy by one single controversial factor: ease of access and probability of survival for its participants. That is, if you are someone who wishes to earn a minimum viable living being creative, what is the likelihood you’ll be able to do so? A singer who wants to sing. An animator who wants to draw. A comedy troupe who wants to make you laugh. A writer who wants to blog about culture. With the question – can I figure out how to make enough money to keep doing this?
My bold statement is that there has never been a better time for Creators by that objective function. I absolutely concur that if you want to maximize around other objectives, or examine particular types of creative industries, you might disagree with me. For sure there were periods where smaller groups of participants had better lifestyles, more stable employment, increased societal influence, or a less demanding fandom. But all of these moments were based on artificial scarcity and cultural gatekeeping. It might be harder than ever to earn $1 million/year as a creative but it’s never been easier to make $50,000.
Software and technology in general has driven down the cost of most creativity and powerful tools are in the hands of more than 1 billion human beings.
Creativity is happening within communities and platforms which bring together distribution and collaboration.
And you can directly and indirectly monetize your creativity in a myriad of ways.
Put in another way, my framework for the Creator Economy is that there are three broad areas of value
Create: Tools that help people be creative and touch the production process in some manner
Distribute: Tools which help people find, growth, interact with, understand their audience/community/fans
Monetize: Tools which help people make money from their creative outputs
I am not saying it’s easy. I’m not saying it’s fair. I’m not saying it’s without tradeoffs. I’m not saying everyone will (or deserves to) succeed. But it has never, ever been a better time to try if you’re willing to commit. My earliest encounters with a personal computer, initial uses for the Internet, and 12+ years of product work [Second Life, AdSense, YouTube], were all driven by the conviction that everyone deserves the chance to be creative. And that the world benefits when little stands in between creator and audience.
But if I’m so optimistic about the world of Creators, what’s going on with the startups formed over the last few years to help this market succeed – why are so many struggling? I’d been thinking about this post for a while, waiting to get to it at some point, but nice essays from Mike Mignano [LSVP], Andrew Chen [a16z] and Kaya Yurieff [The Information] brought my hands to keyboard.
Mike, who we backed when he started podcast creation platform Anchor, wrote last year about what he calls the “Creativity Supply Chain” – how basically the market for Creativity is really much much larger than how we originally defined the Creator Economy, which became overly focused on Influencers and social platforms. I agree!
Kaya covers “How Influencers Dodged the Destruction in Creator Startups” and notes “times are grim for startups that sell products and services to creators. Some are folding, while others can’t pivot their businesses away from the creator economy fast enough. The creators themselves, however, are proving to be far more resilient.”
The two posts pair nicely and I generally agree with the snapshots. However, I wanted to add a few of my own observations to Andrew’s hypotheses.
1) The Creator Economy as an Investable Concept was ZIRP Accelerated. Too Much Capital Too Fast.
Handful of temporal factors turbo’ed the amount of dollars and number of startups in the Creator Economy space.
i. COVID – lots of attention focused online, via social platforms, waiting to engage/be entertained/informed/etc by online creators
ii. Velocity of venture dollars deployed increased because of ZIRP
iii. Lots of new VCs (both new funds and new hires at existing firms). Do these folks want to be the 100th investor chasing SaaS or do they want to define/invent new categories where they can be the thought leaders? So there’s a little bit of fake it until you make it, where the incentives are to find white space to invest in. It’s almost always good faith just a byproduct of incentives and competition.
iv. Lots of founders with ‘relevant’ experience – FB, IG, YouTube, Snap, etc shedding talent and this CV is a credible pattern matching checkbox for VCs who assume these founders have the depth, insight, and relationships to build in this market. There also weren’t a lot of novel ‘consumer startups’ being built in non-gaming areas, so Creator Economy was attractive to folks who didn’t want to work in B2B.
v. Crypto speculation made NFTs, altcoins, etc all seem like viable mechanisms for creatives to scale
Prediction for Next Wave of Startups: Optimistic! Sometimes the best companies get started when a market is out of favor, vs overheated. Today’s founders got to see a bunch of experiments run on other people’s time and dollars!
2) “Creators” Are Not a Single Customer Segment
“Freelancers,” “SMBs,” “Creators” – these are all examples of broad categories which can span too broad a variety of personas, needs, geographies, and so on, to really be targetable by a product wedge. Of course there are some needs which can cuts across a significant number of segments, but it’s nuanced and you need to pick an initial customer base that’s big enough to be meaningful but specific enough in the job to be done. Too many Creator Economy startups targeted overly broadly (“Influencers”) or overly narrow (“sports coaches want to create video”) ICPs.
Prediction for Next Wave of Startups: More startups that build for defined, but not yet venture scale, markets. And then only raise VC once they can (or want to) jump from that profitable first customer to a broader goal.
3) Creators Might Each Have 1000 True Fans, But There’s Overlap and Cannibalization Across Creators
Many CE startups were running on the hypothesis of 1000 True Fans, basically the notion that minimum viable success comes from a Creator finding the 1000 folks who like them the most and figuring out how to monetize this group to its fullest level. This is what allows CE growth spreadsheets to imagine a Creator Economy that even if it followed power laws, would still produce a very valuable long tail. There turned out to be two problems in relying upon this theory as ‘a given’ for your startup.
Cannibalization and Competition Among Creators. If the CE was going through a venture-fueled hypergrowth phase it caused a speedrun of 10x, 100x more creators asking for your dollars to buy their merch, subscribe to their newsletter, tip their livestream, etc. Most consumers are True Fans for more than one creator/interest and also have a fixed budget to spend on content and entertainment (whether it’s predefined or more just a sense of ‘spending too much/what can I afford this month). So getting to your 1000 True Fans meant not just finding 1000 people but 1000 people who could afford what you were selling and preferred you ongoing to all the other Creators competing for their attention and dollars. Hence, conversion rates and retention fall over time.
Global Fandom. Although it’s much easier to be Day One Global for a startup versus years ago, most still can’t take on the infrastructure, legal, and system integration hurdles to serve international creators and/or consumers right off the bat. This adds another friction in finding a Creator’s 1000 True Fans – your business model relies on those Creators and their 1000 customers being in geos you can service and monetize (while also recognizing that not all regions are as valuable from a currency standpoint if your Creators are in US).
Prediction for Next Wave of Startups: More advanced approached to customer CRM/lifecycle management + better content windowing/price segmentation to help you segment and serve 100 Rabid Fans + 1000 True Fans + 10000 Casual Fans + 100000 One Offs.
4) Most Creator Economy Startups Aren’t Greedy Enough
Margin. It’s hard to create a big business on small margins and low take rates. Too many of the CE startups started with sub 20% take rates or venture-subsidized subscription prices. I get it – you want to get to scale first, don’t want to be greedy and reach into Creator pockets. But it’s really tough to get your P&L rightsized this way.
Even more essential (and subtle), I really believe your margin is your mindset! Think of it this way – how much value would you have to create for a Creator in order to justify taking 25% – 50% of a transaction instead of 5%? A lot of value! And it totally resets how you think about a minimum viable product offering or what success can be. If during the seed phase more CE startups solved for the value proposition question *before* getting on the growth curve I believe we’d see (a) fewer move on to the Series A funding phase but (b) the survivors be stronger, better companies.
Prediction for Next Wave of Startups: Higher take rates 🙂
so TLDR: I worked in the Creator Economy since before it was named, believe in the creativity of human beings (whether it’s economically motivated or just for expression), and want to see more products built for Creators. Many of these will originate from within the communities themselves rather than be originated solely by venture-backed entrepreneurs so you can’t judge the ‘health’ of the Creator Economy just by VC funding statistics.
Holiday weekend here in the US means links for you to read
Playing Different (Stupider) Games The Other End Of The Valuation Stick [Kyle Harrison, Contrary Capital] – Kyle puts out a new essay (almost) every Saturday and I really enjoy his consistent and clear eyed POV on venture capital. There’s a group of us who I describe as “in the industry but not of the industry,” in the sense that we understand and embrace the jobs we have but don’t put everything about venture on to a precious pedestal. Here he blends some separate observations about Tiger, AI, Chamath to be what I’d call, tangibly philosophical:
“In the world of building and investing in companies, there are a LOT of different games at play. The only way to avoid finding yourself playing a stupider game is to look around and understand the games that everyone else is playing. And adjust accordingly.”
What Happens to All the Stuff We Return [David Owen/New Yorker Magazine] – How online shopping and reverse logistics tilted a bunch of assumptions about returns (and costs of return policies) on their heads. I love the intricate specialization of different supply chain nodes – the people who just route goods to resellers; the ones who repair and sell; the ones who ‘recycle’ (which is basically bullshit – not much gets reclaimed/reused). Some brilliant anecdotes such as:
Three years ago, the producers of a Canadian television show called “Marketplace” ordered boots, diapers, a toy train, a coffee maker, a printer, and several other items from Amazon Canada. They concealed a G.P.S. tracking device inside each one, then returned everything and monitored what happened next. Some of the items travelled hundreds of miles in trucks, with intermediate stops at warehouses and liquidation centers, ultimate disposition unknown. A brand-new women’s backpack ended up in a waste-processing center, en route to a landfill. The show included a surreptitiously recorded conversation with an employee of a “product-destruction” facility, who described receiving truckload after truckload of Amazon returns and shredding everything—ostensibly for recycling, although the recoverable content of a chewed-up random selection of consumer goods is not high.
AI startups: Sell work, not software [Sarah Tavel/Benchmark] – Like many of us Sarah writes in spurts, so I’m always excited when there’s a burst of stuff from her. Here’s a brief smart take on thinking about what you’re actually selling as an AI startup (really as any B2B SaaS startup I’d say): “To do this, rather than sell software to improve an end-user’s productivity, founders should consider what it would look like to sell the workitself.”
A compelling case to join you consists of two things:
Proof that the idea or product itself will work, and, maybe more importantly:
Validation of you, yourself! — as a person who can ship this, even without waiting for a magic coder person to help. You’re going to be successful bringing this idea to life, no matter what.
Taylor continues with more practical detailed advice and of course a call to action.
“So, my main takeaway for nontechnical founders: Don’t wait. Start that iteration cycle now, and someone will inevitably be excited to join you when it starts working.”
This is my main observation between non-engineer founders who actually gain momentum vs those who don’t. The former start the work. The latter imagine the work can only start once they find a cofounder.
