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 different 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.
“You both have context for this introduction, so I’ll let you two take it from here! I know you’ll really enjoy chatting.” That was the email one of Ethena’s founders sent to me and Melanie Naranjo on 8/21/21, a bit over two years ago. At the time Melania was in discussions with Ethena about joining the startup as VP People, happily employed at a larger company but knowing she wanted new challenges. I’d been an investor in Ethena since its first funding so had enough history on where they’d been – and where they were going – to help give Melanie more context. I’m glad she agreed it was the right role – both her responsibilities and the company (a leader in the compliance training space) have grown quickly in the time since. So here are Five Questions with Melanie Naranjo.
Hunter Walk: One of my favorite things to do for founders is speaking with people who are considering joining their startup. And I was fortunate enough to have this opportunity with you, in August 2021, as you were evaluating the opportunity at Ethena. What were the final things on your mind before joining, and how soon after you started did you feel like the decision was validated as being a good one?
Melanie Naranjo: For me, two of the most important things I need to feel excited about a job are: 1. Knowing that I’m working at a place where everyone is equally passionate about doing great work and helping the company succeed, and 2. Knowing that I don’t have to waste time trying to convince anyone about the value of the People function.
I remember when Ethena first reached out to me because I was immediately excited about the fact that they were in the HR tech space. The idea of working at a company whose entire business model revolves around catering to buyers in the HR space felt like such a breath of fresh air. Because the sad reality is: At most companies, the People function is still seen as a nice-to-have at best, and a nuisance at worst.
But at a company like Ethena, whose company mission statement is literally to build more inclusive and ethical workplaces, I felt hopeful that my role and the People function as a whole would be seen for the strategic superpower they actually are. And as I was making my final decision about whether or not to join Ethena, my greatest priority was making sure I would be joining a company with a shared perspective on the value of the People function: I wanted to join a company where I’d be set up and empowered for success, where my voice would be valued, and where the leadership team cared just as much about the company’s People strategy as I did.
And I can say in all honesty that this became pretty darn evident almost immediately. The leadership team had dedicated the time to put together a list of People initiatives they wanted my support on, they took the time to answer my questions and solicit my advice, and even more impressively: The leadership team had already been so bought into the power of investing in effective People strategies that they had already set up the kind of infrastructure most People leaders have to fight tooth and nail for before I even joined: executive group coaching, recurring company-wide learning sessions, Feedback Fridays (which every company should really be doing), and so much more.
Honestly, I can’t say enough about how thoroughly Ethena knocked my socks off when I joined the team (and how incredibly grateful I am that I made the decision to join).
HW: Your role as VP, People combined a number of different responsibilities – some of them more market-facing than the traditional person in your seat. For a second though I want to focus on the internal aspect of the job. Some people claim ‘culture and employee engagement’ are luxuries you can focus on in good times but during market downturns they should be subjugated to business KPIs. I’m going to assume you disagree with this but how do you manage through a changing environment and try to keep a team steady during a business cycle like the one we’ve experienced over the last year?
MN: I think where most people go wrong during times of difficulty is to try and shield their employees from the truth — especially when it can feel scary. There’s often a fear that employees won’t be able to handle difficult news or will immediately jump to false conclusions, jump ship, panic, etc.
In my opinion, though, most employers don’t give their employees enough credit. Employees are smart, and if you treat them like adults and communicate with clarity, context, and straightforward honesty, chances are pretty high that they’ll get it.
A perfect example of this is the topic of pay transparency. So many employers thought a world with pay transparency was impossible. They worried no candidate would ever accept a compensation package that wasn’t top of band.
Now that pay transparency has been enforced in several states, we’ve seen that — surprise, surprise — that just hasn’t been the case. All candidates and employees ever really wanted was enough information to feel confident in the fact that they’re being fairly compensated for their role.
Tying it back to your original question: The same applies during difficult times.
The more you try to shield your employees (i.e. employing toxic positivity, downplaying potential risks, never talking about the elephant in the room, etc), the less your employees will trust you when you speak. Employees aren’t dumb. They can see what’s going on in the company, and they can see what’s going on in the world. If you never address the reality, they’ll be forced to fill in the blanks with their own (oftentimes exacerbated) assumptions.
The flipside, of course, is that the more transparent and direct you are with your employees, the more they’ll trust you to tell them the truth (even when it’s tough), the more reassured they’ll feel that you are actively monitoring the situation, and the more empowered they’ll be to partner with you on the solution.
And let’s be clear: The term “culture and employee engagement” doesn’t mean “Happy Hours” and “Pizza Parties.” Sure, Happy Hours and pizza parties can be an element of your company culture. But what employee engagement actually means is an environment in which your employees are excited about helping the company succeed. That’s it. Engaged employees want to be a part of the company’s success. Disengaged employees couldn’t care less.
So if you want to make sure you’re prioritizing a culture of engagement during difficult times — and you really should — start by making sure you’re empowering your employees with the information they need to be a part of the solution.
HW: I’m always surprised when someone considering ‘joining a startup’ has put a lot of thought into industry/vertical but not into stage of company. For example, in many ways seed stage companies across different industries are more similar than two companies within the same vertical but one new and one more mature. When you’re hiring at Ethena, how do you assess whether a candidate is stage-appropriate?
MN: This is such a great question, and an area that I don’t think gets enough attention. In particular because the company you are today — especially if you’re a fast growing startup — is not the company you’re going to be one year from now.
Which means you shouldn’t just hire for the person you need today, but rather, for the person you’re going to need 6 months, 12 months, and 18 months from now.
At Ethena, we do this by evaluating for the skills and qualities it would take to stretch and grow not just within the role, but alongside the company’s own growth. We look for employees who are adaptable, who are eager to take on new and unexpected challenges, and who are — to use an admittedly overused term — happy to roll up their sleeves right alongside everyone else: low ego, high humility.
The other thing we make sure to incorporate is a whole lot of transparency around the current team structure and the reality of what a day-in-the-life of the job would look like, including the not-so-fun stuff.
Most companies spend too much time trying to woo candidates on the shiny aspects of the role and not enough time being upfront about the challenges that will come with the role. They optimize for winning over the shiniest looking candidate vs weeding out potential mismatches.
In my opinion, this is a hugely risky move. The most impressive candidate on paper isn’t always the best candidate for the job. To your point, if you’re an early stage startup and you hire someone who’s used to working at a larger, more corporate company, someone who’s used to having a whole team of do-ers under them, it doesn’t matter how experienced they are or how shiny their resume looks: You’re going to run into a heck of a lot of issues as soon as you realize they haven’t had to “do” in a long time and aren’t able to function as a team of one.
HW: Ethena delivers modern compliance training, delivered via software which allows for all sorts of improvements on the ‘guy with a slide deck’ model from 10 years ago. The first product was around Harassment Prevention. Isn’t this a really dynamic topic – how do you stay on top of changing norms, new situations? Like in a remote/hybrid workplace I assume there are a host of different questions raised? How are you finding Ethena customers evolving with, and adapting to, changing work environments?
MN: This question makes me especially excited because we have incredibly engaged — and I mean, impressively so — customers.
The reality is, when you think about Harassment Prevention training, you don’t typically think: engaged learners. You think about a bunch of heavy sighs and eye rolling while employees are forced to take a training that looks like it was recorded in the 90s and doesn’t actually serve any other purpose except to “check the box” saying that employees have taken their state-required training.
With Ethena’s training, though, employees are actually engaged. Not only do they take the time to rate our training (holding steady at an impressive 93% positivity rating from nearly 1 million learners), they also take the time to give us feedback. They share which modules resonated with them most, and what they think could make the training even better. And because the employees are actually paying attention to and learning from the content, they’re passing that information along to their People teams, too, who then share even more feedback with our Customer Success team at Ethena.
This is critical to our continued success because we’re hearing directly from the people interacting with and leveraging our product. We’re hearing firsthand from our customers about the impact and relevance of our training in their day-to-day work.
Combined with our team of expert advisors across the compliance space and quarterly reviews of our training content, we’ve been incredibly successful at keeping our content relevant by adapting to the ever-evolving shifts in: employment law, workplace norms, and cultural landscape. We’ve even branched into new areas of the compliance space — such as Anonymous Reporting and Case Management — as a direct result of customer feedback as they look to consolidate all their compliance needs under one provider.
HW: Any pieces of advice you got from mentors in the past that you want to share and pay forward here?
MN: Optimize for experimentation, not perfection. Try new things. Take bold (but calculated) risks. You’ll learn so much faster and grow so much further, and most importantly: Every day at work will feel like a fun, new adventure.
Thanks Melanie for sharing some advice with me/us. Follow her here for updates on free online trainings and discussions she runs on leadership, people and culture, etc.
I love talking to folks with expertise in areas where I’m more basic. Years ago when Philz Coffee started expanding from a single shop into a multi-storefront, multi-city business I found myself in a chat with their CEO Jacob Jaber. Fortunately he was game to answer a bunch of my questions about the coffee biz (I’m a bit of a fan) with depth and patience. One of them really stuck with me as a framework to understand urban development.
Philz was opening a handful of new stores in quick succession around SF and I asked Jacob a version of the following: I know site selection is a science unto itself but explain it to me in a simple way. His answer was super interesting, and I’ll paraphrase it here. Neighborhoods have three use cases – Live, Play, Work – and so long as two of them exist, it can support a Philz. So for example, if it’s just a Live neighborhood (maybe a suburban town without a big commercial district and residents commute out of the town to work), isn’t an A+ option. Same thing if it’s *just* work – no Live or Play – probably great during early morning commute but can that location support afternoons/evenings/weekends? We then ran through a bunch of Philz locations and he shared his POV on their Live, Play, Work characteristics. Made perfect sense!
Fast-forward to San Francisco 2023, which is basically 25 years in the Bay for me and almost 30 for my wife. A lot has changed in our little city, especially over the last few years. And I’m very supportive of groups like GrowSF working hard to evolve us in a positive direction. But the easiest way for me to describe us right now is harkening back to Jacob’s framework. And it goes something like this:
“During the pandemic a lot changed with regards to how people use spaces, and for a variety of reasons, it’s not snapping back in SF to the way it was before, nor should we expect it do so fully. Neighborhoods that anchored around Work and Live or Work and Play (FiDi, SoMa in particular) are really feeling abandoned because of changes in office space usage. So we need to think really aggressively about how to get those back to at least two of the three attributes in some level of density. On the other hand, neighborhoods that were primarily Live or Live and Play actually have gotten even more interesting as a result of WFH/remote/hybrid. Fillmore/Divis/PacHeights, Hayes Valley, Noe Valley, West Portal, Union Street, Presidio are all as active as they’ve been since I moved here.”
Obviously there are longer discussions to be had about quality of life issues, rise of YIMBY and so on (like I said, GrowSF), but Live Work Play is the lens through which I understand my city.
What’s the most important goal for the money a startup spends? If I asked this question to a bunch of different founders and investors I bet the answers would vary. Some would shout one word like “revenue,” “customers,” “team” or even “profitability.” Others might give me formulas like, “LTV:CAC ratio” or “burn multiple of 1.0 or better.” That’s not what I’m hoping to hear. My point of view isn’t that any of these are wrong per se, and certainly there’s nuance based on type of company, stage of growth and so on, but we often forget one very specific outcome that umbrellas some of these other responses: to increase enterprise value. Startups spend a $1 to ultimately try and create more than $1 of company. If you do that repeatedly and efficiently we will all make money together. If you fail to do this reliably then any positive outcomes are more about luck and timing than durability.
Once the markets started crashing in 2022 there was a swift swerve towards “just stay alive” and having enough capital on hand to make it through a downturn. Cutting burn, topping off funding rounds, optimizing pricing — there were many levers to pull. Now a year later, still in a lull but I believe with more evidence that macro economy has stabilized (although there’s the lagging indicator of startup closures), there’s less generalized advice and more company-specific work to be done. Picture an armada of ships that went through a storm and evaluating which need repairs, which should be scuttled, and which have gained momentum, versus making broad statements about the condition of the entire fleet.
A year ago I emphasized that David Sacks was correct about ‘default alive’ being a terrible true north to maintain. Now, in 2023, I’m coming for startups where that is still the overarching strategy; ones who have more capital than hope. What’s a major indication that a company is still operating with simply a ‘default alive’ mindset? Their investor updates lead with cash on hand and months until cash out as the top line KPI.
If you interpret that last sentence as “Hunter doesn’t care about burn rate” or “VC thinks founders should be spending whatever they need to grow” you’re incorrect. I care very much about both. But what I ultimately care about is that you are playing out a specific strategic bet right now. In the best case one which confidently gets you to a next funding milestone or profitability. In the next best case, one which we all agree is an intermediary set of goals which at the very least increases your optionality and likely enterprise value. I’ve got several companies in that camp right now. We don’t know yet whether the plan of record will get them fully to a next round *but* we do collectively believe that spending a portion of the cash on hand over the coming quarters can get them to customer and revenue milestones that result in increased enterprise value. That reaching, say 100+ customers and $5m+ ARR, make them a more attractive acquisition target than they would be today if we transacted the startup. And so spending $3m of the cash on hand to see if they can get there is a worthwhile goal for common and preferred shareholders.
In the other category, if you’re a company that has more cash than strategy; has more capital than momentum. Boy, let me tell you, your investors are likely either already talking with you about landing the plane or will be having that conversation shortly. There is no good reason for a company to just keep existing in the hope that something magical will happen in the future. It’s not worth the time of your team, your executive leadership, or your investors. My job is to redeploy that capital elsewhere it can get a return. Maybe even in your next company when you’re ready.
There are most certainly ways to resolve these types of situations which are fair, respectful, and balanced. That deserves a separate blog post. For now though, the quicker you can make sure your team and your investors are all aligned behind a “spend X to generate something greater than X” strategy, the more likely you are to produce an outcome which rewards your time and hard work as a founder. Which should always be our collective goal. And if there’s not agreement about where the capital is going, don’t assume it will necessarily remain in your bank account.
Investing in someone is primarily a business relationship. It doesn’t mean you don’t develop a personal affinity – it’s best when you do! – but creating an enduring bond transcends the question of founder:VC dynamics and is often not even directly correlated with economic outcome. Our participation in Anchor (later acquired by Spotify) generated both a return and a friendship between us and the founders. Specifically I’ve had the chance to spend meaningful time over the years with Michael Mignano as he went from startup CEO to Executive/Angel Investor and now VC Partner at Lightspeed. Our conversations are always enjoyable, spanning tech, parenting and culture, so I decided to ask him Five Questions here.
I can vouch for his genuine optimism
Hunter Walk: You got to work with a number of different VCs on your cap table for Anchor. Who was the best one and why was it Homebrew? Seriously though, were there things you saw as a founder – or an angel investor in other people’s companies – that informed your own approach to venture now?
Michael Mignano: Throughout my time building Anchor, I met and pitched many, many VCs. And I think if you were to look at all of those interactions and score them on quality of the “user experience”, the majority (but not all) would probably qualify as poor UX. I don’t think this will surprise anyone. On the flipside, there were absolutely a number of investors I met with, including the ones with whom we ended up working very closely, which were phenomenal!
Ironically (or perhaps not), I believe the qualities of those investors overlap quite a bit with the qualities of great founders: speed, conviction, authenticity, respect and directness in communication, clarity of thought, human connection, empathy. And so those are the investors I’ve tried to emulate. Of course, I don’t always get it right, but I’m trying. I’ve basically tried to take my “founder brain” and just flip the goal to investing and helping, not building a company.
Again, I get it wrong sometimes and now, being on the other side, I see how high volume this job can be at times. And so I do have a bit of empathy for the investors whom I considered “bad UX” back then. At the same time, like most things in life, if you put in a little effort and you stick to your principles, I think it’s totally possible to make sure that when founders walk away from their interactions with you – whether you lean in or pass – that they have a good feeling about how they were treated. So that’s what I’m trying to do.
HW: As your start date was approaching you asked me whether I thought it was a positive or negative to begin a venture career during a downturn. Do you remember what I told you? Was I right? [note, for a variety of reasons I told Mike that I thought it was a positive for him]
MM: I was very excited by your advice on this topic. As a startup founder, you get into this default mode of moving really fast all the time and making quick decisions. And that was definitely who I was during the Anchor days. But then, after spending a few years at Spotify, I grew to appreciate the more thoughtful, strategic approach embedded into the culture of that company.
My boss, Gustav Soderstrom (Spotify’s President and CPO) always used to say, “talk is cheap, so we should talk a lot.” What he meant was that it was far more expensive to move too fast, make a mistake, and spend months building the wrong thing. So instead, we should spend the time to think, talk, and align as a team before kicking off something critically important for the company. I was hoping your advice would be right because it would mean that my partners and I would get to think strategically and not just be in “react mode” at all times.
To answer your question: you were mostly right. I was angel investing a lot during the FOMO era and it was just insane; it doesn’t feel like that anymore. However, I think neither of us had any idea that a few months later, AI would explode in the way it has.
HW: So I have this theory about one contributing factor to why you sold Anchor to Spotify when you did. To be clear, I understand and believe it was a great decision – you got to continue the mission at an industry leader with very good deal terms relative to what could have happened given the market in general and podcasting economics specifically. At the same time I do tend to think people potentially overestimate the challenges of things they haven’t done before while feeling perfectly confident playing to their strengths.
Pre-revenue when Anchor was “just” a product company you were all brilliant iterators and relentless explorers. When Anchor needed to become a business was when you sold. And my armchair psychology was because you and Nir had not previously built an ad/sponsorship/commerce business at scale the risk in getting it right seemed very high. Whereas if say one of you came from AdSense at Google, you might have been like, yeah this is tough but I’ve done it once already, let’s role. Am I directionally right or am I projecting my own issues?
MM: The risk of getting the ad platform right was not our chief concern; we were concerned about other risks, one in particular which I’ll touch on below. However, in addition to the risks, there were also just so many positives about teaming up with Spotify. That combination made it a no-brainer for us. Here were the main contributing factors:
1. No one was poised to invest in (and win) podcasting like Spotify. Apple had made it clear to us through many prior conversations that they were never going to take the medium that seriously (beyond yearly incremental updates to the Apple Podcasts app). And other platforms’ strategies seemed directionally pointed at exclusive content, not building platforms. Spotify’s plan was much bigger than that. It was more along the lines of “win podcasting by any means necessary, including both content *and* platform strategies.” Anchor’s mission was to democratize audio. We felt that to do that, we needed to both enable everyone on the planet to make a podcast while also innovating on the actual consumption format. There was no question that Spotify was our best chance to do that, even more than staying independent. We had all the creators, they had all the listeners. It was a match made in podcast heaven.
2. While there was a minor concern about the ads risk (per your question), we felt there was more meaningful platform risk to the future of the Anchor product offering. More specifically: while we believed Spotify to have greater upside, Apple Podcasts was the clear dominant listening platform at the time, and we relied on distributing to both platforms to deliver value to our creators. However, Apple had repeatedly threatened to cut off our distribution (despite our many attempts to partner with them), and their threats had grown more immediate and credible. We felt that if Apple cut off our distribution to Apple Podcasts, the value of the Anchor offering would be greatly diminished. This was a much bigger risk to the business than landing the ad platform, and it was very much top of mind for us when we sold.
3. Let’s face it: a bird in the hand is worth a lot. When we considered the offer by Spotify, it was clear that it would absolutely be a big win for our users, the entire Anchor team, our investors, my cofounder, and me.
Looking back: while podcasts as a category continued to accelerate after we sold (likely a result of Spotify and their aggressive investments) and at times I questioned if we sold too early, I’m now confident that the decision to sell was the right one. There were few podcast acquisitions after that eclipsed the value of ours, and those that did were only incrementally more valuable. And it now seems the podcast startup market has peaked, with a very uncertain future moving forward. As a result of all the acquisitions, companies like Spotify accomplished their goal. Could Anchor have surpassed the entire podcast industry if we had stayed independent? Who knows, but I have no regrets about where things landed.
HW: As a former CEO, when you back founders, how do you navigate an impulse to imagine how *you* would build the company versus understanding what and how they want to build? When the two don’t match up – different visions – is that something you just keep quiet on?
MM: Right when I started at Lightspeed, a very smart and well known investor correctly warned me of this impulse. I didn’t really understand it at first. But a little while later, I found myself working on a deal and quickly talking myself into why the company would make a great bet because the path forward for the company was so obvious to me. But when I really zoomed out and dug in with the company, I realized they had a completely different vision for the path ahead. The investor’s advice came ringing back. Since then, I’ve worked very hard to make sure that when I’m speaking to prospective companies, the conversation (and decision) is focused on how they want to build the company, not how I or anyone else thinks it could or should be done. I have found that this both leads to 1) better decisions and 2) better working relationships with founders and teams.
HW: As one of the faces for the NYC tech scene – exited founder, then angel, now VC – where do folks outside of the local network underestimate the city’s startup potential and what’s one piece of ‘tough love’ you’d give founders in NYC about how the community needs to continue developing to make even bigger impacts?
MM: When we were building Anchor, we had a few VCs ask us if we would move the company to Silicon Valley in connection with their commitment to invest. While we never actually considered doing it, I learned to understand why they were asking, and believed that it actually had merit: the concentration of engineering talent in SV is unlike anywhere else in the world, making it much, much easier to hire for PDE roles, especially engineering. It’s a true competitive advantage, especially against companies elsewhere in the world. But throughout the Anchor journey, I came to believe that NYC is also a very special place to build a company.
What it lacks in terms of volume of top tier engineers, it makes up for in diversity of thinking, lived experience, and concentration of other professions. If you’re building a fintech startup, you’re near the financial epicenter of the world. If you’re building a media company, you’re near television, news, music, and film. There are so many other examples. And also, there’s a fierce camaraderie baked into the DNA of the city. NYC is an awesome place to live and work, but it’s also a tough place; as a result, people band together and want to help each other. I’ve noticed this time and time again and I believe it to be a true advantage to building a company in NYC.
As for tough love: like other cities, those of us who are in and around NYC have gotten very comfortable with working remotely, myself included. And while I’m a big fan of distributed work, I also think it’s time for startups to get back to working together IRL. There’s nothing like the energy you feel when building a startup with everyone in the same room. But also, there’s nothing like going through the most formative years of your career in the city that never sleeps. Beyond the culture that gets built on your team during lunches, happy hours, and meetups, the people you can meet and bond with in this city never ceases to amaze me. It truly feels as though anyone can accomplish anything in New York City. But if you’re not actually spending time with people face to face, you’re missing out on arguably the biggest benefit the city has to offer.
