Early Stage NYC Startups Struggle Through Venture Downturn

October 12, 2023

Early stage startups in New York continued to slog through the downturn in Q3. Average seed round size fell 16% from Q2, according to a new report from Primary Venture Partners.

It’s Not the Summer Slump

The funding market is highly seasonal. There are two big fundraising seasons — spring and fall. Summer is usually slow.

But the seasons aren’t the cause of this drop. The total funding raised fell 41% from the same period a year earlier.

In a Dim Report, Healthtech Shines

One bright spot: healthtech startups.

This quarter, we saw a spike in healthcare seed rounds. HCIT deals are up 35%, from 14 in Q2 to 19 in Q3.

I actually invested in an awesome NYC healthtech startup in Q3 myself. I hope to be able to announce it soon.

AI Frenzy Cools — For Now

Despite the enthusiasm for AI, funding actually slowed down in the most recent quarter:

…AI saw a slowdown to the fundraising frenzy. AI deals are down this quarter by 53%, from 15 in Q2 to 7 in Q3.

I saw a flood of AI startups a few months after OpenAI released GPT-4 in March. Those new capabilities led to a lot of new companies.

But now, GPT-4 is over 6 months old. It makes sense that the pace of AI startup creation would slow a bit.

Once GPT-5 comes out, I expect to see another huge wave of AI companies that use its capabilities. I’ll probably invest in some of them!

What I’m Seeing in New York

What I’m seeing in the startup scene here is incredible dynamism. I made two investments in NYC companies in Q3 alone — one SaaS, one healthtech.

That ties with the Bay Area and, curiously, Phoenix. There are some hustlers down in the Sun Belt! Maybe it’s all those hours locked inside next to the AC.

Wrap-Up

In the end, funding levels go up and funding levels go down. If you’re a founder, just build something customers want and scale the heck out of it.

That’s true in New York or anywhere else.

What are you seeing in the NYC tech world? Leave a comment and let us know!

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Where’s the Money? — Venture Funding Slips Again in Q3

October 11, 2023

Venture funding continued to fall in Q3, according to a new report from Pitchbook. VC funding was down 63% from the peak 2 years before, with just $73 billion closing in the latest quarter.

It’s Bad, And It’s Getting Worse

Funding fell even from Q2’s low level. Q3 funding was 10% below the $81 billion of deals done in the prior quarter.

The upshot: the market is not getting any better. And we don’t know when it will.

Across every region, the number of deals getting done is down by about half from 2021. The fact that deal count has fallen less than total funding makes sense. Those hedge fund megarounds into late stage companies are over.

Is An Upturn Around the Corner?

But I’m seeing what might be an upturn going on in the market right now.

I’ve seen more companies seeking funding so far in October than at any time in over a year. Perhaps the writing is on the wall — the market sucks, it’s going to keep sucking, so there’s no sense postponing our raise.

With generative AI, the opportunities are out there. A guy just made ChatGPT generate CNC machining code based on a drawing, for heaven’s sake!

Totally wild https://t.co/rgMOliPuHo
— Francis Santora 🐷 (@FrancisPSantora) October 10, 2023

To seize those opportunities, ya gotta raise. And that’s what startups are doing.

The Benefits of a Down Market

If you raise $1 million at a $8 million valuation today, versus $5 million at $30 million two years ago, that doesn’t feel good. But you’re still set up for success.

You can hire, advertise, and grow. And unlike two years ago, you’re not setting up unrealistic expectations by taking a monster valuation today.

If you have a great idea, I encourage you to build it and raise money. If you don’t, someone else will.

For investors like me, this is heaven.

Founders have better tools than ever before with AI, so there are more great companies out there than ever. And the valuations have not been this low in years.

I hope the down market continues for another couple of years so I can place more bets at today’s bargain basement prices!

Wrap-Up

Great companies are built every year, in good markets and bad.

If you’re a founder, you can create one today. If you’re an investor, you can back one today at a great price.

It’s time to move.

What do you see happening in the venture market? Leave a comment and let us know!

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Pelham Capital: A Hedge Fund in Crisis

October 10, 2023

Hedge fund Pelham Capital is in hot water. The London-based giant has lost almost 80% of its assets after years of poor returns.

From a report out overnight in The Financial Times:

Pelham Capital, once one of the biggest names in London’s equity hedge fund sector, has lost more than three-quarters of its assets in the past three years amid poor performance, investor withdrawals and team departures.

Assets are down from $4.5 billion three years ago to about $1 billion today, according to the FT. This drawdown comes from a combination of trading losses and redemptions by disillusioned investors.

A History of Poor Performance

Pelham has underperformed the market for years:

The flagship fund was down 11.8 per cent in 2021 and dropped 29 per cent last year, investors said. This year it has recovered by about 5 per cent, leaving it far off its so-called high-water mark, the level at which it can start charging performance fees.

Founded by trader Ross Turner in 2007, Pelham posted strong returns at first. But like so many funds, it could not sustain them:

…big losses in 2018, 2021 and 2022 have dragged down the hedge fund’s overall returns. Pelham’s annualised return since inception to August of this year is about 5 per cent, according to Financial Times calculations applied to historical data.

Employees Jump Ship

Pelham’s poor performance means it cannot charge performance fees for the foreseeable future. This means no fat end of year bonuses.

Facing a bleak future, many top employees have left. Pelham’s COO, CTO, and a portfolio manager have all jumped ship in recent months.

This is how hedge funds die.

Bad performance leads investors to pull their money out. A lack of performance fees makes it impossible to retain key employees.

Soon, you’re left with no money and no staff. Game over.

High Fees — And Not Much Else

Hedge funds charge a fortune in fees — a 2% yearly management fee plus 20% of all gains is standard. But their performance is poor.

In 2008, Warren Buffett and hedge fund manager Ted Seides made a bet.

Seides picked a portfolio of top hedge funds, betting they’d beat the S&P 500 over the next decade. Buffett bet that the index would prevail.

Buffett won, as he usually does. He gave his $2.2 million in winnings to Omaha charity Girls, Inc.

Wrap-Up

The future for Pelham Capital is bleak. As assets dwindle and the office clears out, the once mighty fund faces an uncertain future.

Whatever happens to Pelham, I’m avoiding hedge funds. There’s no sense paying 2 and 20 for poor performance.

What do you think the future holds for Ross Turner and Pelham Capital? Leave a comment and let us know!

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How I Became an Angel and More with PIN

October 9, 2023

How did I break into investing with no experience and no network? How can new angel investors get started?

I dug into these topics and more in a new interview with the team at PIN. Here are a few of my favorite moments…

How I Became an Angel

I learned about angel investing from a wonderful book:

I came across the concept of angel investing, and after reading Jason Calacanis’s book ‘Angel,’ which offers a practical guide to investing in startups, angel investing didn’t feel like a ‘mystery’ anymore.

Jason’s book tells you everything you need to know about angel investing, in plain English. If you’re interested in investing, your first job is to read this book.

One, Small Problem

After I read Jason’s book, I was itching to place some bets. One, small problem: I didn’t know any startup founders or investors!

In the beginning, I lacked connections in the startup world, but I gradually expanded through syndicates and online networking.

I started with Jason Calacanis’s syndicate, and from there, my network grew over time. While I occasionally engage in cold outreach, most of my investments come from inbound sources – whether directly to me, through other investors, or investment groups.

Building a Network

For any angel, Jason’s syndicate is the best place to start. I wound up joining almost 100 other syndicates as well.

I haunted just about every New York City startup event. You can usually find me near the free food. 🙂

Each person I met introduced me to 3 more. Soon, my contacts were sending me great deals.

A trickle of deals became a flood.

How Can I Deliver More Than Money?

Anyone can write a check to a startup. I stand out by being as helpful as possible without getting in the way:

I review their investor updates closely and address their specific asks. Occasionally, I’m able to provide assistance, like connecting them with resources or experts.

Recently, I even helped one of my successful companies find a head of marketing, which is a crucial hire for them. It’s gratifying to contribute in a meaningful way.

What I’ve Learned: Markets and Diversification

Now that I’ve been investing for 2.5 years, I’m beginning to understand what makes an investment successful. Above all, I focus on the market:

One important lesson is the significance of focusing on the market. A great product in a suboptimal market can limit growth potential. It’s crucial to choose business models that can scale effectively…

No matter how good the founder or vast the market, most startups fail. This is why I never bet more than I can afford to lose.

If you’re new to angel investing, start small. Invest as little as possible in as many companies as you can.

My advice would be to avoid putting all your capital into a single startup. Instead, spread your investments across multiple opportunities to reduce risk. Angel investing is a long game, and building a diversified portfolio increases your chances of success.

Wrap-Up

Finally, as we exit one hype cycle and head into a new one, I urge you to think for yourself. Don’t just do what someone else is doing — not me, not Jason, not anyone.

…one trait I value is the ability to think independently. It’s essential to avoid the herd mentality and make decisions based on your own judgment.

Thanks so much to the team at PIN for getting this amazing conversation together!

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

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Meet My Latest Investment: Argyle

October 5, 2023

Let’s say you work construction. You lay down the pipes, then your co-worker pours the concrete. Oops – the pipes are in the wrong place.

Now what? You have to waste a whole day jackhammering all that concrete out, then start over. But there’s a way to avoid mistakes like this and make your job easy. It’s called Argyle.

Argyle is an augmented reality (AR) platform that helps you visualize your whole construction site. You can see where pipes and HVAC go, where structural supports are, and more!

Argyle uses headsets like Magic Leap and Hololens to let you see construction plans in 3D. Or, you can see the AR model on your iPhone or iPad.

When everyone knows what they’re supposed to do, construction gets a lot easier. You’re on time, on budget, and your customers are happy!

Argyle supports some of the most advanced construction in the world, from semiconductor fabs to electric vehicle battery plants. I’m delighted to call Argyle my latest investment.

Check out Argyle and build faster, with fewer f—up’s!

Do you run a construction business? What challenges do you struggle with?

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Roelof Botha’s Toughest Moment

October 4, 2023

“In early 2000 when the market melted down, we had seven months of runway left and no revenue.”
Roelof Botha

That’s Roelof Botha, Senior Steward of Sequoia Capital. In a revealing new interview with Bloomberg, Botha digs into the toughest times at Paypal and why great companies are built in the down market.

When Paypal Almost Died

In 2000, Paypal was one of the hottest startups in Silicon Valley. It was growing as much as ten-fold each month — but that growth came at a cost.

Between sign-up bonuses for new users and rampant fraud, Paypal was losing a fortune. And with markets in meltdown in 2000, fundraising was impossible.

As CFO, Botha was in charge of this gusher of red ink.

Back to Basics

The team at Paypal did the only thing it could do. It focused on improving its product and making customers happy.

“The only thing we could control was building a business and serving our customers.”
Roelof Botha

Bit by bit, the losses receded. In 2002, Paypal agreed to be acquired by eBay for $1.5 billion.

Botha had survived.

Today’s Down Market

Today, founders are in their 8th quarter of the down market. Many I speak to are worn out and numb.

I know this downturn seems like it will never end. But nothing lasts forever.

In time, tech will boom again. Deals will get done that probably shouldn’t at prices that would make us blanch today.

That’s the one area where I disagree with Roelof.

He says “it’s the end of easy money.” I say memories are short.

But What About Interest Rates?

A small number of incredible technology companies are founded every year. This is true in good markets and bad.

If you’re a founder, your only job is to create one. If you’re an investor, your sole function is to find such a company and back it.

High interest rates have not stopped innovation in the past, nor will they now.

“In 1999, with Paypal and Google, [interest rates were] over 6%. Today the 10 year yield is only 4.5%. So great companies are built in recessions, in high interest rates environments, in low interest rate environments, so that’s what we focus on.”
Roelof Botha

Startup valuations had to reset to reflect those higher rates and the lower stock prices that come with them. That reset is largely complete.

So long as your company is priced appropriately (about $6-10 million pre-money for a seed round), the investors are out there.

Wrap-Up

I’m a little worried about some of the founders I meet.

We’re almost 2 years into the most brutal tech market in a generation. And they’ve been grinding it out the whole time.

This down market will separate the winners and the losers.

Some founders will give up. Others will persevere.

Which one will you be?

What do you think of Roelof’s interview? Leave a comment and let us know!

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The Greatest Trade Ever (Part Two)

October 3, 2023

“‘It got to the point where I literally got sick to my stomach,’ she recalls. ‘Every day I got home and would think to myself, I helped set someone up for failure.’”
The Greatest Trade Ever

Karen Waheed, who worked at New Century Financial, was becoming increasingly worried about the firm’s lax lending. Her bosses, on the other hand, didn’t seem to have a care in the world.

Trouble in Paradise

New Century Financial was based in a gleaming glass tower in Orange County, California, just a few miles from the beach. In a little over a decade, it had grown to become the largest independent subprime lender in the United States.

But by early 2007, New Century was in trouble. It disclosed issues with loans early in the year and suddenly collapsed into bankruptcy less than 2 months later.

Paulson’s trade was finally beginning to pay off.

Cashing In

The day New Century filed for Chapter 11, Paulson made $1.25 billion. This surpassed even the $1 billion George Soros made in a day betting against the British pound in 1992.

As one lender after another ran into trouble in 2007, Paulson began to trim his positions. He exited about 30% of his bets that year, locking in huge gains.

In all, Paulson’s funds made over $12 billion betting against the housing market. In 2007 alone, Paulson personally made $4 billion — the largest payout in the history of financial markets.

Other bearish hedge fund managers like Michael Burry and Andrew Lahde emerged from obscurity to make tens of millions as well. Meanwhile, the nation’s largest banks imploded on an almost daily basis.

How Did They Do It?

Paulson’s trade was the best in the history of financial markets. But it didn’t take a miracle to pull it off.

Paulson and Pellegrini clearly saw a huge bubble. It wasn’t all that hard to spot — does the price of a house jumping 50% in a year seem normal to you?

One thing Paulson, Pellegrini, Burry and Lahde all had in common was that none was an expert in mortgages.

They viewed the market with fresh eyes. Handing hundreds of thousands of dollars to borrowers with no documentation wasn’t normal to them — even if it had become the norm in the mortgage industry.

While mortgages and derivatives may have been new to these traders, they studied hard to learn these new markets. A fresh pair of eyes and a keen desire to learn are powerful weapons.

But most importantly of all, they had conviction. Even as their trades lost money, they held on, sure they’d be vindicated.

“…sitting and waiting his how we made money from the subprime debacle…”
Andrew Lahde

Wrap-Up

As an angel investor, my investments are very different from Paulson’s. But I’m still learning a lot from him.

Paulson made a nonconsensus bet. He stuck to it even when it was hard. And he was right.

Angels and VC’s do pretty much the same thing. And we do have one advantage: even if we wanted to dump our positions, we can’t!

Reading about Paulson and Pellegrini’s incredible trade, I’m even more excited to double down on my most successful investments.

The great opportunities are rare. When I find one, I’m all in.

What do you think of Paulson and Pellegrini’s trade? Leave a comment and let us know!

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The Greatest Trade Ever (Part One)

October 2, 2023

“On the screen before her was a figure she had never seen before, at least not on an ATM…$45 million, newly deposited in their joint account. It was Pellegrini’s bonus for the year….”

Paolo Pellegrini’s wife Henrietta could hardly believe their good fortune.

A few short years ago, Paolo had been living in a tiny one bedroom apartment. Now, they were set for life.

Pellegrini was John Paulson’s right hand man. Together, they made the trade of a lifetime — shorting the housing market.

Wall Street Journal reporter Gregory Zuckerman tells the fascinating story of their bet in his book The Greatest Trade Ever.

A Dangerously Overheated Market

By the mid 2000’s, the housing market was dangerously overheated:

“By 2005, 24 percent of all mortgages were done without any down payments at all, up from 3 percent in 2001. More than 40 percent of loans had limited documentation, up from 27 percent. A full 12 percent of mortgages had no down payments and limited documentation, up from 1 percent in 2001.”

Lax mortgage standards drove rapid increases in housing prices.

After having barely grown at all in real terms from 1975 to 2000, prices were suddenly climbing 7% a year. Pellegrini showed Paulson that housing prices would have to fall by 40% just to get back to their historical average.

“‘This is our bubble! This is proof,’ said Paulson.”

Convinced a housing crisis was coming, Paulson and Pellegrini placed a massive bet against subprime mortgages.

Placing the Bet

Paulson bought insurance on subprime mortgage bonds as a way to short the market. Should the housing market falter, that insurance would become much more valuable.

When they started buying, the coverage cost next to nothing. Paulson and Pellegrini were almost alone in thinking the housing market would crash.

“Could it be that no other investors had caught on?”

The pair snapped up insurance on billions of dollars worth of mortgage bonds. If the housing market came apart, their gains would be historic.

Conviction Is Everything

At first, Paulson’s trade seemed like a dud.

By mid-2006, their investments were falling in value. Everyone from Goldman Sachs to Fed chair Ben Bernanke said the housing market was solid — even as lenders churned out bad loans faster than ever.

Even once a few lenders began to fail later in the year, Paulson’s positions barely budged.

At this point, it would’ve been easy for them to conclude that the market was rigged. Many traders would’ve just dumped their positions and moved on.

But not Paulson and Pellegrini. Stubbornly, they held on.

Paulson and Pellegrini had conviction. That conviction would ultimately make them billions.

Wrap-Up

Would you have joined Paulson and Pellegrini’s trade? Why or why not?

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Mistral AI Has Almost No Guardrails

September 29, 2023

“I can’t believe it actually said that.” That’s what I find myself saying over and over as I use the new LLM from Mistral AI.

Released just this Wednesday, Mistral’s new model comes from a Paris-based team of top AI researchers. These DeepMind and Meta alums made headlines for a massive $113 million seed round announced in June.

Let’s see what this thing can do…

Did It Really Say That?

I started off with something GPT would never touch — ethnic jokes. I asked Mistral to tell me some jokes about my people, Italian Americans.

It happily obliges, and some are even funny! I like the one about spaghetti arms.

But Mistral will also answer much darker queries. I read on Twitter that someone was able to get it to output suicide instructions — so I had to try it.

Last night, Mistral happily provided an answer. But when I went back this morning and tried again, it seemed this had been fixed.

Next, I decided to see if Mistral would provide sexist outputs. Yet again, it gladly obliged.

Mistral released this model way too early. Every journalist and blogger will be trying to get it to say something offensive — clearly not a difficult task.

Every time it outputs something inappropriate, Mistral’s reputation suffers.

Can Mistral Help Me Invest?

But let’s assume Mistral gets some guardrails eventually. How is it for real tasks?

Next week, I’m meeting with a startup that makes software for regenerative medicine providers. I’d like to know how big the market is.

Let’s see what Mistral has to say…

Nice work! It gives us the number of clinics currently open in the US, a great way to measure the size of the market.

But unlike GPT-4, it doesn’t cite its sources. I tried to get links, but even prompting several times, I came up empty.

This makes it hard to tell if Mistral’s response is right or not. On the bright side, Mistral’s output was very fast, much faster than GPT-4.

Can Mistral Beat GPT-4?

Let’s try this market research in GPT-4:

GPT-4 didn’t understand the question and provided an unhelpful answer. Rather than telling me about the size of the market, it just showed me some regenerative medicine clinics near me.

I tried again with another prompt. Let’s see if GPT-4 gets it this time:

Again, GPT-4 wasn’t able to answer my question. What if we went old school and just Googled it?

The third Google result gives a pretty good answer, identifying nearly 3,000 clinics offering stem cell therapies alone. It also gives a citation, unlike Mistral.

Wrap-Up

Mistral seems like a pretty awesome model for a startup’s first release. It’s fast and provides better output than GPT-4 for some prompts.

But the only thing anyone is going to talk about is its offensive outputs. Until Mistral puts some guardrails on this thing, its reputation will suffer.

Meanwhile, good, old fashioned Google actually provided a better answer than Mistral or GPT-4. AI has incredible potential, but Google search may prove surprisingly difficult to dislodge.

What do you think of Mistral? Leave a comment and let us know!

Have a great weekend, everybody!

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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.

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Misfits Market

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I wrote a detailed review of Misfits here.

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The #1 Thing Investors Get Wrong

September 28, 2023

“What do most investors get wrong?” I posed this question to a top investor this week. His answer: investing in companies with no revenue.

Only about 10% of startups ever get a product out, he estimates. Of those, only around 10% will ever make a penny in revenue.

This puts the odds of a company ever actually signing a paying customer at 1%.

It’s what David Sacks calls the penny gap, and it’s real. Day after day, most of the startups in my inbox don’t have a dime of revenue.

How to Make Investing 10X Easier

Here’s how I make my job a lot easier: pass on all of those.

For a startup to ever matter, it needs paying customers. Lots of them.

Investing in revenue-generating companies removes a ton of zeroes from your portfolio. That drastically improves returns.

Are You Solving a Real Problem?

People can tell you they love your product all day long. It doesn’t cost them anything.

But when it comes time to plunk down their credit card, they ghost you. If they’re actually willing to hand over their hard earned money, you must be solving a real problem.

But I Have Tons of Users!

Users and actual paying customers are two different things.

Someone who is willing to pay really cares about your product. That’s the person you need to please.

Looky-loos who won’t pay don’t matter. And they’ll send you off on wild goose chases, telling you to build this feature or change that.

What if This Is My Only Chance to Invest?

Here’s what no one tells new angels: startups are always raising money.

The less experienced you are, the more founders will use FOMO to scare you. If you don’t invest now, you’ll miss the opportunity forever!

Dollar to a dime, that same founder will be pitching you 6 months from now and a year from now. Startups burn money — so they have to raise constantly.

Maybe this really is the next Uber. But if so, it won’t hurt to wait 6 months and let them rack up a few sales.

How Much Revenue Is Enough?

This depends on the investor. Personally, I like to see $200,000-500,000 a year in revenue.

At that level, you have a variety of customers and enough track record to show a growth trend.

Looking back on my 26 investments, the most successful ones had ARR of at least $200,000.

Just recently, I invested in a startup with over $1 million ARR growing fast. Sure enough, they’ve already grown ARR another 70% and raised at more than twice the valuation I paid.

When I’ve invested earlier in companies that had just a couple thousand a month in revenue, the results were poor.

If you’re pitching investors, find out how much revenue they’re looking for. When you hit that milestone, send them a message and let them know!

Wrap-Up

Only investing in revenue-generating companies will massively improve your returns. I’ve invested in 26 companies so far without a single 0, partly because I stuck to real businesses with cash coming in the door.

Whether you’re a founder or an investor, if you follow the money, the results will follow!

Do you focus on revenue? Why or why not?

More on tech:

Meet My Latest Investment: Krepling

You Can’t Invest in the Next Uber — Unless This Law Changes

I Worked for Epic — Bill Gurley Is 100% Right

Save Money on Stuff I Use:

Fundrise

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More on Fundrise in this post.

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Misfits Market

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I wrote a detailed review of Misfits here.

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