Venture Investment in the Heartland Triples

December 5, 2023

Venture capital investment in the middle of the country tripled in the last decade, according to a new report from Heartland Forward. Investment reached $55 billion by the end of 2021.

The 20 heartland states as defined by Heartland Forward

We’re used to thinking of startupland as reaching a few dozen miles from San Francisco to San Jose. Maybe add on New York, if you’re in a generous mood.

While those regions still lead the technology industry, the middle of the country is catching up fast.

COVID pushed fundraising onto Zoom, where much of it remains. This has made it easier for founders all over America to get their slice.

Opportunities Where You Might Not Expect

One of the most exciting investments I’ve made recently is in a place you might not expect — Chattanooga, TN.

Krepling, an e-commerce SaaS company, is growing faster than just about anything in San Francisco or New York. And sure enough, investors lined up with their checkbooks out for its recent seed round.

If you have an awesome product with incredible growth, you can raise capital, wherever you may be.

Where the Runway Is Plentiful

Companies like Krepling have a secret advantage over everyone else — their costs are much, much lower.

You can rent a 1 bedroom apartment for less than $1000 a month in Chattanooga. Good luck doing that in New York City or Palo Alto.

Food is cheaper, office space is cheaper, everything is cheaper! All those lower costs mean more runway for your startup.

Raising money right now is hard. The venture market stinks, it’s stunk for almost 2 years, and it’s not showing any signs of getting better.

Locating in a reasonably priced area can put your startup in a strong position. And the middle of the country is filled with low cost, beautiful towns to choose from.

Travel Is Your Friend

One founder I know who lives in the heartland has a very simple fundraising hack: the airplane.

Every 3 months, he visits either New York or SF. He meets as many investors as he can on each trip.

And sure enough, he’s got over $10 million in commitments for his Series A.

Meeting people in person can help. But you don’t have to live on the coasts to do it.

A Place to Focus

“There’s nothing to do here but work! It’s great!”

That’s what an investor in a small southern town told me recently.

Every day, more founders are joining him to work in a place where it’s easy to focus.

For generations, writers have gone alone to a remote cabin to finish a novel. Startup founders moving to small towns to grind aren’t so different.

Wrap-Up

Long neglected by the venture world, America’s heartland is having a moment.

Venture investment is growing faster in the middle of the country than anywhere else. More and more founders are relocating there, eager to extend their runway and minimize distractions.

I’m excited to see a new wave of unicorns coming from the center of our nation. And I hope to back a few of them myself!

Are you investing in middle America? Why or why not?

More on tech:

Venture Capital Is a Terrible Asset Class

How to Spot Vaporware

Never Let a Founder Pay, and Other Do’s and Don’ts

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Photo: Chattanooga, TN

Pizza and Homemade Mutz at Porta

December 4, 2023

A big ball of gooey mozzarella hit the table, drizzled with olive oil. “We’ve got to come to Jersey City more often.”

This is Porta, an excellent pizzeria on Downtown Jersey City’s lively Newark Avenue. I strolled down the pretty, pedestrianized street and ducked into the restaurant, grateful for the warmth on an unseasonably chilly night.

The hostess led me to a spacious downstairs area filled with family-style tables. As I perused the menu, my friends Tim and Matt* filed in.

I settled on the mozzarella appetizer and an arugula pizza.

The pizza is made with San Marzano tomatoes, mozzarella and truffle oil. It’s baked in Porta’s own wood fired ovens, quickly roasting in the scorching heat.

Ah, my mutz!

The mozzarella was creamy and unctuous, perfectly complimented with olive oil. Porta’s chefs make the cheese fresh every day, something you’ll rarely see at a restaurant.

Make sure to get some bread with it…there’s nothing like piling that cheese on top of bread and shoveling it into your mouth.

The restaurant is cavernous, and I thought for sure it would never fill up. But just a few minutes after we sat down, nearly every seat was taken.

The moment of truth — our pizzas were here!

Mine was piled high with beautiful, crisp arugula. This could qualify as a health food, right?

Perhaps not — but it was delicious.

The greens and olive oil provide a perfect contrast to the creamy mozzarella. The crust is crispy and nicely browned by the wood fired oven.

When a pizza cooks fast in intense heat, the crust is airy and crispy. This is one of the reasons it’s great to go out for pizza: no home oven can reach those temperatures (often 700 degrees or more).

My friend Matt fell silent as he dug into a plate of meatballs. Conversation grinding to a halt is the surest sign of great food.

Tim got a pizza I’d never seen before — a carbonara. On top was a fried egg, a lovely touch.

Stuffed and getting sleepy, we called for the check. Leaving this inviting atmosphere and heading out into the cold was hard to do, but we were already making plans to come back.

Porta has locations in Jersey City, Montclair, and Asbury Park. The Jersey City location is open 7 days a week.

Stop in for a delicious pie and some homemade mutz!

What are your favorite pizzerias? Leave a comment and let us know!

More on Fundrise in this post.

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*names have been changed

Why Stocks Could Rip in 2024

December 1, 2023

Stocks just had an awesome November. But 2024 could see an even bigger rally, driven by declining inflation and the return of retail.

The Year-End Melt-Up

The end of the year often sees a stock rally. This fall has been no exception.

The S&P 500 jumped 8.9% last month, the second best November since 1980. Throughout my time in Porto, I kept checking the market, thinking “I ought to go on vacation more often!”

Stocks were so beaten down that despite the rally, valuations remain reasonable. The S&P’s PE ratio is in the low 20’s, about average for the last few decades.

The End of Inflation?

Equities had a rotten 2022, driven by rapid rate increases from the Federal Reserve. The Fed was hitting the economy with a stick to try to tame inflation — and it worked.

The Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index, increased just 0.1% in October. Annualized, that puts inflation at just over 1%, well below the Fed’s 2% target.

Even year-over-year, the PCE is running at just 3%, not far from the Fed’s target.

The Top of the Rate Cycle

Declining inflation means the Fed may no longer need to raise rates.

Rate increases take time to work their way through the economy. With month-over-month inflation already running below the Fed’s target, why would they risk slowing the economy even more and risk causing a recession?

Indeed, if the economy is already beginning to slow, the Fed may need to cut interest rates next year.

A peak in rates could cause a rally. And if we see lower rates, I expect stocks to really rip.

The Return of Retail

Although the S&P has jumped 19% so far this year, retail investors have actually been leaving the market. Investors pulled $137 billion from equity funds this year, on top of $54 billion in 2022.

Many mom and pop investors probably got spooked in 2022. Even with this year’s strong performance, they may be too scared to reenter the market.

But sooner or later, greed trumps fear.

If we continue to see strong performance, retail is likely to return. And if interest rates decline, alternatives like high yield bank accounts become less attractive.

2021 saw $295 billion in retail money flood equity funds. If we see anything like that in 2024, it could push up stock prices significantly.

Wrap-Up

This year has seen a significant rally in stocks. But with a strong economy, declining inflation, and lots of retail money sitting on the sidelines, 2024 could be even better.

What do you think the new year holds for stocks? Leave a comment and let us know!

By the way, yesterday marked 3 years on the blog. Thanks for a great three years, everybody!

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Phishing Scams Skyrocket, Powered by AI

November 30, 2023

Recently, my grandma got a phone call. I had been in a car accident and needed money to get home. One small problem: it wasn’t me.

She almost gave the scammer money, until my aunt stopped her. My aunt contacted me to see if everything was all right, which I assured her it was.

Scammers nearly took her money using nothing more than a telephone. What happens when they discover AI?

AI Takes Fraud to a New Level

Some criminals already have. From a CNBC report:

Since the fourth quarter of 2022, there’s been a 1,265% increase in malicious phishing emails, and a 967% rise in credential phishing in particular, according to a new report by cybersecurity firm SlashNext.

“Gone are the days of the ‘Prince of Nigeria’ emails that presented broken, nearly unreadable English to try to convince would-be victims to send their life savings,” [security analyst Chris] Steffen said. “Instead, the emails are extremely convincing and legitimate sounding, often mimicking the styles of those that the bad guys are impersonating, or in the same vein as official correspondence from trusted sources,” such as government agencies and financial services providers.

AI lets scammers generate content in any language that feels natural and is tailored to the recipient. It can crawl the internet and mention details about you to build rapport.

How AI Could’ve Gotten Grandma’s Money

Let’s go back to that fraudulent phone call. What if the voice on the other end of that phone sounded exactly like me?

With AI, that’s easy to do. A couple hours of a person speaking is all you need to make an AI voice that can say anything.

At that point, even my aunt could’ve been fooled. Shoot, anyone could be!

I expect to see scams like this targeting the elderly very soon, if they’re not operating already. The best approach is to do what my aunt did — independently verify the facts.

Stopping AI Scams

The best way to stop AI scams is to take a page from the financial industry and adopt Know Your Customer (KYC).

AI models are powerful. Prolific users of them should have to provide identifying info like driver’s licenses.

You’re going to think twice about scamming people if they have your photo ID on file.

Putting a price on mass e-mails would also help stem the tide of fraud. Why should anyone be able to send a billion e-mails for free?

Charge the sender even a penny each and they’ve got a bill for $10 million. That message better be worth it.

Not only that, but you’ve got their payment info. If the messages turn out to be malicious, you can easily track the sender down and arrest them.

Wrap-Up

AI is a powerful tool that can do enormous good in the world. But all powerful new technologies have a dark side.

We should adopt KYC standards for major users for AI models. This will help us ferret out scams and make sure AI is used for good.

What do you think the next AI scam will be? Leave a comment and let us know!

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More on tech:

How to Build a Drone Botnet for World Domination

Border Security For Less Than a Billion Dollars

How Ron Conway Landed His Investment in Google

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How to Spot Vaporware

November 29, 2023

Every now and then when I ask a founder for a demo, he can’t give me one. That’s because the product doesn’t exist.

Let’s take the example of a restaurant reservation platform.

Rather than building out the tech, some founders just start advertising to restaurants and diners and taking reservations. When a reservation comes in, they make a call and book it manually.

This gets a marketplace going. The problem is, it doesn’t scale.

Only Software Scales

If you have a few reservations coming in, it’s not hard to make a call and book on your own. In fact, it’s a lot easier than building an app to do it!

But what if a dozen turns to 100 turns to thousands? You can no longer do it manually unless you hire an army.

And if you do that, you have a low margin call center, not a high margin tech business.

Time to Grow Up

I don’t see any problem with going the Mechanical Turk route at the very beginning. It can be an easy way to see if there’s demand for your service.

But as soon as you see a little traction, start coding. A successful company can grow so fast it surprises you.

If you’re still doing everything manually, don’t pitch investors. You’re wasting your time, and you’re wasting ours.

Technology investors invest in technology, not call centers. Bring us some tech!

Finding Vaporware

The best way to find vaporware is to ask for a demo, every single time. Never, ever invest unless you get one.

If for whatever reason a founder can’t even use his own product, he’s not qualified to be a founder. There are 0 valid excuses here.

Some types of businesses are particularly prone to vaporware. Marketplaces are the biggest offenders, in my experience.

Doing some hocus pocus behind the scenes instead of actually writing code is tempting. The customers won’t care, right?

That’s all well and good until you realize your business cannot grow.

Wrap-Up

As investors, it’s our job to funnel money to the great companies and cut off the bad ones. Any company that cannot build a product doesn’t deserve investment dollars, period.

It’s our job to assess that product. A demo is the best way to do so.

Keep your eyes on the product and customers and you’ll find some awesome investments!

Have you encountered vaporware? Leave a comment and let us know!

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More on tech:

Venture Capital Is a Terrible Asset Class

Never Let a Founder Pay, and Other Do’s and Don’ts

Why I Only Invest in Pure Software

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

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I wrote a detailed review of Misfits here.

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

Venture Capital Is a Terrible Asset Class

November 28, 2023

Everyone raising a venture fund will tell you they plan to 3x your money, at least. But it turns out, almost no one can do it.

David Clark of Vencap International ran an analysis on nearly 1,200 funds covered by Pitchbook. Most haven’t even returned 2x their invested capital, much less 3x.

Clark’s Analysis

Of these 1,186 funds, just 181 (15.3%) have DPI of 2x or higher. 70 (5.9%) have returned 3x or more back to LPs and only 25 funds (2.1%) have distributed 5x to investors. /3
— David Clark (@daveclark85) November 27, 2023

Clark’s analysis looked at funds from 2000 to 2015. Any fund from 2011 or earlier should’ve exited its investments by now, so I wouldn’t expect them to show higher returns in the future.

Some of the newer funds are still holding investments that haven’t gone public yet. This may increase their returns somewhat, but performance is likely to remain middling.

So ultimately, I would expect final DPIs for the 2000-2015 vintages to end up midway between current DPI and current TVPI. This would mean ~10% of funds exceeding 3x net performance and median performance being well below 2x. /7
— David Clark (@daveclark85) November 27, 2023

What Performance Should We Expect?

I cannot stress enough how abysmal this performance is.

A median return below 2x is far worse than you’d see in stock index funds! The S&P 500 has averaged a 10% annual return since 1957.

In 10 years, that gives you a 2.6x return on your money. And that is with total liquidity at all times.

Moreover, your money is in big, blue chip companies. That’s a lot safer than fledgling startups.

Under no circumstances should you accept a lower return than that in illiquid, speculative companies. Investing in venture only makes sense if you can make 15% a year, minimum — or a 4x fund over 10 years.

Why Does Venture Have Such Rotten Returns?

The problem in venture is supply and demand.

VC assets under management are growing at 20% a year. Meanwhile, there are still only so many great startups.

Too much money is chasing too few good companies. Especially at the later stages when winners are becoming apparent, this leads to inflated prices and poor returns.

Fat wallets also make investors lazy.

Why not rip $10 million into a crypto company with no product? We’ve got billions to play with!

What Kind of Funds Win?

A few funds still produce amazing performance. Susa Ventures I is one such fund:

Susa Ventures I is one of the 25 funds in this dataset that has distributed 5x+ to our limited partners

Three observations:
1. We got lucky with some great companies & founders
2. Smaller funds have a better chance to outperform. Fund math is undefeated.
3. We distribute… https://t.co/svnjBlVnvq
— Chad Byers 🦍 (@chadbyers) November 27, 2023

The fund was small, making it easier to run up a big multiple. It’s a lot easier to get to 5x if that means you have to produce tens or hundreds of millions in returns, rather than billions.

Each year, there are only so many big exits to go around. You don’t want to have to be in a decacorn in every fund just to get a decent return.

What Does This Mean for Me?

My “fund” is microscopic. That makes it much easier to get a big return, since I don’t need a monster exit to make it happen.

If I take the money I have earmarked for the first 3-4 years investing (a typical fund life), I only need a single exit of about $2.5 billion to hit that 15% a year benchmark. The rest of the portfolio could go to zero.

Hitting a unicorn isn’t easy, but since I’ll be making around 36 investments in that period, I think it’s feasible.

What’s more, I invest much earlier than most VC funds. That gets me into deals at low prices with a lot of upside.

Wrap-Up

Anyone considering investing in a VC fund should be extremely selective.

Look for smaller funds with strong track records. And carefully consider whether you need to be in this asset class at all.

Those boring index funds perform surprisingly well!

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

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More on tech:

Never Let a Founder Pay, and Other Do’s and Don’ts

Why I Only Invest in Pure Software

Super Pumped (Part Three): What Uber Can Teach Investors

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

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In Porto

November 27, 2023

I sat on the shore, watching the red sun descend into the ocean. This was truly a beautiful place.

I just spent the last two weeks in Porto, Portugal, in the country’s north. This seaside town filled with beautiful architecture and great food is a must-visit!

The Douro River and central Porto, seen from the lovely Palacio do Cristal.

Let’s Eat!

For me, food is the focus of any trip. On my first night, I had dinner at a real old school Portuguese restaurant: Murça No Porto.

Located right in the center of town on the aptly named Rua de Alegria (Happiness Street), Murça No Porto dishes up traditional Portuguese food to locals. I ordered caldo verde, sardines and potatoes, and walnut cake.

The soup was richly flavorful, made creamy by pureed potato, something I’ve never seen before. The sardines were fresh as could be, and the walnut cake was deliciously fluffy.

All that, plus bread, any drink you want (including wine), and a coffee was less than 9 euros. That’s under $10 US.

Good luck doing that in New York!

Azulejos and More!

But there’s more going on in Porto than just food. After dinner, I took in the vivid azulejos of Capella das Almas.

Azulejos are traditional white and blue tiles containing intricate images. They cover churches and train stations all over Porto.

They can even be found on a humble rowhouse.

Mercado do Bolhão

Okay, back to food. 🙂

I stopped at Mercado do Bolhão, a lively market selling everything from wine to live shellfish.

This market is home to the naughty fishwives who made fun of Anthony Bourdain when he visited to film Parts Unknown. In fact, I think I saw the naughtiest one at her stand — although she seemed to have cleaned up her act.

This market is a must for any visitor to Porto. The sheer variety is mesmerizing, as are the smells of cheese, port, and fresh pasta.

I grabbed a bola de berlim and strolled past the stands, taking in the atmosphere. A bola de berlim is a cream-filled donut bigger than your head. They’re everywhere in Porto, and not to be missed.

The Hospitality of the Portuguese

Unfortunately, I picked up a nasty stomach flu a few days into my trip. But it was this sickness that showed me how great the Portuguese are.

I was to meet a young tech company founder named João the next day, but had to postpone. That night, he brought soup and light snacks to my hotel, the only thing I was able to eat.

All this, for a person he hadn’t even met yet! What a great country.

The next day, I met him and his lovely girlfriend Flor. We strolled through the verdant Parque da Cidade and then took in the surf crashing into the seacoast at Foz.

Getting to Porto

If you’re looking to take a vacation, I can’t recommend Porto highly enough. And you can even get a direct flight from Newark airport!

The fantastic Santo Inácio Zoo — very much worth a visit

Livraria Lello, a beautiful bookstore that inspired Harry Potter

I stayed at the very central Eurostars Aliados, which was excellent. Get the breakfast — it’s phenomenal!

In this wide world, I am so grateful for all the beautiful places and kind people. And that I have the privilege to experience them.

Have you been to Portugal? Would you like to?

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Never Let a Founder Pay, and Other Do’s and Don’ts

November 10, 2023

I sat down to coffee and dessert with one of my founders recently. At the end, he tried to pay the tab.

I had to explain to him what might be the most important rule of investing…

Never Let a Founder Pay

If you’re taking a founder out to coffee, lunch, you name it…always pay the bill.

Founders bust their butts for us. It’s the least we can do.

This goes for founders you’ve invested in and even those you haven’t. Don’t forget, many startup founders are barely scraping by financially.

One of the best early stage VC’s told me this rule:

“A founder remembers everything you ever did for them. Every drink you bought, every lunch tab you paid. Even when they’re running a billion dollar company.”

Be Classy When a Company Fails

The founder I was having coffee with had just sold his company. It wasn’t a huge success — we basically just got our money back.

He was afraid I’d be upset. Quite the contrary — I was delighted to have my capital returned!

Unfortunately, some investors lash out when a company doesn’t become a big success. One sent him an angry e-mail when the company was acquired at a modest price.

Folks, never, ever do this.

No one feels worse than the founder if he failed. There’s no need to pile on.

If you’re investing in startups, you signed up to take losses.

Take your lumps like an adult. And don’t forget to thank the founder for all the hard work they put in.

When a company fails, you see an investor’s true colors.

It’s easy to be nice when everything’s going well. But when times are tough, the knives come out.

Keep Confidential Info Confidential

As an investor, you’ll be exposed to tons of confidential information. It’s your job to keep that information confidential.

No company wants its most critical information blabbed all over town.

Never share anything that’s not public information unless the founder gave you permission. This includes the deck, deal memo, P&L, or even the fact that the company exists.

Pretend you’re in the CIA. It’s on a need-to-know basis.

If you want to introduce them to another investor, ask for permission to share the deck. If the founder gives you the okay, it’s fine to share it with investors you trust.

And in terms of sharing public information, the more the better!

Give your founders some love online. Like and retweet their posts.

It helps them find more customers!

Wrap-Up

We investors are in a privileged position. We get to sit all day in judgement of some of the most innovative companies in the world.

Let’s be classy while we do it. Keep private information private, don’t whine if a company fails, and pick up the check.

As top angel Jason Calacanis says, “dealflow is destiny.” And your dealflow depends entirely on your reputation.

If you follow these do’s and don’ts, you’ll be well on your way to building a great reputation as an investor.

What’s the worst investor behavior you’ve seen? Leave a comment and let us know!

This is the last blog until Monday, November 27th. I’m heading to Porto, Portugal on vacation!

If you’re going to be in town, let me know!

Have a wonderful Veteran’s Day and Thanksgiving, and I’ll see you on the 27th!

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

More on tech:

Why I Only Invest in Pure Software

WeWork’s Bankruptcy: A New Beginning?

Super Pumped (Part Three): What Uber Can Teach Investors

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!

Why I Only Invest in Pure Software

November 9, 2023

WeWork filed for bankruptcy on Monday. Allbirds is a penny stock. Companies like these are why I invest in pure software — only.

The Penny Stock Parade

WeWork peaked at a valuation of $47 billion. It was once the most valuable startup in America.

Now, it’s a penny stock.

The same goes for Allbirds, the once celebrated shoe company. Despite being on every foot in Silicon Valley, Allbirds too is a penny stock — 95 pennies, to be exact.

In the boom times, countless companies raised venture capital by spreading a thin veneer of tech to their old school businesses. Venture capital, which used to back software, began to invest in coffee, eyeglasses, you name it.

Now, those companies are circling the drain.

Even the Biggest Successes Are Struggling

It’s hard to think of a bigger darling in D2C than Warby Parker. As a lifetime glasses wearer, I have to admit, they look cool.

But you know what doesn’t look so cool? Their stock chart.

Warby has avoided penny stock territory, but it’s still down over 80% from its 2021 IPO.

A couple of years ago, you couldn’t ride the NYC subway without seeing a Casper ad. Often, the entire inside of the train was covered in them!

But Casper also turned out to be a flash in the pan.

The company IPO’d in 2020 far below its last private valuation. The stock continued to fall, dropping over 75% before being bought out by a private equity firm for peanuts.

Why Are These Businesses Doing So Poorly

None of these companies should’ve ever raised a dime of venture capital.

Venture capital is meant for highly scalable businesses. Adding one more user to a software product like Salesforce costs basically nothing.

Since high margins kick in at scale, it’s okay for these companies to lose money in the beginning.

The fixed costs of building a product are high. But once software businesses reach a certain size, they become money machines.

Indeed, Salesforce is worth over $200 billion, orders of magnitude higher than any of the other companies we just talked about.

Businesses involving “stuff” like offices or mattresses aren’t easy to scale. And the margins stink.

I don’t blame the founders of WeWork, Casper, or any other company for taking venture capital. Founders get money where they can.

I blame the VC’s for handing it out.

What I Look For Instead

I like businesses that are pure software.

Salesforce makes a CRM it sells to businesses. There is no stuff — just code.

There are no supply chain issues. Adding another user is trivial. And it’s pretty hard to knock off.

You can’t say the same for a mattress.

What’s more, many pure software businesses are winner take all.

If Salesforce is the best CRM for large companies, that’s what you’re going to use. Since it scales easily, there’s no reason the entire Fortune 500 can’t use it.

And indeed, 90% of them do.

Wrap-Up

I want a portfolio full of Salesforces, not WeWorks.

So I look carefully at a startup’s business model. Is it pure code? Is it scalable?

If not, it’s a pass.

There are other forms of financing that can work for old school businesses. Bootstrapping and bank loans are a few options.

But they should never raise venture capital.

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

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More on tech:

WeWork’s Bankruptcy: A New Beginning?

Super Pumped (Part Three): What Uber Can Teach Investors

Super Pumped (Part Two): The Rise and Fall of Travis

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Super Pumped (Part Three): What Uber Can Teach Investors

November 8, 2023

Uber made its early investors billions. But some had a chance to invest early — and missed an incredible opportunity.

The book Super Pumped details how some investors won the Uber deal, and how others missed out. This fascinating tale of one of the decade’s best startups taught me a lot as an investor.

Sequoia’s Miss

Sequoia Capital, long considered the finest venture firm in the world, passed on Uber repeatedly.

We don’t know why they didn’t invest. But I suspect they were concerned about Uber running afoul of taxi regulations.

However, the initial product was entirely legal. UberCab was simply software to order a black car.

In the past, you did it with a phone call. Now, you clicked a button. Either way, it’s legal.

For a firm betting on early stage moonshots, Sequoia was too cautious.

Skate to Where the Puck Is Going to Be

“I skate to where the puck is going to be, not where it has been.”
Wayne Gretzky

When UberCab launched, it was a rather unattractive desktop app, not the slick mobile platform it is today.

But early investors like Jason Calacanis saw past that.

They knew Travis’ vision was to be able to get a car anytime, anywhere using your phone. Their bet was that he could do it — and the bet paid off.

When Uber was founded in 2009, smartphones weren’t yet widespread. The iPhone was just two years old.

But a good investor can spot a trend. And iPhone sales were skyrocketing.

Soon, there’d be one in every pocket. If that iPhone had the Uber app on it, Uber would make billions.

The Best Deals Don’t Come Easy

Other than the first few angels, every investor had to fight to get into Uber. Bill Gurley and Travis Kalanick made the Uber deal in a San Francisco bar on a Sunday night.

You have to chase the best deals, even in your off hours.

That’s why I found myself in a quiet corner of a hotel lobby in Barcelona one night in 2021.

It was almost midnight local time. But this was a deal I couldn’t miss.

The meeting went great and I made the investment.

Today, that company, Deft, has created one of the most exciting multimodal search engines in the world. They just got featured in TechCrunch!

What to Look For

Above all, what made Uber was Travis’ tenacity.

If an investor asked him about his prior experience as an entrepreneur, they’d find out he sold Cutco knives door to door. They’d also learn that his first startup got him sued for $250 billion.

And still, he kept going.

A founder that dogged attacking a huge problem is a great bet.

I find myself looking for the same things Gurley does: strong traction in a giant market. And if the startup takes advantage of a huge platform shift, like AI today, that’s chef’s kiss.

Wrap-Up

For an angel like me, Uber would be the ultimate score. All day, every day, all I try to do is find one.

Super Pumped shows me how important it is to back gritty founders. And they don’t come grittier than Travis.

Uber also taught me to accept some risks, like regulatory issues, if the upside is big enough.

What did you learn from Travis? Leave a comment and let us know!

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More on tech:

Super Pumped (Part One)

Super Pumped (Part Two): The Rise and Fall of Travis

WeWork’s Bankruptcy: A New Beginning?

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!