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Seed Stage Funding Falls to New Low

February 14, 2024

If you’re having trouble raising money, it’s not just you. Angel, pre-seed, and seed funding in January fell to the lowest level since before ZIRP, according to a new Crunchbase report.

Those earliest rounds totaled just $2.1 billion in January. This funding slowdown happened even as total venture funding actually increased from December.

What I’m Seeing at Seed Now

I’m seeing deals take a long time to close these days. What might have been sown up in a few weeks is dragging out for several months.

Most investors seem cautious.

They’re more likely to find flaws these days. In 2021, all most people could see were dollar signs.

That said, great companies are still getting funded. It just takes more traction and a lower valuation.

I’m seeing many seed stage companies with over $1 million in revenue growing fast. They would’ve easily raised a Series A in 2021, if not a B.

For me, it’s a great opportunity!

When Does It End?

Venture capital is a lot like recycling. You give a company money, they grow, and hopefully one day they IPO.

Then you get a big bag of cash. You recycle that back into more startups.

“And on it goes, this thing of ours.”
Paulie Gualtieri

But no bags have been coming through lately. We had a couple IPO’s last year, but nothing close to enough.

Once some of the big names like Stripe or Reddit go public, it’ll be a different ballgame.

Investors will start seeing dollar signs again. And they’ll have mountains of cash to put into new startups.

Wrap-Up

Building these companies is never easy. And right now, it’s a lot harder than it normally is.

Customers are cutting budgets. VC’s are standing pat.

In the end, the only thing you can control is you. Just keep building your business the best way you know how.

Sooner or later, the market will figure itself out.

What are you seeing at the early stage these days? Leave a comment and let us know!

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How Skeptical is Too Skeptical?

Common Startups That Don’t Work

Seed Valuations Hit All-Time High in 2023

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How Skeptical is Too Skeptical?

February 13, 2024

“I have to be a little bit skeptical, or I’d invest in everything. But it’s also my job to ask myself ‘What if it works?’.”

If you invest in startups, you have to hit a delicate balance.

You can’t give everyone a check . And yet, you have to believe that some of these little companies will make it.

So lately I’ve been struggling with this question: how much skepticism is too much?

I Wanna Get Cynical, Cynical

I dug into this problem with a friend Saturday night.

We’re in different industries, but we agreed on one thing: when we don’t take time off, we get cynical.

The longer I go without a day off, the more every company starts to sound the same. Instead of seeing the good points, I tend to see the flaws.

For her working in law, unrelenting work gets her snapping at underlings and not being who she’d like to be.

“In 2021, I took only five days off,” I explained. “Eventually, one startup ran into the next and I didn’t even know what I was looking at anymore. That’s when I decided that I needed to give myself PTO days.”

My Boss Is a Jerk…I Work for Myself.

These days, I budget a very generous 20 days per year plus holidays— up from zero.

I used some last year to visit Porto, Portugal.

I wandered around, looked at cool buildings, ate like a prince and read the Elon Musk biography. I did meet one founder — I can’t help myself! 🙂

I came home refreshed and ready to attack. That’s the mode I want to be in.

We Think We’re Rational, But…

As angels and VC’s, we’re surrounded by the new.

It’s super fun! You see all the coolest stuff before most people know about it.

But digesting mountains of new information every day wears your brain out. It needs a rest.

When I’m worn out, I view startups differently. “That’s such a crowded market, no thanks,” I mutter to myself as I read a slide deck.

Had I just come back from vacation, I might’ve said, “Look at that product velocity! I’m in!”

We humans like to think we’re purely rational — especially in tech. But we’re not.

We get tired. We get cranky. And it effects everything we do.

Wrap-Up

Any early stage deal you see will have 100 problems. Minimal revenue, tons of competitors, an unclear sales strategy.

If you want to find flaws, you certainly can.

But as Don Valentine supposedly said, “We are in the business of making investments. We are not in the business of not making investments.”

So I’m making time off part of my strategy. A few well-timed breaks per year can help me stay fresh, ready to see what’s awesome in your company.

Now, when can I find time for one with all these meetings…

How do you balance skepticism and enthusiasm? Leave a comment and let us know!

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Common Startups That Don’t Work

Seed Valuations Hit All-Time High in 2023

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Hedge Fund ‘Returns’ Mostly Swallowed by Fees

February 12, 2024

These hedge fund fees are getting ridiculous. Some are taking almost 60% of investment gains, according to a new Bloomberg report.

These days, a handful of large multistrategy funds dominate the hedge fund industry. Investors are falling all over themselves trying to write bigger and bigger checks into the same funds.

This means they can charge whatever they want in expenses. Those fees are reducing returns to very low levels.

Some funds are passing through 100% of their expenses to investors. Those funds returned just 6% after fees last year.

Six percent?! I could get 5.5% in a bank account!

Why should I give my money to a hedge fund that might lose it when I could get practically the same return, guaranteed with FDIC insurance, and the fee is 0?

Big hedge funds are operating like government contractors: cost plus. They pass all the costs on to you. This means they have every incentive to make those costs as high as possible.

Steaks all around! After all, we’ll never see a bill…

It all comes down to what Gordon Gekko said in one of my favorite movies, Wall Street:

“You are all being royally screwed over by these bureaucrats with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes!”
Gordon Gekko

Funds should go back to the traditional 2 and 20 model. That’s already high enough! Limits on the costs they can pass through give managers a reason to keep them under control.

Otherwise, investors may just take their money elsewhere.

What do you think of hedge fund fees? Leave a comment and let us know!

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Diving into Steak and Sides at Del Frisco’s

February 9, 2024

On the crisp linen tablecloth sat a thick, leatherbound menu. I cracked it open. This was going to be an incredible meal.

This is Del Frisco’s Double Eagle Steakhouse in NYC.

The light streamed through tall windows as we made our selections. Hmm…so many choices…

Oooh, bread!

I dug my claws into a massive tray of rolls sopping with butter, taking an immodest portion. Hopefully no one else wanted any.

No matter how fine the fare, why is bread always one of the most exciting moments in a meal?

I made a little polite conversation, but my mind was on only one thing: my octopus.

The tentacles rested on a bed of fragrant chimichurri sauce. Shaved almonds added a nice crunch, contrasting with the texture of the octopus.

Delicious.

I used to think I hated octopus. I had only ever had it raw. Long story — lots of time in Japan.

But last year, I found out I actually love it, so long as it’s cooked. Del Frisco’s serves it lightly grilled, a great preparation.

Next came the sides…

Waiters started laying in front of us steaming dishes of all the steak house classics: creamed spinach, mashed potatoes, asparagus and more. My eyes locked onto the creamed spinach, ma cherie amour.

I began to think of it as my creamed spinach. Surely no one loves it as much as I?

Needless to say, my portion was healthy.

And never forget la piece de la resistance, the steak.

Not my steak, but a beautiful steak. I ate mine before I could get a picture. 🙂

I ordered an 8 oz filet, medium rare. The peppery crust on the outside perfectly complemented a tender interior — lovely.

I stuffed my face with mashed potatoes, spinach, and more bread. Life doesn’t get much better than this.

“Dessert?”

Uh, of course! Who do you think you’re dealing with?

I ordered the chocolate mousse cake. The fellow next to me went with butter cake — intriguing.

Our desserts came out, beautifully decorated. I sunk my fork into the chocolate mousse. It felt like plunging my hand into a snow bank — smooth, soft, yielding.

The creamy mousse with a hint of cocoa bitterness was just right.

My dining companion seemed overjoyed with his butter cake. I’ll have to get that next time!

Del Frisco’s is located on Sixth Avenue in Midtown Manhattan. Finding the entrance is a bit tricky — it’s actually just around the corner on 49th Street.

Del Frisco’s also has other locations in major cities across the country. Stop in for a great steak — and don’t forget the spinach!

What’s your favorite steakhouse? Leave a comment and let us know!

Have a wonderful weekend everyone!

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Common Startups That Don’t Work

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Seed Valuations Hit All-Time High in 2023

February 8, 2024

So much for the down market. Seed valuations reached an all-time high in 2023, according to a new report from Pitchbook.

Median pre-money valuations hit $12 million last year. This was higher even than the peak of the 2021 bubble, when they sat around $8 million.

For seed valuations, there has been no downturn at all. Prices have kept rising every year since 2020 with no end in sight.

Why Is Seed Hotter Than Ever?

The late stage market is a mess and venture funding overall has fallen by well over 50%. So why is seed stage doing so well?

Many multistage funds got burned badly with late stage investments. But they’re still sitting on giant piles of cash to deploy.

They also have younger staff eager to write some checks. So they give them a little money and say “Go play at seed.”

Pre-seed and seed are also the most insulated from public markets. Although the Magnificent 7 are crushing it, tech as a whole isn’t.

The NASDAQ remains below the market peak. And many tech stocks are still down 75% or more.

Many managers want to stay as far away from that carnage as they possibly can.

What I’m Seeing Right Now

Here’s what I’m seeing today in the market…

Deal volume is up from last year, a welcome change.

Through much of 2022, so few deals were actually closing that it was hard to invest in as many companies as I’d like to. I did just 7 deals last year, compared to a typical pace of 10-12.

However, the quality of those deals was very high.

Companies are doing more with less. The down market makes founders wary of spending money, and AI means they can hire fewer people while actually getting more done.

When a company does make it to seed these days, it often has a ton of revenue.

In 2021, I saw seed deals get done with little or no revenue all the time. These days, I’m investing in seed and even pre-seed deals that routinely have $1-2 million in revenue.

Those companies would’ve easily gotten a Series A in 2021, maybe even a B. Today, they close a healthy seed round, but no more.

For me, this is an incredible opportunity!

Who wouldn’t want to invest with more traction at the same price? A company with $2 million ARR is a much less risky bet than one with $60,000.

Wrap-Up

Markets are ripping now and the IPO window may come unstuck by mid-year. If that happens, I expect to see more money pour into venture, pushing those seed valuations even higher.

I want to keep loading up on these amazing, de-risked early stage startups as long as I can. Make hay while the sun shines!

What are you seeing at the early stage right now? Leave a comment and let us know!

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More on tech:

Is Adam Neumann Buying WeWork?

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

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

Common Startups That Don’t Work

February 7, 2024

I look at around 2,000 startups a year. Certain ideas pop up over and over — and keep failing.

Today, I thought I’d break down a few common startup ideas I see, and why they tend to go wrong.

1) Geolocation – “An app to find your friends and hang out” is everyone’s first startup idea.

You see where your friends are on a map. Turns out Jim is around the corner from you — let’s hang out!

The problem is that nobody wants this. Most people don’t want others knowing where they are all the time, even friends.

What’s more, if I want to hang out with Jim, I can just text him! I don’t need your app.

2) Event tech – Platforms to find local events are everywhere. The problem is, the biggest winner, Eventbrite, is worth less than $1B.

This is a small and crowded market. It’s hard to create a unicorn here.

There are some unique spins on event tech. But most of the platforms are Eventbrite with a different name, and there’s just no reason for anyone to try them.

3) Dating apps.

Just about every conceivable variation on a dating app has been tried. There are apps for Christians, apps for group dates, and apps for short guys.

Hardly any of them ever catch on.

You need a critical mass of people to get a dating app going. And if everyone’s already meeting people on Hinge or Tinder, who needs a new app?

The revenue model is usually ad supported with some paid users. The lifetime value of each customer is so low that you can’t afford paid ads.

This means you have to go viral — easier said than done.

I sense enormous dissatisfaction with dating apps. But all in all, the existing ones seem to be serving people well enough.

It’s kind of like McDonald’s. Everyone says they hate it, but they sell a billion hamburgers a day.

Wrap-Up

In the end, startupland is like Hollywood: nobody knows anything.

You could build a geolocation app, pitch it to me, and I could pass. It could go on to become a $100 billion company, and I’m left crying in my cold brew, wondering how I missed it.

If you have a unique spin on one of these areas, and you can honestly say your experience is 10x better than the competition, go for it! And if it starts to catch on, save a slice for Francis, won’t you?

What are some common startup ideas you see? Leave a comment and let us know!

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More on tech:

Is Adam Neumann Buying WeWork?

Make It New

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Is Adam Neumann Buying WeWork?

February 6, 2024

Neumann’s back! Founder Adam Neumann is trying to “purchase [WeWork] or its assets” out of bankruptcy, according to a letter from Neumann’s attorneys.

Meet the New Founder, Same As the Old Founder

Neumann built WeWork from the ground up, but his overspending and self-dealing tanked the company’s 2019 IPO. The startup finally succeeded in going public two years later at a much lower valuation.

Neumann’s attorneys claim that WeWork has been unwilling to share financial information that would help in a financing or takeover. WeWork’s management may be wary of letting the controversial founder back into the fold.

As DealBook put it:

It’s unclear whether WeWork’s stakeholders would be comfortable selling the company back to the man whom some of them see as helping to create its troubles.

Neumann Wants WeWork More Than Anyone Else

Neumann is a loose cannon. But who wants WeWork more than him?

For Neumann, this is unfinished business. In 2019, he was pushed out of the company he started and left for Israel, his childhood home.

But shortly thereafter, Neumann bought over $1 billion in apartments across the Sun Belt, later announcing a new startup, Flow. At the same time, Neumann announced $350 million in funding from a16z.

It’s unclear how much of that money Neumann has left 18 months later. But between Flow’s bank account and whatever he can raise from institutions, Neumann should be able to submit a compelling offer for WeWork.

What’s the Alternative?

Does anyone else want this thing?

WeWork is drowning in debt. The company is losing over $100 million a month according to its latest quarterly report.

Above all, WeWork needs to renegotiate leases in order to become a viable business. The company’s footprint is too large, and many of the agreements were signed at the peak of the market.

But lease renegotiations aren’t making much progress. Indeed, landlords have complained that WeWork hasn’t been responsive to their inquiries, according to the Financial Times.

The bottom line is WeWork is almost broke and needs to buy time. And love him or hate him, Neumann is there, cash in hand.

Wrap-Up

Last July, I predicted that Neumann would try to buy WeWork. The iconic brand, low price and personal history made that a pretty easy call.

Neumann wants the deal. But WeWork needs it desperately.

Despite his flaws, bringing Neumann back is the best outcome for WeWork. Without the founder, it may not survive much longer.

Should WeWork sell to Neumann? Leave a comment and let us know!

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More on tech:

If You Want to Raise a Series A, Cut That Burn

Make It New

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The Mechanics of Investing in a Startup

February 5, 2024

Note: This is not investment or legal advice.

Once you’ve decided to invest in a startup, how do you actually finalize the deal? This morning, I’m signing and wiring for a new investment. Here’s how it works…

1) Term Sheet. The lead investor generates a term sheet. This document tells us how the investment round will work.

The term sheet will say how much money is being invested in the company. It will also tell us the valuation and the type of financing (SAFE, priced round, etc.).

Angel investors don’t lead rounds or generate term sheets. As an angel, deals are “take it or leave it.”

2) Review and sign docs.

When the financing is ready to close, you get a ton of documents to sign. These generally include stock purchase agreements, rights of first refusal, etc.

In total, you’re looking at over 100 pages of dense legalese. I generally skim it looking to confirm key details, like the amount of money raised and the post-money valuation.

Many early stage financings are done using a SAFE. This is a standard document from Y Combinator’s website. The SAFE saves you time and legal fees compared to drafting a more complex agreement.

If the financing is done with a priced round, most startups use standard documents from the National Venture Capital Association (NVCA). Like the SAFE, using standard docs saves time, effort, and money.

I usually get these documents as a Docusign link. I review them and sign them online.

3) Wiring.

Given how complex the whole process is, you could almost forget the entire point: getting cash into the startup! Let’s take care of that final, all-important step.

You usually make an investment in a startup using a wire transfer.

Most banks can do this. Some even provide free wire transfers, which is really nice if you make a lot of startup investments like I do.

The startup will give you its wiring info. This includes the bank name, account number, etc.

I go to my bank’s website, initiate a wire transfer, and type in the info the startup gave me. Whoosh, money heads from my account to theirs.

And we’re finally done!

It would be nice if you could do this with an ACH. Every bank can do those, generally free. But in the vast majority of cases, wiring is the only option.

Wrap-Up

Meeting startups and deciding to invest in them is fun! Reviewing legal docs, signing, and sending wires is kinda boring.

But it’s critical.

Once you’ve agreed to invest in a company and they’ve sent you the signing and wiring info, you should always sign the docs and wire right away. I try to wire same day if at all possible.

Being easy to work with helps your rep as an investor. It’s also just being a good human.

Okay, off to find more startups!

What questions do you have about investing? Leave a comment and let me know!

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More on tech:

Make It New

If You Want to Raise a Series A, Cut That Burn

You’re Not Going to Get That Dry Powder

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

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

Make It New

February 2, 2024

“Make it new.”
Ezra Pound

Uber and Airbnb are the biggest winners of the last cycle. Their markets are very different, but here’s what they have in common: both were fundamentally new.

Until Airbnb, no one had ever made it easy to rent someone’s spare room. And the first time I tapped on my phone and a car showed up, I wondered if I was dreaming.

These days, companies doing something totally new go to the top of my list.

My New Way of Judging Investments

As an investor, I look at lots of factors: market size, product quality, founder backgrounds, etc. But a moment in a recent episode of This Week in Startups stopped me cold.

“I’m looking for things that are new.”
Zach Coelius, angel

It struck me: this is what Uber and Airbnb really have in common. They weren’t slightly better versions of something else — they were fundamentally different.

“Is it new?” is a simple but powerful way to filter startups.

Fundamentally New vs. A Little Better

Uber and Airbnb provided fundamentally new experiences that people want. There might have been a company or two that had taken a shot at these markets (Taxi Magic and Couchsurfing.com come to mind), but no one had done it successfully.

Most startups aren’t like Uber and Airbnb.

They’re not doing anything new. They’re doing the same thing other companies do, a little better.

Well, they say it’s better. Their competitor probably says otherwise.

They wind up fighting it out over Google and Facebook ads to the same customer base. In the end, they burn lots of money and never really make it big.

Wrap-Up

There are a thousand ways to judge a startup.

How fast is it growing? How big is the market? What has the team done before?

But for me these days, the biggest question is “Is this new?” When I see something I’ve never seen before, that’s when I want to learn more.

What’s the coolest new tech you’ve seen lately? Leave a comment and let us know!

Have a great weekend, everyone!

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More on tech:

If You Want to Raise a Series A, Cut That Burn

Look Who’s in Times Square!

How to Build Something People Want

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