As an east coat Jew, there are always going to be a few issues for me which veer into neurosis. The existence of blueberry bagels. People who eat pizza with a knife and fork. Slow walkers. But outside of these there’s one yet unsolved question that I struggle with more than others: what’s a better word than friend to describe someone with whom you’re familiar (and positively disposed towards), but haven’t spent enough time together or gotten to know deeply enough to truly call them “friend?”
Most people tell me I should just call them “friend” but this isn’t right for me. A friend is someone I feel like I know. Where the relationship is of similar bidirectional intensity and commitment. A friendship is a vouch.
By saying everyone is a friend you lose the intimacy (and expectations) for what a friendship actually entails. The simplest fallback is acquaintance. Here’s how that normally goes, most often in a professional context:
“Hey Hunter, [other person] says you’re friends?”
“Well I’d call them an acquaintance. But if I spent more time with them I bet we’d be friends.”
To me that feels acceptable, but there’s a weird asymmetry where most of the time the person I’m calling an acquaintance is calling me a friend and then it gets weird.
So here’s my question/request for you:
What do you call someone who you’ve had some amount of interaction with, perhaps even share some interest group/social circles/built some familiarity with one another, but aren’t yet “friendship” level close?
My requirements are:
Genderless term
Can work in a business/professional setting
Common enough to be understood by 95%+ of people
Has no baggage that makes it seem like I’m critiquing the other person who thinks we’re friends
Although my mother calls me “always curious” there are actually lots of things I’m ok not completely understanding. Most of the time these fall into categories of objects or activities that “just work reliably” or when there’s someone I trust who both shares my interests and has expertise in the area where I might maintain some ignorance. However, even when I don’t fully dedicate myself to studying something, a status quo appearing to be illogical drives me nuts. And such is the case with the United States not playing offense on high skilled immigration despite it generally polling as a bipartisan. What could be more American than the idea of ‘stealing’ the smartest people from around the world and turning them into tax paying, job creating citizens? America First indeed.
Now I can speculate why we’ve not seen enough movement on this segment of immigration reform. Democrats wooing the progressive left might be morally compromised in appearing to favor ‘high skill’ populations while ignoring other pressing immigration needs. Or be listening to the unions (who are largely wrong on this issue). Or be wary of any pro-immigration legislature becoming ‘soft on borders, browning of America’ rhetoric for their conservative voters in competitive districts. And many Republicans seem to be frightened of their own base on immigration or have also fallen victim to some form of incumbent regulatory capture. Or they just hate people who don’t look like them more than they care about our country’s future. These are Bad Reasons.
Writer Noah Smith has been an strong advocate for skills-based immigration reform and his essays on this topic have personally resonated. He took on the ‘wage competition‘ issue last December and more recently even the “is it detrimental to ‘poach’ other country’s skilled labor?” (Answer is No, in fact more often mutually beneficial). I belong to an industry (tech) and in a role (investor) which benefit immensely and directly from the entrepreneurism of technical founders, often first generation Americans or newly arrived. So my incentive here goes beyond some notion of ‘it’s the right thing to do for America’ generally (or symbolically) and right in the bullseye of “if we want the US tech industry to continue to lead the world it’s essential that we return to being a magnet – in work, in education, and in quality of life.”
Our industry association (the NVCA) also believes in immigration reform but seemingly as a priority second to taxes (at least if the Public Policy menu is ordered in importance). Taxes are a real issue for sure – much of their work is on the company-formation side (how stock options are treated, etc) and that matters to founders and teams. But quite simply we’ve reached the point where priorities deserve to be flipped.
False tradeoff you say? I can have my immigration reform and my carried interest designation? Great, I’ll take it I guess. But I’m a believer in priorities and so when it comes down to lobbying, coalition building, and calls to action, let me be amongst those who stand up and suggest the rest of this decade should be about putting our collective weight behind the future of our industry: importing brains.
How many cliched comparisons can I bundle into a single blog post? We’re about to find out…
WSJ’s Berber Jin asked me for some comments around startups closing their doors, as part of a trend story trying to assess the health of the market. Failure is always part of our business – one might go so far as to say it’s the ‘natural state’ of a startup – they are likely to fail until they prove they can succeed. Jin’s resulting article “Startups Are Dying, and Venture Investors Aren’t Saving Them” includes a portion of what I shared with him (Cliched Comparison #1: Perfect Storm):
Hunter Walk, an early investor in Toolchain, said that as the market changed, investors wanted to see evidence of dollars over usertraction, making it difficult for the company to raise money. The investing mania that ended early last year has added to the pile of startups that are now shutting down as fundraising prospects dwindle, he said. “What we have right now is a perfect storm resulting in more than usual shutdowns,” he said.
Let’s unpack this a bit because there are three distinct cohorts of shutdowns occurring, which is some ways remind me of the ghosts from A Christmas Carol (Cliched Comparison #2). Yes, it’s the ghosts of Startups Past, Startups Present and Startups Future, all visiting us during a tortured night’s sleep.
Startups Past: the boom of the last decade kicked forward and delayed a bunch of closures. These seed companies raised enough capital to persist longer than normal and/or weaker companies in hot verticals received follow-on financings that wouldn’t normally be granted to them in a tougher environment. Now as the market turns there’s no more checks coming for them, no matter how much dry powder is on the sidelines. So think of it this way, we’ve got startups shutting down in 2022-24 that shouldn’t necessarily have made it this far – they’re 2017-2021’s normal failures clustered into current times.
Startups Current: Companies funded during the last few years that didn’t accomplish their necessary milestones for incremental capital, exacerbated by a challenging environment that decreases the chances of a bridge round, leaves some of their current investors without new funds to deploy, and (most annoyingly to founders) moving goalposts on what they’re supposed to achieve.
Startups Future: These companies have capital left but not necessarily a clear path forward, or enough team/executive/investor momentum to continue together. Founders and VCs are working together to help these startups find the right solution – usually some combination of returning capital; pivoting into new corporate entities to explore fully different directions; selling off portions of the startup; leaving the IP with the founders and eliminating the preference stack through a buyout; and so on. The impact is we’re pulling forward 2024-2025 “cash out” dates into the current day because the opportunity cost of people’s time and investors’ capital is sufficient to resolve many of the situations today.
Startups can be amazing, wonderful, inspiring opportunities and participating in one can often be the right decision, even if the outcome doesn’t go the way you had hoped. So let’s finish up with a hopeful (?) reminder: while the magnitude and reasons behind the spike in company closures is certainly disruptive and painful, it’s part of the regenerative cycle in our community, like how a forest fire allows for new growth to emerge (Cliche #3). Keep making good decisions (smart teams, important problems) and you will have good outcomes.
“Sold too early” is historically a derisive term thrown at founders who exited startups still on an upward trajectory, and it’s true that almost every successful company went through periods of interest from potential acquirers, even if it was just casual inquiry. But after a decade in venture capital, alongside my immense respect for the founders who just keep building, I’ve also come to appreciate that knowing when to get out matters as much. And so looking backwards over the last few years of ZIRP Boom, we can now honor those folks who got the bag for their companies by taking the right offer at the right time.
Here’s what I’m purposefully excluding: SPACs, crypto, founder/investor secondary that didn’t include the team, potential fraud, soft-landings dressed up as acquisitions, never compensated their teams with equity, etc. This is about actually interesting companies that probably had to make hard decisions about raising more capital or selling. Although I wasn’t involved in the situations I’m naming below (and so can’t 100% vouch on the details), they’re ones which never had any backchannel stink on them and all seemed to be successful enough before M&A (stage-specific – ie the more mature companies had proven more than the younger ones did). I’m also sure there’s a bunch that I’m forgetting – feel free to disagree or expand the list in your own post.
Frame.io by Adobe: Natural landing spot for a fast-growing SaaS video creation company at reportedly $1.275B in cash. I’m sure the company could have stayed independent and continued building but they exited during a period where multiples were high, antitrust wasn’t an issue, and to a company that can carry the product forward.
Honey by PayPal: $4B in cash for this incredibly mainstream product – maybe one of the last great non-gaming consumer product acquisitions on the books? I assume next phase of the business would have required more and more negotiated merchant/CPG deals, build out the ad network aspects, and always face some privacy/consumer data regulations? What a win!
Locker Room by Spotify: Remember when everyone needed their Clubhouse clone? Spotify gave Betty Labs an estimated $67m for the Locker Room app that became Spotify Greenroom. I believe they’d only raised a seed round so founders/company still had majority of equity (hopefully!). Right place, right time, right decision.
Mirror by Lululemon: There was some snickering about why would Mirror cash out while Peloton, Tonal, and other connected fitness devices were the future. No one is snickering now. Mirror built an impressive product and then took the $500m buyout, not having to worry about customer retention, hardware supply chain, and post-COVID inflation chill.
I’d toast to all these founders but as a result of these outcomes they probably have better champagne than I do! 🍾🍾🍾🍾🍾🍾🍾
(When I asked some friends for their nominations others which came up were Afterpay, BentoBox, Slack +++)
Ok, this is the “For VCs, There’s More Pain Coming” post that I promised earlier (while also suggesting it’s actually a GREAT time to start a company). Obvious caveats to my POV here, most specifically: exposure is limited to largely the US/SiliconValley ecosystem, driven by our own portfolio, my friends and co-investors, the funds I’m a LP in, and our institutional LP relationships. But since this is vibes > data anyway, I’ll start with a story from Homebrew’s 2023 Annual Meeting.
Satya and I were having lunch (yummy Chinese food) with our LPAC and the conversation turned to generally “how much more did venture portfolios have to fall before they found their true current value?” That is, for the class of funds institutional LPs tend to back, on average, where was bottom? Each underlying firm has its own ‘valuation policy’ and we can have a separate conversation about the quality of those estimations, but you can generally assume that (a) there’s no real incentive for established VCs to be out of line with their view of reality (this stuff gets approved by accountants) and (b) LPs see this across a variety of managers and are sophisticated enough to apply their own modifiers to the numbers they are provided.
At the time, this is last quarter and the stock market has trended upwards nicely since then (a potential leading indicator of private tech valuations), we all agreed venture portfolios were probably still 25-40% overvalued. That’s a big number, one which if accurate moves many funds to at/below their target return goals for at least the moment! Our estimates were not out of line with new data from top firms like USV who, according to reports, “marked down the value of seven of its funds by nearly 26%.”
What are my major assumptions for why there’s more markdowns to come in the aggregate for the last decade of venture portfolios?
Valuations. The number of startups who raised money beyond the ‘Unicorn’ benchmark grew so dramatically before the 2022 reset that there is just simply farther to fall when many of these fail to grow into their targets, or disappear completely. The capital piled into them also transformed them, asking them to grow faster, spend more, and so on. These mutant unicorns may not recover without dramatic changes to culture and strategy, not just spend.
Fund Sizes Got Too Big. Firms raised too much money. I’m not crying for them – it’s their fault and they’re getting paid hefty management fees even if they’re mediocre investors – but greed and/or competitive pressure (plus an influx of new LPs) caused many VCs to have fund sizes which outpaced their capacity to deploy prudently and their existing strategies.
Restructures, Down Rounds, and Pay to Plays. Whatever gets reported is just the tip of the iceberg. The reality is lots of companies – many of them quite promising – have already undergone, or will be facing, next financings which “clean up” old cap tables. Often not all insiders have the dry powder to protect their positions, or feel the juice isn’t worth the squeeze. Sometimes these are led by outside investors and old ones will just take the impact and walk away. Regardless, even in rounds with no punitive structure, the quickest way to underperformance as a fund is by increasing your ‘dilution before exit’ portfolio model assumptions by 1000-5000 basis points. And that’s what’s happening here.
Many VCs Owned Too Little of Their Portfolio Companies to Begin With. When markets were at their peak the discipline around ownership felt antiquated to some, or at least challenged by the competitive realities. So when great exits again return to the $1b, $3b levels instead of everything being $5b-$50b on paper, it causes a lot of pain. As I wrote about last year, this is a huge (but not unexpected) change to models. Quite simply, on a $10b outcome everyone eats, but on a $1b outcome only concentrated investors see enough back to move the needle and/or those investors who got in early and keep their fund sizes reasonable. The growth in fund sizes plus the decrease is outcome size coupled with ownership challenges is a disaster. When the company exits you’ll get all the ‘congrats’ but you’ll know the DPI doesn’t match up. Let me tell you *every* credible VC fundraise deck I’ve seen this year talks about the importance of ownership concentration.
MoreThanAverage (ALLEGED) Fraud. If not in number of companies, then seemingly in the amount of capital they were able to raise before getting exposed.
Overweighted in Speculative Crypto and Weren’t [Slimy or Smart depending on your POV] Enough To Get Out Before The Shitcoin Collapse.
So yeah, it’s gonna be a tough vintage of returns for many but hopefully healthy for our industry. Lower performing VCs will disappear faster and new entrants will differentiate themselves. Funds will get rightsized, which helps better align investors and founders in what defines a successful outcome. And fascinating new advances (and needs) in AI, climate, biology, etc are driving tech-IP driven startups.
The historical dynamic for software markets was one of ‘winner take all/most.’ Economies of scale, network effects, soft monopolies/bundling, patent moats: there are many reasons why. Putting your money into one of these leading companies could produce incredible returns over time for venture, institutional, and retail investors. In some twisted way then, the opposite of these companies (Oracle, Google, Meta, Microsoft, Apple, Salesforce for example) would be ‘winner take none’ outcomes. Verticals where an incredible amount of investor capital was committed and even the ‘best/surviving’ companies ended up consuming a tremendous amount of dollars.
a first place winner trophy that is dented and dirty, digital art
Sometimes a winner take none market can emerge when a technology breakthrough just didn’t pan out, or there’s a dramatic change in customer needs/expectations. But other times, and through the most recent cycle, it seems like some of the most dramatic ones were just blitzscaling aimed the wrong target. Narratives and spreadsheets which somehow would take low margin, high fixed cost businesses and transform them into technology companies.
As a venture investor these are especially painful because they fail slow, burning a lot of capital and time and hope along the way. Early in Homebrew’s existence we had a mini Winner Take None in the consumer/SMB shipping space, so I’ve got some familiarity with these situations and don’t mean to just throw stones at others.
What drove these mistakes? Besides ZIRP, there’s often the application of a business model from one success to a market that’s not as well suited. The “Uber for X” and “Airbnb for X” largely lacked positive attributes that transportation and travel possessed and accordingly found infrequent usage, low margins, complex processes and so forth. Winner take none.
Ok, I’ll get back to my procession of Startup Land Heat Checks shortly, but in the meantime, here’s a bunch of smart stuff I’ve enjoyed reading over the last few weeks:
a person reading a magazine while stuck in a spider web, anime
It’s Not Your Fault, But It’s Your Problem [Charles Hudson, Precursor] – I vigorously agree with so much of what Charles writes, and so glad he’s getting posts out more frequently these days. This paen is a reminder that lots of the time you’ll encounter real roadblocks caused by issues outside of your control, but where you still need to navigate them to move forward.
“Right now, we are in a moment where many founders find themselves confronting problems they didn’t create but must tackle. This is not the time to complain or lament your fate – it’s your opportunity to rise to the occasion and push through despite the challenges.“
What makes this worth reading is that Charles has empathy for founders (he’s been one), and will continue to show up as one of their investors in a supportive manner. So it’s not “rah rah go do the work and make me my money” bs content marketing. It’s words (and advice) he’s been given and had to take himself.
Preempting the Round [Jared Hecht, Founder – GroupMe, Fundera] – The first time a founder hears an investor suggest they might want to ‘preempt their next round’ they 🍾. The second time a founder hears this they 🙄. Jared takes you through why. It happens often enough that I’ll write a post later about what to do once you get this advance from an investor, but even that one will be largely based on the wisdom and battle scars shared here.
“I’ve been burned by entertaining preemptive rounds on multiple occasions. It’s like touching the hot stove repeatedly.“
“But there was no secret shoe pipeline. In fact, Malekzadeh would simply wait until the shoes he’d presold were released, then purchase them on the open market from retailers such as StockX, according to people familiar with his operation who asked to remain anonymous because the matter is sensitive. Delivery delays could persist as long as a year, but he managed to fulfill most orders—until one day he couldn’t.”
“That freedom unlocked an era of unfettered creativity for a generation of artists and built a critical digital-first audience that would later lead to rap’s dominance in streaming. It also led to the current dilemma: How do you preserve a part of hip-hop history that isn’t necessarily legal?”
After “Barbie,” Mattel Is Raiding Its Entire Toybox [Alex Barasch/NewYorker] – Came out before the movie opened, so the insider account of how the IP negotiations occurred is even more astounding as box office approaches $1B. I interned at Mattel in the summer of 1999 so have some light first-person stories about how this company works.
“At the start of the “Barbie” process, Gerwig decided to write the screenplay with her partner, the writer-director Noah Baumbach. Mattel and Warner Bros. insisted on seeing a preview of the script’s contents. The couple balked—they needed the freedom to experiment. Jeremy Barber, an agent at U.T.A. who represents Gerwig and Baumbach, is close with Brenner, so he could be blunt. “Are you crazy?” he told her. “You should’ve come into this office and thanked me when Greta and Noah showed up to write a fucking Barbie movie!”“
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Hi! I took a month or so off from writing, largely because so much was in motion, that I needed to get some work done and process a bit before committing thoughts to, err, paper? We hit 18 months on the Homebrew Forever model (and just closed our 20th investment using personal capital) so lots to share on that front soon’ish. And Screendoor, our fund of funds backing emerging managers from underrepresented populations, continues to amaze me in ways I didn’t anticipate (more on that soon’ish as well). But first, stretching the blogging muscles with some general ‘state of the nation’ posts.
IT’S A GREAT TIME TO START A COMPANY BUT A TOUGH TIME TO BE RUNNING ONE
Great Time to Start
Founders with 3-10 years of startup tenure, having gone through hypergrowth (the good and the bad), often with prior experience working together, and a strong POV on a problem to be solved. I don’t think I’ve seen as many combos like this since we started over a decade ago.
Less market pressure to spend ahead of PMF, fewer overfunded competitors doing the same thing, etc
Macroeconomic concerns and softness in tech markets mean that legacy companies have underinvested in their own non-core initiatives (creating holes for startups) and tight headcount/budgets mean they’ll buy vs build pieces they need.
Talent on the market being shed by larger companies and last generation of zombie startups.
Beginning of thaw in the venture markets, especially at seed.
Tough Time to Be Running a Startup
We are absolutely not through the worst of the pain from the market reset. Lots more wind downs, restructures and soft landings coming [this is important enough to be its own post shortly].
Customer budgets are still tight, especially in tech.
Layoffs and lack of hiring at customers means many SaaS/per seat/usage B2B companies are fighting ACV contraction where you need to add new logos just to show marginal growth, let alone 2x+ YoY.
Many companies haven’t fully optimized for what it means to be hybrid/back in office.
It’s just been a stressful few years!
Ok, my goal is to follow-up quickly with:
For VCs There’s Still a Lot of Pain Coming
Soft Landings Are Really Soft Right Now
Why Shutting Down Correctly Matters
“Cash on Hand” Is The Most Polarizing KPI in Startups
a smiling woman putting on headphones to block out all the noisy birds around her, digital art
Part of the novelty in new social products is the fresh start on a social/interest graph. Especially now that we’re smarter in the dark patterns of ‘autofollow all contacts’. and so on, I find anecdotally that more people are going with a Slow Graph (add selectively as they figure out how to use the product) versus Fast Graph bootstrap. Threads is an interesting exception because we usually don’t see a new launch successfully from a company which already has a robust social product, and thus, existing relationships for you (in this case Instagram itself). Meta’s onboarding allows (encourages) you to simply recreate that list onto Threads, even putting Instagram accounts which haven’t yet created their Threads profile into a ‘pending’ status. Once they’re ‘live’ you’ll automatically add them.
I’m here today to encourage the normalization of the unfollow, especially as you decide how Threads will fit into your habits. Toss the social anxiety off and liberally hit that button. Don’t end up ruining your own experience!
But you probably will. Because the growth objectives of these business and our own stubborn behaviors/incentives push us to add add add follows.
“We found out it was a privately owned company in Queens, and I’m already running around making more money than — look, you got to imagine how rich you are when you’re making about $32 million running around on tour. From where I was at? Think about the transition. I stopped feeling the financial transactions. The money that was physically around me didn’t even count. The money that counts is at the accountant’s office. When I say “How much?” and I’m looking at the monthly, it’s all black-and-white. It’s not green. So if I do the deal with Vitamin Water, I don’t really need the money up front. The big money, on the back end when they sell it, I need to participate in that. And it changed the way artists look at deal structures. Because until those stages, they were not looking to do deals like that. They was looking for how much they could get an advance right quick, get the shot, and go from there.”
Stop with the Fake FOMO (Chris Neumann) – Trying to create fake FOMO when fundraising almost always fails and even when successful, creates a bit of a ‘winner’s curse’ – you get the type of investors who fall for this stuff. Per my earlier interview with him, I appreciate that Chris covers a lot of core topics for founders and startups. There are of course lots of things you should do in a fundraise to build momentum, but Fake FOMO ain’t one of them. In Chris’ words,
Remember, investors receive hundreds of emails from founders each month. I promise that it’s glaringly obvious when founders try to push fake FOMO. You might think you’re being smart, but the VC on the other end is likely rolling their eyes.
Zadeh Kicks had been offering the Cool Greys for as little as $115 since the fall before the drop. On release day it owed customers more than 600,000 pairs—an enormous chunk of Nike’s entire stock, which sneaker site Housakicks estimated at 1.2 million to 1.7 million pairs. Malekzadeh had no hope of filling the order. What’s more, the cycle was already repeating: Even as he scrambled to find Cool Greys, he was getting tens of thousands of preorders for the next big Jordan release, the Air Jordan 4 Retro Military Black, due out the following May.
After the Supreme Court overturned abortion rights, following her home state’s own restrictions, she posted again: “When you live in Texas and all you wanted was a hot girl summer, but now you have a ‘no reproductive rights’ summer.”
