Tremendous

An angel investor's take on life and business

  • Why I Passed: “WorkerIQ”

    They were raising $1 million on an $11 million post-money SAFE. The product was awesome, but I passed. Here’s why…

    WorkerIQ is a composite, not a real startup, and the name is made up. But it shows why a great product alone doesn’t get you funded.

    The Good

    “WorkerIQ” makes it easy to track where industrial workers are and whether they’re safe. Workers wear a bracelet that tracks location and can tell if a worker has fallen.

    “WorkerIQ’s” customers are mostly in heavy industry: oil refineries, mines, shipbuilding, etc. These jobs require coordination by big teams. They can also be very dangerous.

    The bracelet is comfortable to wear and does a great job of telling you if everyone is where they’re supposed to be. Even more importantly, it can help you find an injured worker ASAP.

    The founder, “John,” had a great background in industry, having worked in management at several oil refineries. I knew he’d be able to speak his customers’ language.

    Revenue was substantial, at over $1.4 million a year. That put the pre-money valuation of this round at just 7x annual revenue, which is low for a company at this stage.

    The Bad

    “WorkerIQ” had a lot of revenue, but it wasn’t growing much. Over the last year, the company had grown just 5% month over month (MoM), or 80% year-over-year (YoY).

    I like to see a company at this stage at least triple year over year. We need to get to $100 million in revenue to become a unicorn. It’s hard to get there growing only 5% MoM.

    What’s more, nearly half that revenue came from hardware. That revenue was non-recurring and had much lower margins.

    Decision Time

    “John” had developed an awesome product and knew his customers inside and out. But unfortunately, the product wasn’t selling that well.

    In a normal business, nearly doubling revenue in a year would be amazing. But in the funhouse mirror world of VC, it wasn’t a top performer.

    I was also concerned about the quality of the revenue. Much of it was non-recurring and low margin.

    Despite loving the “WorkerIQ” product, I passed.

    Wrap-Up

    Every year, thousands of startups are founded. Only a few will ever matter.

    To have any chance of making money, we have to invest in the strongest performers. And “WorkerIQ” just hadn’t reached that level yet.

    But if they can get that growth cooking, I’d be glad to take another look!

    Would you have invested in “WorkerIQ”?

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    Why Credentials are Overrated

    Meet My Latest Investment: North
    My Ten Year Angel Investing Plan

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Why Credentials are Overrated

    A lot of early stage investors are obsessed with credentials. I think that’s a big mistake.

    There’s nothing wrong with going to Harvard or working at Google. But when you look at the best founders, they don’t look like that.

    Instead, you see people with a strong entrepreneurial bent that rose from obscurity.

    Let’s look at the three most valuable companies to come out of the last cycle: Uber, Airbnb, and ByteDance. What can we learn from these special founders?

    Travis Kalanick

    Travis Kalanick of Uber definitely didn’t have a Big Tech pedigree. In fact, his first startup got him sued for $250 billion — nice, huh?

    His next startup, Red Swoosh, gave him a modest exit and a little cash to play with. But it wasn’t until his third that he hit the big time.

    Travis did go to a good school, UCLA. But of course, that’s not Stanford or MIT (nor is my alma mater, Wisconsin).

    What stands out about Travis isn’t any particular line on his resume. It’s his persistent desire to create and sell, all the way back to when he sold pancake breakfasts for the YMCA as a kid.

    Brian Chesky and Joe Gebbia

    Brian Chesky and Joe Gebbia were even more obscure than Travis.

    Brian called his team the “bad news bears of Silicon Valley.” Hardly anyone wanted to meet with them. They were lucky if they could get an e-mail returned.

    And no wonder! They came out of the Rhode Island School of Design, not Stanford CS. Neither had ever worked in tech in any capacity — they were industrial designers.

    But to one man who was paying close attention, there was a tell. That man was Paul Graham.

    Brian and Joe had sold Obama and McCain themed cereal during the 2008 election. It gave them just enough money to keep the company alive.

    These were founders with a burning desire to succeed. How many people would have gone to these lengths to keep a company going?

    PG made the bet.

    Zhang Yiming

    Not a lot of people in America have heard of Zhang Yiming. Until this morning, I hadn’t either!

    Yiming is the founder of ByteDance, the parent company of TikTok. Of all the companies we’re looking at today, ByteDance is by far the most valuable — $268 billion.

    Like Travis, Brian and Joe, Yiming didn’t come from Big Tech.

    Nor did he go to Harvard, MIT, or even Tsinghua. Instead, he studied at the more modest Nankai University in Tianjin.

    Yiming worked for a travel startup called Kuxun out of school. Later, he founded a property search site called 99fang.com.

    He quit after a couple of years and founded his next company: ByteDance.

    Yiming didn’t have much of a pedigree. But like the other founders we’ve looked at today, he had a strong entrepreneurial bent.

    He went to a startup after college, not a major company. And soon, he was off on his own starting businesses.

    Wrap-Up

    Among accelerators and early stage investors, the focus on pedigree seems to get stronger every day.

    Investors are looking for a shortcut. An easy way to tell who will succeed.

    But they’re focused on the wrong things.

    If we look at the biggest successes in tech, they’re short on pedigree. But they’re long on entrepreneurial nerve.

    So I don’t look for an Ivy degree or a track record at Facebook. Instead, I want to know what you’ve started, and how many times you’ve failed.

    I’ll take a gritty entrepreneur over a gleaming resume any day.

    What do you look for in founders?

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    Meet My Latest Investment: North
    My Ten Year Angel Investing Plan

    Why I Passed: “CEOCoach”

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Meet My Latest Investment: North

    $60 billion a year in global cloud spend. A lot of that is wasted. But my latest investment, North, is changing that.

    “Plug it in and if you don’t see savings in 5 minutes, fire us.”

    That’s founder Matt Biringer on a recent podcast.

    North really is that fast. And it can save you 50% or more on your cloud bills.

    Best of all, there’s nothing for you to manage. It all happens automatically!

    North makes sure you’re not paying for resources you’re not using. It also lets you buy compute in bulk with other customers, lowering your costs.

    When I meet startups, I look for an unbeatable value proposition. North has one of the best value props I’ve ever seen among the thousands of startups I’ve met with.

    Matt is also incredibly hard working. He’s in Slack answering customer messages at midnight on the weekends.

    With an incredible value prop and deep concern for customers, it’s no surprise North is growing really fast. I’m super excited to be a small investor in their recent seed round!

    Check out North and save your startup some money!

    More on tech:

    My Ten Year Angel Investing Plan

    Why I Passed: “CEOCoach”

    Why Angels Struggle to Keep Their Checks Small

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Why I Passed: “CEOCoach”

    They were raising $2 million at a $9 million post-money SAFE. This startup had some awesome growth, but I passed. Here’s why…

    “CEOCoach” is a service that provides a coach for top executives. ”CEOCoach” is a composite, not a real startup, and the name is made up. But it shows why even some companies with great growth have a hard time raising money.

    The Good

    “CEOCoach” is a pretty cool service! They match top executives with their own personal coach, who helps them improve their leadership and decision making.

    When I met with the founder, “Mike,” I could tell how deeply he cared about this problem. Mike’s eyes lit up when he talked about how “CEOCoach” was helping execs get more out of their teams and grow their businesses.

    “CEOCoach” itself was growing really fast too! Over the last year, they had grown 19% month over month, an incredible record.

    The Bad

    Not many companies grow as fast as “CEOCoach.” But I questioned whether they could maintain that growth.

    Churn was high at 5% of revenue a month. That means after a year, you lose 46% of your revenue.

    You’re basically rebuilding the company from scratch every 2 years. It’s hard to grow to $100M ARR when you can’t hold on to customers.

    “CEOCoach’s” retention sat at 54%. I’d like to see a minimum of 60% yearly for a company like this, and I’d prefer 80%.

    “CEOCoach” had what we call “the leaky bucket problem.” It could get customers to sign up, but it couldn’t keep them.

    This tells me the customers aren’t getting enough value from the service. And that’s a problem.

    Decision Time

    “CEOCoach” had some incredible growth. I really liked the founder, Mike, and wanted to support him.

    But I couldn’t get past the high churn. I had serious doubts that this business could keep growing given their difficulty holding on to customers.

    I passed.

    Wrap-Up

    I actually really like “CEOCoach,” and I might be very interested in investing in it in the future. If they can get that churn down, it could be a fantastic business.

    Like every startup I meet with, I saw “CEOCoach” at a moment in time. Today their churn is high, but that could be totally different tomorrow.

    Startups are always raising money. The odds are good I’ll have another shot at this one, and if I do, I just might take it!

    Would you have invested in “CEOCoach”?

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    My Ten Year Angel Investing Plan

    Why I Passed: “ProductPreview”

    Why Angels Struggle to Keep Their Checks Small

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Why Angels Struggle to Keep Their Checks Small

    “It was the biggest mistake I made as an investor.”

    I was chatting with a fellow angel a while back. He shared with me something he learned the hard way: keep the checks small.

    But year after year, angels keep getting this wrong. Here’s why…

    How Angels Fail

    Take a typical new angel — we’ll call him Jim. Here’s how Jim will fail at angel investing:

    1. Jim takes $350k he doesn’t need and puts it in the angel investing bucket.
    2. Jim meets Mike, a founder he loves.
    3. Jim invests $200k in Mike’s startup.
    4. A year later, Mike comes back for more. “We need it to launch the product,” he explains.
    5. Jim gives them another $100k. “This should do it,” Jim thinks.
    6. Six months later, that money is gone. Mike comes back again.
    7. “We just need another $50k and we’re home free!” Mike tells him. Mike is persuasive and charismatic — after all, he’s a founder!
    8. Jim gives him the last $50k, desperate to save the $300k he’s already put in.
    9. Product never launches.
    10. Company folds. Jim loses everything.

    I don’t want to be Jim. That’s why I have to diversify widely.

    Diversification gives us the best chance of hitting an outlier. It usually takes 30-50 well chosen seed stage investments to hit a unicorn. And those unicorns are where almost all the returns come from.

    But in order to diversify, I need to write smaller checks.

    Wanting to Feel Important

    Writing lots of small checks is a simple strategy, but angels have a hard time sticking to it. We humans want to feel important, and we just don’t feel as important when we’re investing $5k as when we’re investing $100k.

    “I was concerned about what my fellow investors would think of me,” my angel friend said.

    That’s a very natural human thing. But we have to overcome it, as he did.

    I try my best to purge myself of any desire to feel important.

    These investments aren’t about me being a big shot. They’re about creating something awesome and making a profit while we do it.

    I’m just a small part of that. I know it. And I’m fine with it.

    People Pleaser vs. Company Builder

    Here’s another reason why angels write larger checks than they should: they want to make people happy!

    Most of us do. It feels better to make somebody’s day than to disappoint them, right?

    What do you think makes somebody happier: $250k or $5k? Yep.

    But while I always try to be polite, I can’t be afraid to disappoint people. That’s simply part of the business, and anyone who’s in it as an investor or a founder will have to live with it.

    Our job is to help build companies, not make everyone happy.

    Wrap-Up

    If we want to succeed as investors, we have to find a sound strategy and stick to it. Our feelings can be a big barrier there.

    Humans want to feel important, and they want to please other humans. But we have to move past those feelings in order to find success.

    I like to focus on the task at hand.

    Meet founders, pick the best ones, and slide in a small check. Then, help all I can.

    Nothing else matters.

    What mistakes do you see angels making?

    There will be no blog tomorrow. See you guys on Monday, and have a great weekend!🥳

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    The Power of Small Checks

    My Ten Year Angel Investing Plan

    Why I Don’t Pay for Angel Groups

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Top-Heavy markets spell trouble for late stage startups

    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?

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    How to Drip Market Investors for Fun and Profit

    My Ten Year Angel Investing Plan

    Why I Don’t Pay for Angel Groups

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

    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

    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.

    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?

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    My Ten Year Angel Investing Plan

    Why I Don’t Pay for Angel Groups

    Meet My Latest Investment: Melengo

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • My Ten Year Angel Investing Plan

    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:

    1. $17 million ARR
    2. $10 million
    3. $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!

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    Why I Don’t Pay for Angel Groups

    Meet My Latest Investment: Melengo

    Talking Startups on the OpenVC Podcast

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

  • Raising Less

    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:

    1. Company raises a pre-seed or seed. I invest.
    2. Revenue grows very fast.
    3. Company raises $1-4 million once or twice on SAFEs at higher valuations over the next couple years.
    4. Revenue is at around $10 million ARR before Series A.
    5. 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!

    If you enjoyed this post, subscribe for more like this!

    More on tech:

    Talking Startups on the OpenVC Podcast

    Meet My Latest Investment: Melengo

    Why I Don’t Pay for Angel Groups

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order. 

    *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

    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?

    Leave a comment and let us know!

    If you enjoyed this post, subscribe for more like this!

    More on tech:
    Why I Don’t Pay for Angel Groups
    Meet My Latest Investment: Melengo

    Why I Passed: “ProductPreview”

    Save Money on Stuff I Use:

    Fundrise

    This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    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.

    Use this link to sign up and you’ll save $15 on your first order.