Great interview with surviving cast members of Happy Days, which was a number one TV show itself, as well as producing FIVE spinoffs. Worth reading the whole interview but one particular part stood out for me involving the producer Garry Marshall and star Henry Winkler.

WINKLER He [Marshall] was generous but also was structured. He took no bad behavior. One time, when he was announcing the guest cast, I said, “Garry, we have to hurry up because I’m flying to Arkansas.” He nodded, put down the microphone, grabbed me by my shirt, put me against the wall and said, “Don’t ever do that again, because they have every right to be recognized like you.” He kept us in line.

Talk about setting a tone! How often as leaders do we let little things slide or fail to apply values consistently? Holding aside the physicality of this encounter, which is very 70s and very Hollywood, it’s a reminder to me about building teams and supporting your people. And those lessons get handed down through generations.

It was a relationship, and an appreciation, that Winkler carried with him going forward

Lots of venture capital transitions underway. Here’s what I predicted in Allocate’s 2024 Outlook

Last week Pitchbook asked me (and others) for background on how a VC actually gets fired (or more often ‘transitioned’)

Darwin moves slowly in venture, but these investor changes can be very disruptive to the founders who were backed by the exiting partner. Since writing “Oh Shit, Your VC Just Quit Her Fund! What a Good CEO Should Do Next” in 2019 I’ve seen plenty of startups get effectively stranded within a firm. We had one of these early in our existence that in hindsight I wish we were more aggressive in helping the founder recognize the purgatory. Now we’re much quicker and more direct to help resolve the situation (even if the result is clarity that startup has likely been orphaned by the other investor).

So while there’ll be a lot of continuing coverage of investor transitions, the real ongoing story is the impacted founders. If you’re a founder and find yourself in this situation feel free to reach out in confidence — if I’ve got time and ideas i’ll share them with you.

Regret. That’s the emotion I most associate with Pat Kinsel and his startup, Proof (fka Notarize). Because I remember hearing about their seed round and thinking it sounded a lot like a Homebrew company, but yet Pat didn’t seek us out, and we didn’t have him on our radar. Fast forward a few years and we finally connect via mutual friends and Twitter threads, but Proof is Too Successful for our early stage capital, meaning I admire from afar versus from the cap table.

Pat’s recent blog post “A VCs Most Critical Task” both caught my eye and went in an unexpected direction: helping founders bring on great executives, while simultaneously preventing bad hires. I wanted to talk a little more about his experiences and advice here, so thus a Five Question Interview.

Hunter Walk: You recently wrote “I have decided that an early stage (Series A-B) venture capitalist’s single most critical task is to make certain their portfolio companies do not hire the wrong executives.” Without accusing you of subtweeting a particular situation, what prompted the post?

Pat Kinsel: The pandemic, mostly. The pandemic pushed companies forward 3 or 5 stages prematurely, mostly in response to false or temporary demand. The hardest things to reset are the culture and processes set by bigger company executives who stepped into a business everyone thought was further along. Most of us cut costs and reduced our team sizes, but what we also needed to do was reset how we work. It took even longer to realize we were still running a bigger company playbook, just with fewer people on the field. It was exhausting for the team trying to maintain processes without scaffolding and impossible for executives who don’t know how to run the smaller org. Virtually every founder I talk to wishes they could go back in time, hire stage appropriate leaders, and tackle the scale-up challenges in sequence like you’re supposed to.  

I said “mostly.” Beyond issues with stage-fit, we should all be honest that people don’t do real reference calls and bad behavior is often never shared. A good VC should be able to get the truth from their networks.

HW: Talk more about the mistakes you usually see made at A/B startups? Is it hiring for resume vs fit? Assuming the BigCo exec can truly adjust to the pacing of a startup? Have you personally made this mistake – as a CEO or VC?

PK: Yes, I’ve made every mistake as a founder. 

If the biggest risk an executive has taken in the past few years is joining your company, they’re the wrong person. The job is making big decisions and more –  it’s managing teams through risk and uncertainty and that’s a skill that people quickly lose. Others have something to prove and I think this is the key issue to suss out. An executive now at a big co. who truly built a product or a team from the ground up and now has a vision to do it differently and better might be a unicorn for your business. But an exec who rose through the ranks and now has something to prove to his old company probably is not. 

I think the primary difference between executives at different stages is how siloed they are. At a big company, a sales leader probably only lives within that function. In smaller companies, they collaborate as part of a revenue organization. In smaller companies, everyone must work together. Execs might need to span functions. Can they? Will they? 

This is why VC intros to executive hires can be so so dangerous. Many VCs know people in big companies who manage something important and try to pull these people out when they might be the dead wrong candidate. The risk aversion that kept them in the big company might get broken when the big fancy VC recruits them, but it returns the instant they’re in your company.

Yes, I also made every mistake as a VC. When I was on the board of Drizly and Lob, I was very young. There are a lot of VCs out there offering advice without any real knowledge, either as an operator or as a VC who’s seen some things. I have no idea how the venture industry solves that problem, but founders need experienced voices to help evaluate candidates.

HW: How involved should the VC get in this process? Is it at the level of meeting candidates before the offer stage, or just in talking through the type of roles and people in a more generalized Hiring Plan conversation ongoing?

PK: Both. 

Most founders have no idea what a well running team or organization looks like. They’ve never even seen or collaborated with the functions they’re now supposed to build. At a minimum, VCs should help founders understand what different functions do, how they are run, how they should be compensated, and what common conflicts exist between teams. The issues are most often at the intersection between teams; not knowing this, how can founders ask good questions and find the right people? 

Beyond that, I think VCs should be involved until founders can prove they can hire. They should come in late in the hiring process and provide a coaching role – “here’s a concern and here’s how we could get more info to address it.” There is tremendous value for founders in talking to many many candidates and that can’t be offloaded – it’s the predominant way they’ll learn about the actual function and what style or vision they align with. The VC should just be a check at the end.

HW: As a CEO, how do you want to talk about Exec Team quality at the Board level? I find there are really two main points to be clear about – how is a person’s performance, and do you think they can continue to scale in role for the next 18-36 months?

PK: It takes a long time to escape the hero mindset and stop believing you personally have to deliver the results – that team is everything. I believe founders should be completely transparent with their boards about the executive team. It takes a year to find great executives so you must always look down the field. 

I’d add a 3rd thing, it’s not just about the performance of each executive and their ability to scale, it’s about the performance of the team overall. Is someone personally great, but holding the group back? Could someone new change the dynamic and up level everyone?

HW: What’s a favorite question to ask a potential hire, or ask when conducting a reference check on someone you’re evaluating?

PK: For a senior hire, “Why Proof?” 

If you’re hiring an exec and they cannot passionately articulate a reason to join your company, why their skills can 10x your performance (and thus their wealth), why it’s a problem they feel compelled to solve and a mission they must be a part of… it is the wrong person. They should be extremely well versed in your business. If you can’t find that person, bet on someone earlier in their career with drive. As I said in the blog post you referenced, “a firestarter.”

Thanks Pat! And given that last question, feels appropriate to link to Proof’s open roles.

When the founder of WordPress/Automattic says all he wants for his birthday is for you to blog, well, you blog. I’ve known Matt for, gosh, 15 or more years, and although I don’t see him as much as I’d like, I do admire what he’s built here and the spirit with which he lives. Here are some things to read:

There’s No Money in Free Software [Ben Werdmuller] – The provocative titles refers to Ben’s experience trying to build a startup around an open source product. To be intellectually honest he supplies a few examples of companies which have navigated this tightrope walk but ends up ultimately believing…

“My take is this: if you want to make money building something, sell it. If you want to release your software as open source, release the bit (or a bit) that doesn’t have intrinsic business value. Use that value to pay for the rest. If you need money to eat and put a roof over your head, do what you need to get money. And then if you want to be altruistic, be altruistic with what you can afford to distribute.”

Billion dollar failures, and billion dollar success [Tom Conrad in Conversation with Lenny Rachitsky] – Just a great pod between two product minded humans. Tom reflects on his ‘wins’ [Apple, Pandora, Snapchat] and his more sideways experiences [Pets.com, Quibi] in a way that actually brings emotion to a CV and produces some actionable ideas for people earlier in their careers.

Resetting expectations for VC investing in health tech [Christina Farr/OMERS Growth Equity] – Rather than just rearview punditry (oh no, the era of free money for startups is over), Christina looks at the dynamics of health care venture investing and why it might be *good* for the world to have more small successes in this vertical than everything needing to be a venture scale success (or failure).

Enjoy! And Happy Birthday Matt!

I *think* Daniel and I met at a VC happy hour many years ago. But outside of the history, he’s one of my favorite people to chat about the roller coasters of company building. He’s founder and CEO of Greenhouse, a ‘hiring operating system’ for companies which spans recruiting and onboarding tools for enterprises and SMEs. Originally backed by venture capital, in 2021 Daniel worked with TPG, a large private equity firm, to make them the majority investor. This means the company is predominantly owned by the management/team and TPG. It might ‘exit’ again at a later point (anything from a sale to an IPO), but it’s no long dependent on VC funding. There’s a ton of writing out there about getting *on* the venture curve, but not a lot about getting *off,* so Daniel’s advice below is especially important.

Hunter Walk: Before we dive into your company Greenhouse, give me one story from your childhood that foretold you were going to end up a startup founder.

Daniel Chait: Oh man, I have a ton of these! Looking back it was pretty obvious where I’d end up in my professional life. I was the kind of kid that (a) didn’t really buy into authority figures, and (b) loved solving problems and building stuff. I was also very fortunate to come from an entrepreneurial family; both my parents ran their own businesses.  My dad had a medical practice and my mom founded an HR company at the kitchen table and grew it into a global powerhouse in their industry.

To pick just one representative story… I was sent to the principal’s office one day in high school, probably for goofing off in class. I never did much that was all that bad, but at the same time, I was bored in school and often thought it all felt pretty pointless vs doing “real work” which I loved. So anyway, I was waiting in a little area outside the principal’s office for him to call me in.  As I sat there I was overhearing the secretaries complain about this new computer program  they had (WordPerfect, my guess is it was 5.1 for DOS), which they were struggling to use.  

Well, as it happened I was pretty much an expert WordPerfect user. Pretty weird hobby for a 15 year old kid but I had used it at my mom’s office and, sick of doing repetitive drudge work, had taught myself to program WP macros in order to automate mundane tasks for her. 

So back to the secretaries. I couldn’t help but pop over to them and start showing them how to do things, solve their problems, etc.  By the time the principal came out, the secretaries asked him if he could wait so I could keep helping them! I ended up leaving there with a part time job as their “computer guy.” I really loved getting to use my know-how and wits to forge my own path, make money, and get to work on cool computer stuff.

HW: Greenhouse, which powers the hiring process from sourcing to onboarding for thousands of companies, will soon be a teenager, having been founded in 2012. What does 2023 Daniel know that 2012 Daniel didn’t?

DC: As a lifelong entrepreneur, Greenhouse is now basically the largest company I’ve been a part of (and has been for several years) so I’ve had to learn a ton over the years about how to scale myself.  

That has mainly meant really figuring out how to be a leader and continuously refining my leadership approach as the company has grown.

My approach is centered around Patrick Lencioni’s “The Advantage” and Fred Kofman’s “Conscious Business” principles, each of which are really systems for building and maintaining culture and organizational health.

This is still very much a journey I’m on. I don’t profess to have it solved, but I’ve learned a great deal about how to scale my leadership approach that I didn’t know back when we started Greenhouse.

HW: Hiring, and PeopleOps in general, is an area where software has improved the quality and efficiency of workflows. Now AI has promised to take that even further. How is Greenhouse experimenting with AI-enablement? Is it an evolution or a revolution for your business and customers?

DC: I’m going to keep this brief, but if you want to the long version of it, I recommend reading our blog about it. I’ll summarize by saying it’s an evolution; one that will require experimentation and innovation with a discerning eye. We have conviction about AI’s role in hiring as an assistant, not a decider. Our goal is to develop innovative products and features that help make recruiters jobs easier, emphasizing the importance of humans making decisions in hiring. 

We know that AI can help hiring teams do more with less. In today’s workforce, where HR teams are stretched thin and resources are limited, AI can augment short-staffed teams by reducing menial, repeatable tasks and allowing recruiters to focus on what matters — finding the right talent.

HW: In 2021 you partnered with growth firm TPG to bring them on as your primary investor, which I assume gave your current venture capital partners a chance to at least partially exit the business. These sorts of opportunities can really realign incentives/expectations as well as give you a chance to reset on some decisions made previously. Can you tell us a little how this came about in the first place and what the day-to-day implications were of the shift in ownership structure.

DC: Here’s how this relationship came about in the first place: I had a longstanding relationship with TPG by way of the RISE Fund (TPG’s Social Impact investing fund). Greenhouse has a focus on social impact through our mission to make companies better at hiring, as we also help improve fairness for job seekers and candidates, improving the conditions for the workforce overall.

Coming out of the first half of 2020 we were experiencing a boom after the initial shock of COVID-19. Our customers were growing and hiring quickly, and as a result our business was growing fast. So we found ourselves in the position of needing a new capital partner, as well as wanting to seek out  expertise in scaling the business as we were thinking about maturing and growing as an independent company. As a result, we were considering relationships with a number of different large-scale investors including private equity firms. 

We ended up partnering with two different funds at TPG; the TPG Growth Fund and the RISE Fund.

The TPG Growth Fund invests behind companies, teams, and strategies that they believe in and where they can help accelerate their growth. It’s not “traditional PE” — meaning, a leveraged buyout fund where they try to cut costs and squeeze margins — it’s more like a later stage Venture Capital firm, with extra support capabilities to help companies as they scale. The RISE Fund, which takes a quantitative approach to social impact, aligns well with our core values and social impact mission. Because of all that, it was apparent that Greenhouse was aligned to the intentions and goals of both the Growth and the RISE funds. 

Since the relationship started, it’s really lived up to the promise. TPG is a great partner; they do what they say, they’ve really been trustworthy. And they bring great resources to bear. They help with issues of scale and growth, with operational questions, and even with things like purchasing and cash management. They’ve just been fantastic and incredibly helpful.

At the same time, being private equity backed also means balancing a somewhat different set of investor goals than you may be used to as a startup founder. PE firms are not looking for a risky approach that may return 10 times but may also flame out; rather, they’re looking for sustained, efficient growth and profitability. Steering the company in that way has been a growth area for me as an entrepreneur and something as a CEO that I’ve been learning to do well. It’s a different way of thinking and managing the business, but one that I believe helps any leader run a better business.

HW: We’re going to see many more software CEOs (and cap tables) look for private equity exits like yours. What are the most important questions founders should ask themselves about their business to help them understand if they’ve got the combination of scale, product, and leadership that’s attractive to a financial partner of this type?

DC: Yes – this is such an important question! If you’ve spent a bunch of years with VC partners, bringing on a PE firm can feel very different, so you really do need to be well informed here.

I would start by saying, you need to be comfortable giving up some control. Most PE firms focus on acquiring a majority of the companies they invest in, though this varies. PE generally thinks of their role as a three-stage journey “Buying > Value Creation > Value Realization.” That third one generally means “Selling” though that can take various forms, such as exiting via IPO, paying themselves a dividend, etc.. And they really want a lot of influence and control over not only how they create value (ie how the company is run and the choices you make about where to to invest vs cut, growth vs profit, etc) but moreso, control over when and how they sell.

 What you want to be sure to ask about is are you aligned with the PE firm about how they think about creating and realizing value. Because, really, when you take a PE investment, that comes with an obligation to  drive value for shareholders and in a specific way that aligns to their needs and risk profile.  

A few other things to think about: PE approaches debt very differently than VC firms. You should ask what they think is the right level of borrowing (they call it “leverage”) for your firm and make sure you’re ok with the answers. 

One other thing folks don’t always talk about with PE – they charge fees to the company for a bunch of the services they provide. Those fees can add up – millions of dollars per year in some cases – and make up a material way that many PE firms realize value. Ask up front how the fees work and make sure you understand what you’ll be paying them and what you’ll get. If you’re used to partnering with VCs this can come as a surprise, sticker shock included.

I will finish here. PE is not one just one thing. Know your firm and do your research. Find out the reputation of the firm, because they often have extremely different approaches and cultures. And, find out who your specific partner will be and learn about that person. Spend time with them – it matters a lot because after all, this is a hopefully long-term business partnership!  I feel very fortunate with my TPG relationship. They are an excellent firm and the people I work with are humble, hard working and smart.

Thanks Daniel – appreciate you sharing with me!

I love to write. And don’t maintain a ‘schedule’ per se, but have always said that ‘if two weeks go by and I haven’t posted, it means something is amiss.’ Well, something is definitely amiss in the world so maybe easing back in is best done by sharing others’ work.

Tech is a Tool, not a Religion [Philip Rosedale/Second Life +++] – I worked for Philip during the early years of Second Life, which was an amazing experience coming out of grad school. He’s a lifelong technologist and I’m appreciative of his voice in this discussion of techno-optimism. “Fairness is a Requirement” for maximization is a particularly strong statement because it recognizes the deep power that emotion has in determining our reactions. I’ll quote an extended passage from his post, but recommend you read it fully:

We, like Capuchin monkeys, are pro-social mammals – very dependent on each other for survival – and this evolved behavior could only have evolved alongside a keen sensitivity to fairness. Think about it: if we have evolved cooperative behavior without an awareness of fairness, ‘free riders’ (those contributing less than the average in a group) would have won out and reduced the amount of cooperation we were doing back toward zero. This is why perceived fairness is VERY important to us, and why the following statement can be regarded as necessary-but-not-sufficient for creating well-being:

We believe markets lift people out of poverty – in fact, markets are by far the most effective way to lift vast numbers of people out of poverty, and always have been.

Sentences like these are often defending the argument: “It’s OK that wealth inequality is increasing (due to the actions of free markets, btw), because poor people have more stuff now than ever before” (phones, cars, refrigerators are typically-given examples). But it’s not OK at all, because we are evolved to value fairness so highly. In fact, we are surrounded by examples of people being willing to die over fairness – for example if you think that your children are being treated unfairly.

How to take time off and use it well [Molly Graham/Quip, Meta, Google] – Look, I’m just going to say first, subscribe to her free newsletter. HUGE words:value ratio. This one, about how to take time off between jobs, has quickly become something I share with friends who are transitioning gigs. I’m a huge believer in rests and recharges (even if I haven’t done it well myself) in order to make better career decisions. Here she handles the objections people usually raise to affording themselves this privilege, and her own experiences on ‘the work to be done’ during the break period.

ChatGPT has forever changed my career [Danilo Campos/Indie Developer] – Danilo is one of the technologists I reliably learn from when it comes to technology and empowerment. Here he writes on why ChatGPT (and LLMs) have expanded his personal efficient frontier of what’s possible. In two passages that I’ll link together from separate parts of his essay. First about the challenges of software projects and then how the new AI blasts through that for him.

Velocity is the fuel of a software project. Velocity makes challenges feel winnable. Velocity provides a sense of progression, and it’s addicting. It feels good to build things. It feels good to see the things we imagine take shape.

The morale benefits of velocity are intuitively understood and deliberately captured by the best software leaders. Going from zero to one is hard, and it helps when you believe it’s possible.

In each case, missing pieces of context might have derailed my sense of progress and confidence, prematurely ending my coding session. Instead, ChatGPT gave me enough useful guidance that I could overcome my roadblocks and deliver on my next requirement.

Stitch enough of these moments together, you’re going to ship.

Danilo brings it all back to the question of, do we want to become beholden to one company [OpenAI]

Instead of dismissing or decrying them, we need to get to work democratizing their access, or this will become a serious vector of inequality.

Barnes & Noble Sets Itself Free [Maureen O’Connor/New York Times] – If you’re of a certain age [I am] and certain disposition [I am] the 90s evolution of B&N into welcoming, browsable, hangout Third Places looms large in your nostalgia. Then of course [waves hands] ‘the Internet.’ What’s beautiful now is the rebirthing of B&N in more of a local indie layout. They’re configurable, able to run experiments, and frankly, gorgeous.

The new look aims to encourage browsing, which Mr. Daunt believes improves customer satisfaction. “If you just want to buy a book, the guys in Seattle will sell you a book,” Mr. Daunt said. “The enjoyment and the social experience of that engagement with books in a bookstore? That’s our game.”

Enjoy.

A local shipping business set up a Lemonade Stand next to their retail store that’s reservable (for free) by community kids. Love stuff like this. More kindness and generosity in our world.

For your weekend pleasure

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.”

After 10 years covering startups, former TechCrunch editor-in-chief Matthew Panzarino tells us what’s next [Podcast Interview with Nilay Patel/Verge] – Great conversation between two folks who’ve had notable perches within our community. It’s a bit heavy on process and perspective of modern tech journalism, but I love that stuff. Matthew recently stepped away from his role at TechCrunch and is in a reflective mood.

[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. 

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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.

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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

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