Tremendous

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Top-Heavy markets spell trouble for late stage startups

June 19, 2024

At $3.3 trillion, NVIDIA is the most valuable company on earth. The Magnificent 7 now make up 35% of the S&P 500.

Meanwhile, the average SaaS company trades at a 5.9x revenue multiple. This is the lowest since 2016 and below long term averages.

I’ve never seen markets this top-heavy in my life. And it’s a rough environment for late stage startups.

IPO Window Painted Shut

We’ve seen very few IPO’s since 2021. A few like Klaviyo and Instacart have come out and performed decently, but those winners are few and far between.

I agree with Bill Gurley that you can go public in any market. And I’d like to see more companies in the $100-250 million range do so.

But the reality is, companies just aren’t doing it.

The Late Stage Funding Crunch

So we’re staying private. How about raising another funding round?

Well, about that…

Late stage venture funding is down 75% from the the 2021 peak. Those $100 million pre-IPO rounds that fell from the sky three years ago are now hard to find.

It’s hard to raise in the public markets, and it’s hard to raise in the private markets. If you’re a late stage startup, that’s a tough row to hoe.

Abandoning Late Stage Startups

The folks who did those $100 million rounds in 2021 often weren’t normal VC’s. They were giant hedge funds like Tiger Global and Coatue.

These guys invest in both public and private companies. And increasingly, they’re saying sayonara to privates.

Crossover funds were doing 700 deals a quarter during ZIRP. Now, they’re down to about 150.

Where did they go? Probably back into the public markets…

That 5.9x SaaS multiple looks pretty yummy compared to what they’d pay in privates. If you’re a fund with the flexibility to do both, moving more cash into publics makes a lot of sense right now.
That leaves less money for the late-stage private startups.

Wrap-Up

So, where does all this leave late stage startups?

As ever, profitability is the trump card. If you don’t need to raise money, you control your destiny.

And for early stage investors like me, here’s the point to remember: the market we invest in isn’t the market we exit in.

If I make an investment today, it won’t IPO for 10-12 years. By then, public markets could be drooling over tech startups.

We’ll get our beaks wet. We just have to be patient.

What are you seeing in the market?

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How to Drip Market Investors for Fun and Profit

My Ten Year Angel Investing Plan

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I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Sources:

S&P market cap: https://www.slickcharts.com/sp500/marketcap

NVDA most valuable company: https://www.bloomberg.com/news/articles/2024-06-18/nvidia-s-591-078-rally-to-most-valuable-stock-came-in-waves?srnd=homepage-americas

Magnificent 7 market cap: https://companiesmarketcap.com/

SaaS multiples: https://www.saas-capital.com/the-saas-capital-index/

Fall in late stage funding: https://news.crunchbase.com/venture/startup-funding-q1-2024-charts/

Crossover investors retreating: https://files.pitchbook.com/website/files/pdf/Q1_2024_PitchBook-NVCA_Venture_Monitor.pdf

How to Drip Market Investors for Fun and Profit

June 18, 2024

I saw an incredible startup at a demo day yesterday. When I contacted the founder after, she offered to add me to the investor update.

This is genius. But very few founders do it.

Was just on a demo day. Saw an extremely high potential company, e-mailed them.
Founder offered to add me to the investor updates. Wonderful way to drip market investors, I love it. 😍
Underused hack.
— Francis Santora 🦀 (@FrancisPSantora) June 17, 2024

Got Dat Drip

Startups use drip marketing to get customers all the time. This involves e-mail sequences that get potential customers interested and push them to eventually buy.

By adding a potential investor to your investor update, you’re drip marketing the VC’s.

You keep inserting your startup into their head. And you show progress over time that gets them drooling.

How It Works

I get lots of updates for companies I’ve never invested in. I’ll give each one a quick scan, and if I see something notable, I’ll reply.

Now and then, one of these prospects starts to really break out. When that happens, I start furiously typing a message to the founder, eager to secure my spot while there’s still time!

Drip marketing gets investors excited. They can follow your growth in real time.

It also creates FOMO.

They know they’re not the only ones getting those updates! They better get a check in while they still can.

Excitement + FOMO = you raising more cash.

Saving You Time

The scarcest resource on earth is founder time. If you’re gonna write this update every month anyway, why not get some additional mileage out of it?

Fundraising is very time-consuming. But if you drip market investors and show real progress, you’ll have VC’s contacting you.

Think of all the time that saves! Also, who do you think you have a better chance of closing:

A) An investor you contact
B) An investor who contacts you

Yep.

But What About Confidentiality?

Putting a bunch of people who haven’t invested yet on your update puts your company’s private information into broader circulation. But it’s worth it.

Confidentiality in startups is overrated. It’s so hard to get anyone to care about your company, even if you strip naked and scream about it in Times Square!

Does it really matter if the world knows your MRR? Do they even care?

The upside of raising capital more easily is worth the risk.

If you have truly sensitive info, like a customer you’re under NDA with, just don’t put it in the update. You can always tell your major investors one-on-one.

Wrap-Up

Every time you talk to an investor, offer to add them to the update. Some won’t read it, but some will.

If you start to break out, you’ll have VC’s trampling each other to get in the round. All without you doing any more work than you’re already doing today.

Do you add potential investors to your update?

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My Ten Year Angel Investing Plan

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My Ten Year Angel Investing Plan

June 17, 2024

Ten years. 100 investments. Three years in, I’m at 30, and I’m finalizing a new one right now.

Why 10 years? Why 100 companies? Story time…

Walking Away

In 2019, I walked away from a great job.

I worked in medical software for many years. The field had been good to me, but I felt like I’d done everything I was ever going to do in that business. Plus, I’d made a little bit of money, and I wanted to see what else the world had to offer.

I bounced around for a while, doing some volunteering, some work as an extra on film sets, French conversation groups, you name it. Then, around Christmas in 2020, I read Jason Calacanis’ book Angel.

If you have any interest in investing in startups or raising money for a startup, read this book ASAP. It’s one of the most actionable books I’ve ever read, and it’s not boring.

I was fascinated by the world Jason described. So, I started listening to his podcast This Week in Startups too.

Making Plans

“Maybe I can do this,” I began to think.

I knew it would take 10 years or more for an early stage company to exit. If I wanted to see if I was any good at this, I’d have to give it a decade.

So I committed to invest in 100 companies over 10 years. Here’s how I arrived at the number 100…

I took the amount of money I was okay with losing and divided it by the minimum investment for most companies. Whether a syndicate or direct, I can usually get in for $5,000.

So, I took the $500,000 I was okay losing and divided by $5,000. That’s 100 investments.

Don’t Forget Reserves

Those 100 investments are only half the picture. The other half is follow-on.

Over time, I’ll narrow those 100 first bets down to 10 or 20 top performers. These are companies with strong growth that raise a Series A.

For those elite special ops level founders, I’ll throw in an additional $25k or more. A few have already gotten it.

Illiquidity Risk

100 investments is my goal, but you never want to put any system on autopilot.

Depending on how my non-startup investments perform, I may need to slow down at some point. I don’t want to get too illiquid, with too much money in startups and not enough in liquid assets.

This may mean taking a pause at around 70 as I await some exits. I could still make an investment here and there. I could also be useful to founders in other ways, like helping them get their decks in ship shape.

But for now, it’s all systems go.

How I Think About Deals

When I look at a deal, everything goes back to my 10 year plan.

Looking at a deck this morning, I kept thinking, “This is pretty good!” They had around $500k ARR growing fast and a strong team.

But the valuation was steep, a $30 million post. So I thought to myself, “Is this the best deal I can do in the next month or two?”

It wasn’t. So I passed.

Having a clear plan for your investments tells you where to set the bar. And knowing where that bar is, that’s everything.

Defining Success

So, after 10 years, how will I know if this angel investing experiment is a success?

A 3x fund is usually considered to be a top quartile VC fund. That’s my goal.

If I give a basket of my investments 10-12 years, did they 3x? If so, this experiment was a winner.

So far, it’s looking good. Here are my top 4 companies so far, all seed and pre-seeds done in the last 3 years:

$17 million ARR
$10 million
$7 million (2)

Wrap-Up

My commitment to myself was to do this for 10 years. So what happens in 2031?

I’m free to leave startupland and never come back. But something tells me that’s not gonna happen.

I’m way more obsessed and fanatical about investing than when I started! Each week, I seem to work a little more, try a little harder.

On weekends, holidays, vacations, even a camping trip last weekend, I have to stop myself from working. It’s too darn interesting!

No one knows what the future holds, but odds are I’ll be here a while.

Are you interested in investing in startups? Leave a comment and let us know!

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Talking Startups on the OpenVC Podcast

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Raising Less

June 14, 2024

I’m seeing a pattern among my most successful investments. They’re raising a lot less money.

How It Works

Here’s how it usually goes:

Company raises a pre-seed or seed. I invest.
Revenue grows very fast.
Company raises $1-4 million once or twice on SAFEs at higher valuations over the next couple years.
Revenue is at around $10 million ARR before Series A.
Series A only raises a couple of million at a valuation of over $100 million.

The raises after pre-seed/seed are tiny, selling just a couple percent of the company each time. That’s a huge change from how it’s been done in the past, when each round would dilute prior shareholders by about 20%.

These subsequent raises are more about bringing on the right people than raising money. A venture firm that can bring in lots of customers gets the chance to invest $1-4 million, but no more.

‘What Do You Mean You’re Profitable?’

Startups are doing this because they don’t need the money. They are running very cash efficient businesses.

One company I’m an investor in actually has more cash in the bank than they ever raised! This means they’ve been net profitable since the founding — unheardof in startupland.

When Vanta got to $10 million ARR before raising a Series A, it shocked our little corner of the world. Now, Vantas are becoming more and more common.

DoNotPay even paid a dividend recently! They were making so much money they gave shareholders over a million dollars.

I’ve never once heard of a startup doing this before DoNotPay. But we may start to see dividends more and more often.

Do you think DoNotPay will be raising tens or hundreds of millions over and over, diluting 15-25% each time? I don’t think so.

They have no use for it.

What’s Driving Cash Efficiency

Startups may have started becoming more cash efficient because of the down market. But now, it’s taken on a life of its own.

AI has made every engineer 50% more productive. And if we’re all on Zoom, why not bring in engineers from Bangalore for $60k instead of $250k in SF?

Compared to the boom in 2021, we have engineers at 25% of the cost who are 50% more productive. That’s a roughly 6x boost in productivity per dollar in just 3 years*.

No wonder companies aren’t raising as much.

What This Means for Investors

Companies raising less spells trouble for the big, late-stage funds. If your business model depends on ripping $100 million or more into companies, and the companies no longer want your money, you’re finished.

Remember, every time founders take VC dollars, they own less of the company. So if they don’t need the cash, founders have a strong incentive to reject it.

My business model fares much better in this climate. My pre-seed and seed investments will suffer less dilution if companies raise less follow-on funding.

My follow-on investments, which usually happen at Series A, may get done at a higher price. But since my first bet isn’t getting diluted as much, this should even out.

If I see companies raising less becoming a durable trend, I may shift my business model. In a world like that, it may make sense to make a bigger first bet and not do any follow-on.

For now, I’m sticking to my existing strategy and watching the market closely.

Wrap-Up

The greatest thing about these cash efficient startups is that the public markets will eat them up.

Public market investors are sick of unprofitable tech. But profitable companies should get a great reception from the markets. They may even be able to go public at lower levels of revenue, perhaps $100-250 million ARR.

For early stage investors, companies raising less is great. We suffer less dilution and these cash efficient startups should have a smoother path to exit.

But for the late stage guys, the best days may be in the rearview.

Are you seeing startups raise less? Leave a comment and let us know!

Have a wonderful weekend, everyone!

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*Note: Here’s how Claude and I calculated this. Shoutout to Claude for getting this right, when GPT-4o gave an incorrect answer.

Let’s say I have one engineer at $250,000 and another at $60,000. The engineer at $60,000 has 50% higher productivity than the pricier engineer. Both work 2000 hours a year. Is there a way to calculate the per-unit productivity of each person?

Edit
Yes, we can calculate the per-unit productivity of each engineer by considering their annual salary and relative productivity. Let’s solve this problem step by step.
Given:
• Engineer A earns $250,000 per year and works 2000 hours.
• Engineer B earns $60,000 per year, works 2000 hours, and has 50% higher productivity than Engineer A.
Step 1: Calculate the productivity ratio between Engineer B and Engineer A.
Engineer B’s productivity = 1.5 × Engineer A’s productivity
Step 2: Calculate the per-unit productivity for Engineer A.
Engineer A’s per-unit productivity = Engineer A’s productivity / Engineer A’s salary
Let’s assume Engineer A’s productivity is 1 unit per hour.
Engineer A’s per-unit productivity = 1 unit/hour ÷ $250,000/year
Engineer A’s per-unit productivity = 1 unit/hour ÷ $125/hour = 0.008 units per dollar
Step 3: Calculate the per-unit productivity for Engineer B.
Engineer B’s productivity = 1.5 × Engineer A’s productivity = 1.5 units/hour
Engineer B’s per-unit productivity = 1.5 units/hour ÷ $60,000/year
Engineer B’s per-unit productivity = 1.5 units/hour ÷ $30/hour = 0.05 units per dollar
Therefore, Engineer A’s per-unit productivity is 0.008 units per dollar, while Engineer B’s per-unit productivity is 0.05 units per dollar. Engineer B has a higher per-unit productivity, which means the company gets more output per dollar spent on Engineer B’s salary compared to Engineer A.

Copy

Retry

FS
what is the cost disparity then, per unit of productivity? please express it as a ratio.

Edit
To find the cost disparity per unit of productivity, we need to compare the cost per unit of productivity for each engineer. We can express this as a ratio of Engineer A’s cost per unit to Engineer B’s cost per unit.
From the previous calculation:
• Engineer A’s per-unit productivity = 0.008 units per dollar
• Engineer B’s per-unit productivity = 0.05 units per dollar
Step 1: Calculate the cost per unit of productivity for Engineer A.
Engineer A’s cost per unit = 1 ÷ Engineer A’s per-unit productivity
Engineer A’s cost per unit = 1 ÷ 0.008 = $125 per unit
Step 2: Calculate the cost per unit of productivity for Engineer B.
Engineer B’s cost per unit = 1 ÷ Engineer B’s per-unit productivity
Engineer B’s cost per unit = 1 ÷ 0.05 = $20 per unit
Step 3: Express the cost disparity as a ratio of Engineer A’s cost per unit to Engineer B’s cost per unit.
Cost disparity ratio = Engineer A’s cost per unit : Engineer B’s cost per unit
Cost disparity ratio = $125 : $20
Cost disparity ratio = 6.25 : 1
Therefore, the cost disparity per unit of productivity between Engineer A and Engineer B is 6.25 to 1. This means that the company spends 6.25 times more for each unit of productivity from Engineer A compared to Engineer B.

Talking Startups on the OpenVC Podcast

June 13, 2024

What makes a great deck? Where can angels find deals? I dug into all that and more on the very first episode of the OpenVC podcast!

Here are some of my favorite moments…

2:03: How I got into angel investing and finding some early success.

9:43: Helping founders after I invest.

12:35: Where I find deals.

15:44: What makes a great pitch deck.

22:20: Continue as an angel or raise a fund?

28:50: Why I no longer tell founders “Have a great weekend!”

Right before we started recording, I got to talking with Harrison about British food. He lives in London, and I mentioned how much I love scones with clotted cream and jam.

After the episode, he sent me amazing scone mix, clotted cream, and strawberry jam from England! They were absolutely delicious.

Thanks so much to Harrison and OpenVC for having me on the podcast!

What did you like about the episode? What did I get wrong?

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Why I Don’t Pay for Angel Groups

June 12, 2024

I never pay to be in an angel investing group. Here’s why…

I was chatting with a great up-and-coming angel investor this week. “What do you think of these angel groups that charge a membership fee?” she asked.

Some angel groups charge thousands of dollars to join. When I look at these groups (also known as syndicates), I do the same thing I do when I look at a startup.

I compare them to what else is in the market.

And the market is telling me that this isn’t worth paying for.

Setting the Bar

I’m a member of almost 100 syndicates. So far, the one with the best track record and dealflow I’ve seen is Jason Calacanis’.

Joining that group is free. So why would I pay someone else for an inferior product?

I know that sounds kinda harsh. But this is a free market.

I’m not going to pay for A when B is better — and free!

Getting Paid Twice

Never forget, syndicates are already getting paid.

They generally take 20% of any investment gains you make. This is called the “carry.”

Carry aligns incentives perfectly. They only make money if I make money.

That’s more than fair. I have no problem giving someone 20% of an Uber if I get the other 80%.

But paying just to be in a group and see some deals, then also paying carry? That doesn’t work for me.

Great, Free Syndicates to Check Out

Here are my favorite syndicates.

Of the roughly 100 I’m in, these have had the best dealflow. I’ve done deals with all of them. And all are free:

If you join all these, you’ll have access to tons of solid dealflow. And you’re never obligated to invest in anything.

Always do your own research and make your own decision. Don’t rely on a syndicate lead, me, or anyone else for that!

What Is Worth Paying For

One program that is worth paying for is Angel University.

Jason and LAUNCH run it a few times per year. I’ve taken both their 1.0 and 2.0 courses.

I use what I learned in these classes every single day. And it’s very reasonable — just a couple hundred bucks, and it all goes to charity.

Wrap-Up

Some angel groups are more about socializing than anything else.

I enjoy chatting with interesting people, but in the end, I’m here to make investments. And I don’t need to pay thousands of dollars in membership fees to do that.

I’d rather give that money to a startup. 🙂

Would you pay for an angel group? Leave a comment and let us know!

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Why I Passed: “ProductPreview”
“Not Yet”

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“Not Yet”

June 11, 2024

I rarely tell a founder “no.” Instead, I say “not yet.” Here’s why…

When I first started angel investing, I thought I had to give every company a yea or nay. But over time, I realized I don’t.

Most any startup could be a great investment. It’s just a matter of whether it’s met my criteria yet or not.

Keeping Your Options Open

Saying “not yet” preserves optionality…or, as normal people would say, keeps your options open. 🙂

Saying “no” is the end of a conversation. But “not yet” keeps the conversation going.

That’s important, because none of us knows where the next Airbnb is coming from.

“None Of Us Knows What the Future Holds, My Friend”

Everyone thought Brian and Joe’s idea for crashing in spare rooms was stupid. And at first, they struggled to make it work.

What if I’d met them in year one? If I’d said “no,” they might have taken me off their list.

But if I’d said “not yet,” they might message me once Airbnb was starting to work!

And that is exactly what I what a founder to do.

It all comes down to the quote from Paulie Gualtieri in my favorite TV show, The Sopranos. None of us knows what the future holds.

When I Do Say No

I do give a clear “no” to some startups. Those are usually companies that are way outside my investment area.

So biotech would be a “no,” as would a company in an unfamiliar market like Germany or Nigeria.

I might also say “no” to a startup operating in an extremely small market. For example, an app to find firewood just isn’t addressing a large enough market to produce a big outcome.

Wrap-Up

Saying “not yet” keeps a company on the startup conveyor belt. In time, the company that wasn’t quite right might be just perfect.

If you’re investing in startups, try saying “not yet” rather than “no.” You might be surprised how yummy some of those companies look in the future.

Do you say “no,” “not yet,” something else? Leave a comment and let us know!

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The Startup Conveyor Belt

Why I Passed: “ProductPreview”

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More on Fundrise in this post.

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Why I Passed: “ProductPreview”

June 10, 2024

They were raising $5 million at a $30 million post-money valuation. I loved the founder and the product was innovative, but I had to pass. Here’s why…

“ProductPreview” connects brands with consumers to give feedback on products before their release. ”ProductPreview” is a composite, not a real startup, and the name is made up. But it shows why even companies with great ideas and committed founders may not make good investments.

The Good

“ProductPreview” has a really cool platform that lets brands test products before they release them.

If Acme Coffee is working on a new blend, they could send me some to test out. I brew it up and let Acme know if I like it or if this new blend is a dud.

No business wants bad reviews and product flops. So testing a product in advance makes a ton of sense.

When I met with the founder, I could tell how much she cared about the business. Her dedication was showing results. “ProductPreview” was closing in on $3 million a year in revenue.

The Bad

“ProductPreview” had significant revenue. But unfortunately, it was barely growing.

In the past year, revenue had grown only about 20%. The best companies at this stage are doubling or tripling year over year.

Worse yet, “ProductPreview’s” burn was out of control. The company was burning over $200,000 a month.

It took “ProductPreview” $10 of burn to add $1 of ARR. A great company at this stage would be burning $3 or less to add $1 of ARR (a burn multiple of 3).

The company employed 41 people, a huge number for a company its size.

Decision Time

I really liked this founder and admired her dedication. I also thought the idea had some real potential.

But the combination of minimal growth, excessive headcount and heavy burn were too much for me. I passed.

Wrap-Up

When I have to say no to a founder I really like, it sucks. I wish I could say yes to everyone!

But these investments have to make money. Otherwise, we won’t be able to keep making them.

Then, there would be no venture capital for anybody.

Would you have invested in “ProductPreview”? Leave a comment and let us know!

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Meet My Latest Investment: Melengo

Why I Passed: “DoorTrack”

Why You Need a Technical Co-Founder

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Meet My Latest Investment: Melengo

June 7, 2024

“I need to be in that.” That’s the first thing I thought when I saw Melengo present at a demo day last October.

Well, I just made it happen!

Melengo makes it easy to develop an apparel line, get financing, and get the products made. You can go from a basic sketch to a beautiful piece of clothing in just a few weeks!

Today, people wade through random factories on Alibaba and hope for the best. The process often takes 6+ months.

In my research for this investment, I went on Alibaba myself and looked at hoodies. One called “cotton” in the description turned out to really be a “cotton/polyester” blend. Ahh, the old bait and switch.

Who wouldn’t prefer Melengo to this?

Founder Justin Kwong is approaching a giant market in a really innovative way. His intense focus on the problem and the strength of Melengo’s traction really stood out to me.

Justin’s long term plan is to make the Uber of manufacturing. Making a product should be as easy as getting a ride – and not just for clothing.

An ambitious vision with real traction today – that’s the kind of company I want to back. Check out Melengo and make some awesome products!

Have a great weekend everybody!

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