This Is the Worst Venture Market in Ten Years

July 28, 2023

We are in the worst venture market in ten years, according to a new report from AngelList and Brex. Despite a strong NASDAQ, it’s harder to raise a round, get a markup, or reach an exit than at any point since 2013.

From the report:

Dating back to 2013, 2Q23 was the slowest quarter ever observed in our dataset in terms of startup dealmaking, with only 5.25% raising a round or exiting. This rate of dealmaking exceeds the previous low of 6.1% set last quarter (1Q23), making the first half of 2023 one of the worst fundraising environments we’ve observed for startups.

AngelList has a great dataset of a huge number of venture deals.

I’m on there myself several days a week, scouting for prospects. So this report offers a grim, but accurate, picture of the market.

What I’m Seeing in the Market

I’m doing fewer deals myself these days. I’m not happy about that — I’d like to be doing more!

But there is a lot less to choose from right now. And if only a small fraction of deals meet your criteria, things become even more difficult when there are fewer deals to choose from.

I think a lot of angels have pulled back or exited the market entirely.

Earlier this year, I was in an SPV* for an awesome AI company. I was worried I wouldn’t get the full allocation I wanted!

Turns out I had no reason to fret. I got every penny I asked for, and the deal didn’t even come close to filling up.

If an AI company with rapid growth and a killer product struggles to raise, I can’t imagine what it’s like for the average startup.

Good Deals Are Still Getting Done

But before you go into a corner and cry, here are some good things I’m seeing in the market.

Great startups are still getting funded. The round might take 6 months and the valuation will probably have you muttering profanity under your breath — but sooner or later, the deal gets done.

If you’ve got a great company and you want to raise money, go for it! But don’t be surprised if it’s really, really hard.

If you’re an investor, now is the time to be in the market. You can walk into almost any deal you want, and you’ll be paying prices so low you’ll think 2021 was just a bad dream.

When Does This End?

So, when does the market recover?

AngelList is predicting early 2024. I think that’s too optimistic.

I’m not predicting a recovery until late 2024 or even early 2025.

A lot of LP’s are tapped out and raising a venture fund is hard. Many angels have run away terrified, never to return.

But in the end, we can’t know where the market is headed and it doesn’t matter.

I play the game on the field, whatever it is. Good market or bad, I want to find the best companies and back them.

But I won’t mind if these valuations last just a little longer!

What are you seeing in today’s venture market? Leave a comment and let us know!

Have a great weekend everybody!

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The Startup Mystery Shopper

Demo Is the New Deck

*SPV: Special Purpose Vehicle. This is an LLC that holds the money of a bunch of investors in an investment group, or “syndicate.” That money goes into a startup as one line on its cap table, keeping the cap table (or list of owners) clean. This is how syndicates make investments.

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The Startup Mystery Shopper

July 27, 2023

I read the deal memo and ran the numbers. Everything looked great. But was this company really legit?

There was only one way to find out.

The Mystery Shopper Method

This afternoon, I dug into a promising telehealth startup. I liked it from the investor perspective — now I wanted to see what it was like to be a customer.

So I pulled up their website and started a support chat. Not wanting to fake an illness, I simply asked what type of services they provided and whether it was available in my home state of New Jersey.

As an agent was coming up, I noticed support was available from 6am to 9pm, 7 days a week. Impressive.

In less than a minute, a nice lady popped up on my screen.

“Are you targeted to people with chronic conditions, or do you also do preventative health?” I asked.

“We handle all of your preventative needs, from physicals to lab work. But we also can manage chronic diseases with specialists referrals and care plans,” she responded.

“Awesome. When do you think you’ll be available in New Jersey?”

“We should be there by the end of the year!”

I thanked her and wished her a good day. And I learned something critical about this company.

Even for a person who had never spent a dime with them, customer service is amazing. And they provided that great service without having any idea I was considering an investment in the company.

“The true test of a man’s character is what he does when no one is watching.”
John Wooden, former Head Coach, UCLA Bruins Basketball, 10 Time NCAA Division I national champion

Why Being a Mystery Shopper Is a Key Part of Due Diligence

People can tell you a lot of stories. But experiencing a company’s product and service for yourself, without them knowing who you are, tells you more than anything.

That’s why I like to kick the tires when I evaluate a startup.

If I can use the product myself, I do. If I can interact with their customer service, I will — although I’m careful not to take up too much of their time.

Wrap-Up

An investment in an early stage startup is a 10 year partnership. Both sides should go into it with their eyes open.

That’s why I want to know everything I can about a company. And founders should diligence their investors too!

So if your company ever gets an unexpected message, it just might be me — looking for my next deal.

How do you like to diligence companies? Leave a comment and let us know!

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Noodles Galore at Tengri Tagh Uyghur Cuisine

July 26, 2023

“You look so happy,” my friend said, smiling.
“I am. These noodles are amazing.”

This is Tengri Tagh Uyghur Cuisine in NYC. Founded in 2021, this Garment District eatery specializes in the cuisine of China’s Muslims, the Uyghurs.

The Uyghur people have lived in Central Asia for thousands of years. Their food includes some items that may be familiar to you from other Chinese restaurants, such as dumplings, and others that may not, like Uyghur naan.

The tiny storefront was packed. My friend raced to the one remaining table — good thing she’s quick!

She studied the menu at length, finally choosing the lamb kebabs and yogurt. For me, the choice was clear — noodles.

As we sat at the little table anticipating our food, we watched happy families grin as they gobbled up dumplings, noodles and rice. A small shop with great food is the homiest atmosphere.

Out came our dishes! I carefully balanced the plates as I brought them to the table — drop these, and I could lose a friend forever.

She started with the yogurt, offering me a taste. The cool, tangy yogurt made the perfect appetizer.

Onto my noodles! I chose the oily noodles, which are served with a scallion garnish and fragrant chili crisp. The spicy, oily coating brought out the flavor of the springy, chewy noodles.

Meanwhile, my friend attacked her succulent lamb. As we ate, we barely said a word — a sure sign of good food.

“Where does this bowl end?”

Even after wolfing down a mountain of noodles, the dish looked like it had hardly been touched! I dug my chopsticks deep into the bowl, testing its depths.

Oh don’t worry, I finished it.

As we wrapped up our meal, I finally managed to look away from my plate to the decor. Delicate musical instruments and traditional crafts lined the walls.

The Uyghur people have faced incredible repression. But their unique culture is alive and well.

And whether you’re Uyghur or not, I’m pretty sure you’re gonna love those oily noodles.

Tengri Tagh Uyghur Cuisine is open every day except Monday and Friday. It closes at 8pm, so be sure to come early. The restaurant also has a new location in Forest Hills, Queens with longer hours.

Pop in for an amazing meal!

What are your favorite restaurants in NYC? Leave a comment and let us know!

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How Do We Solve the Consumer Debt Crisis?

July 25, 2023

I looked at the small pile of groceries on the conveyor belt. “How on earth is this $75?”

A lot of us are feeling that way today as prices go through the roof. And I’m one of the lucky ones — for me it’s just an annoyance.

But for many people, this is a crisis.

The Consumer Debt Pinch

Consumer debt has jumped almost 20% in just the last 3 years, according to a report from the Federal Reserve.

And if that wasn’t bad enough, interest rates on that debt are also through the roof! The average credit card rate has jumped from 16 to 22% in the last 3 years for cards with finance charges, per WalletHub.

Economic Effects

If the average person is hitting his financial limits, he will reduce spending. This could hurt the economy later this year and into 2024.

Consumers may get some help from falling interest rates, however. The Fed seems to be near the end of its tightening cycle and could lower rates in the next few quarters.

How Do We Fix It?

I come at this problem from a technology angle, the way I do with most every problem.

There are ways for people to better manage their debt. But they’re hard to access.

Lots of credit cards offer 0% interest rates on balance transfer. Taking your rate from 22% to 0% makes it a heck of a lot easier to pay that card off!

You can also negotiate with creditors to lower balances or get more time to pay.

If there’s so much help out there, why is it so hard to find?

That’s why I’m interested in technology to help people manage and reduce debt. With Americans owing about a trillion dollars on their credit cards, this is a huge market.

It’s also a great opportunity to help people.

Is the cost of living hitting people you know? Leave a comment and tell us!

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Now Is the Time to Invest in AI

July 24, 2023

For the first few months of the AI craze, I stood pat. Now, it’s time to move.

Sitting at this laptop two months ago, AI investments looked weak. I saw one startup after another at 9 digit valuations with minimal defensibility.

Many were a thin wrapper for OpenAI and nothing more.

Today, I’m seeing thoughtful implementations of generative AI. These companies could be the next unicorns.

For example, take my latest investment, Micro1. Micro1 is a platform for hiring engineers.

Micro1 uses AI at every step of the process. It scans resumes with AI, tests engineers with AI, and teaches them how to be more productive by using AI.

But it also includes a human being in the loop, evaluating engineers to be sure customers get the best.

What founder Ali Ansari has built isn’t easy to replicate. And it’s certainly no OpenAI wrapper.

I’m beginning to see more and more companies that use AI intelligently, like Micro1 does. Founders are integrating it into workflows to make products better, instead of just launching new skins for ChatGPT.

So how can investors know the difference? The best explanation I’ve seen comes from Jake Saper at Emergence Capital:

“So, how do you know if you’re building a cool app on top of OpenAI vs an enduring business? Start by asking a simple question: “How much of the job to be done (JTBD) we’re focusing on can be done within OpenAI/Anthropic/etc?” Enduring businesses tackling complex jobs to be done likely require meaningful software beyond the generative AI element; the good old fashioned building blocks of SaaS, like complex workflows, data integrations, advanced permissioning, etc will likely prove to be the scaffolding around which defensible generative AI-enabled businesses are built.”

ChatGPT only came out 8 months ago. It makes sense that the first companies to appear would be thin skins over its technology. They take less time to build!

The complex implementations of AI take longer. But those are the real businesses.

Best of all, I’m seeing much more reasonable valuations in AI companies. Pre-money valuations are usually around $10-15 million, even in the best seed stage startups.

Some AI companies still fetch eyewatering prices. They’re usually producing a foundational model — an OpenAI competitor, in other words.

That requires a massive number of specialized AI chips. They are in short supply and cost a fortune.

This means the company has to raise a container ship full of cash in order to get off the ground. With that massive raise comes a correspondingly massive valuation.

I’m not playing that game. The upside is minimal at those prices, and incumbents with more resources will probably kneecap the upstarts.

But the overall picture in AI is bright.

Startups that are more productive and capable than ever are raising at reasonable valuations. I’ll do that deal all day.

What are you seeing in AI today? Leave a comment and let us know!

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Szechuan on the Hudson at Ke Ming

July 21, 2023

A steaming mini-wok hit the table, brimming with shrimp and glass noodles. This was going to be an incredible meal.

Ke Ming is a Chinese restaurant on bustling Washington Street in Hoboken, NJ. It serves a wide variety of superb Chinese dishes, with an emphasis on Szechuan cuisine.

I launched my attack on the shrimp, busting through the shell to the succulent flesh. It was tender and deeply perfumed with garlic.

Outstanding.

Plunging my chopsticks deeper and deeper into the wok, the noodles never seemed to end. I slurped them down, delighting in their springy texture.

But we mustn’t forget the egg rolls!

The wrappers were crisp and just oily enough. Inside, crunchy cabbage awaits.

Maybe we can consider egg rolls a health food?

“Want to try mine?”

I tasted the peppers from my friend’s plate — crisp and fresh with the perfect level of spice. Only a true pal would share this dish.

Whether you’re in the mood for American Chinese food like General Tso’s or something more authentic, Ke Ming has you covered. I particularly love their General Tso’s Tofu.

The tofu is deep fried and prepared like the famous chicken dish. Each piece is crisp and unctuous.

I have never seen this dish anywhere else. Ke Ming may have invented it — an achievement up there with sliced bread and the wheel.

I also love the soup dumplings. The tender skins shroud a delicately flavored soup and succulent pork.

But my favorite thing about this little restaurant may be the owner.

He always makes sure we have our favorite sauces and preferred style of chopsticks. He even ran down the street once when my friend left his doggy bag behind!

Check out Ke Ming and experience the best of Chinese cuisine and hospitality!

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

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Demo Is the New Deck

July 20, 2023

“Can you give me a demo of your product?” That’s how I’m beginning just about every Zoom these days. Here’s why…

A Demo’s Worth a Thousand Words

I used to go straight to the deck. But over time, I realized the same deck could describe a dozen companies.

You’re going to “democratize access to X” or “help teams collaborate on Y.” Okay, great, but what does that really mean?

Nothing makes things clearer than seeing the actual product.

A demo lets me see how well the software really works. I can also judge its level of design — fetching, or frightful?

The Best Founders Give the Best Demos

But a demo helps me do a lot more than evaluate the product. I also learn a lot about the founder.

Is he fluent in the product? Or does he struggle to use the very tool his company produces?

A good CEO knows the product inside and out.

Brian Chesky has 7,000 employees at Airbnb. Still, he obsesses over every button.

Finding Vaporware

Demos also help me figure out what’s real and what’s not. Is the product fully built-out, or is this founder selling vaporware?

It’s fine if you haven’t built out every feature yet. But today’s product needs to provide real value and be easy to use.

Demo Like a Pro

Founders should practice giving a demo of around 2-5 minutes. This is enough to give investors an idea of what the product does and how.

Go through the key workflows in your product. Taking Uber as an example, you would show me how to request a ride, know where the car is, and pay.

You can also record this as a Loom and send it along with the deck to prospective investors. Here’s an excellent demo to use as an example. It comes from Dan Siroker, founder of Rewind AI.

Demos Change Minds

Last year, I passed on a marketplace startup. The product didn’t seem differentiated enough.

The founder asked for a second meeting, and took me through a detailed demo of exactly how his platform was different from the competition.

He was right! So I made the bet.

I’m very grateful to him today. The company just passed $5 million a year in revenue and is one of my best investments.

A great demo changes minds and gets you checks.

So, No More Decks?

Decks still have their place. They provide a lot of financial information that a demo can’t.

I want to know about your product. But I also need to know the numbers — revenue, CAC, burn, etc.

Ideally, I’d like a Loom and a deck before we meet. At the meeting, we can run through the product together and do some Q&A.

Wrap-Up

A demo is a founder’s best opportunity to stand out. A great product speaks for itself.

Don’t get lost in PowerPoint hell. Show investors what you’ve built — and blow them away.

Are you a fan of demos? Leave a comment and let us know!

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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.

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Meet My Latest Investment: Micro1

July 19, 2023

Startups need great engineers. Engineers want to level up with GPT-4. My latest investment, Micro1, solves both these problems at once.

Micro1 is an amazing platform that connects you with the top 1% of engineers worldwide. They’re carefully tested by both AI and humans to make sure you get the best.

Micro1 judges their proficiency on key tools like React and Python. It also evaluates their English skills and more to be sure you get the best.

Micro1 helps engineers double their productivity with GPT-4. They can learn GitHub Copilot, ChatGPT, Copilot Labs, and more.

Then, they can take those new skills and get an awesome job through Micro1!

When payroll comes around, you’ll breathe a sigh of relief. Micro1 takes care of all payroll, benefits, and compliance, worldwide.

There is no better way to hire top engineers.

Micro1 is growing fast and I’m excited to be an investor! I can’t wait to see this great team take over the software industry.

Check out Micro1 and get the engineer that will 10X your product!

How do you find engineers today? Leave a comment and let us know!

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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.

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

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

They Said It Was Stupid. Now It’s Worth $93 Billion.

July 18, 2023

“At the time…we were trying to raise $150,000 at a $1.5 million post money valuation. So for $150,000 you could have owned 10% of Airbnb. And the majority of them didn’t even reply to the email.”

That’s Brian Chesky, co-founder and CEO of Airbnb. In the history of Silicon Valley, Chesky may have been rejected more than any other founder.

A Startup Not Even a Mother Could Love

His idea was radical: paying to stay in a stranger’s house. Even his own mother wasn’t buying it, much less investors.

“Joe and I went to University Avenue. We met an investor, who I won’t name. He orders a strawberry smoothie. He then sits down, drinking his smoothie. Never picked his head up.

It was my first interaction with an investor. I thought, ‘Maybe this is what they all do.’

He goes ‘Uh huh, uh huh, uh huh.’ And then within 10 minutes he, like, leaves. And I thought, like, he had to park his car. We haven’t seen him since, though.”

After going through Y Combinator and coming out with serious traction, Airbnb was finally able to raise money. But even then, it could only pull in $615,000 at a $3 million post-money valuation.

Today, Airbnb has over 200 million users. Its market cap is over $90 billion.

How Investors Missed the Opportunity of a Lifetime

When the next Airbnb comes along, I want to be a part of it. So how do I avoid making the same mistakes as those other investors?

Airbnb didn’t look like most successful startups at the time.

The founders weren’t from Stanford. Two out of three were designers, not coders.

My lesson here is that a unique team can have a unique insight. And so long as they can build it, the company can work.

Moreover, the idea this motley team proposed was hard to accept. Who would pay to stay in someone’s house?

We investors have to remember that not everyone is like us! Investors are usually wealthy and would gladly pay up to avoid awkward encounters with a host.

But rich capitalists weren’t Airbnb’s go-to market. Chesky and Gebbia were focused on young travelers on a budget.

Investors also looked at the market too narrowly.

The market for staying with a stranger may not have been that large. But the adjacent hotel market is massive — over $200 billion per year.

Staying in a spare room is a good substitute for a hotel for many travelers, especially those on a budget.

Finding the Next Brian Chesky

Above all, the story of Airbnb tells me to keep an open mind.

Not all successful founding teams look exactly the same. Markets can be bigger than we think.

The return to backing a weird idea that works is massive. So with every startup I see, I ask myself, “What if it works?”

Would you have invested in Airbnb? Why or why not?

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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.

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.

Good Syndicates vs. Bad Syndicates

July 17, 2023

For angel investors, syndicates are one of the best ways to get access to deals. But how do you know which syndicates are worth joining?

Syndicate Basics

Syndicates are groups of angels who invest together. For new angels, they can provide instant access to deals.

A lead, usually a more experienced investor, brings in deals. Each angel can decide if they want to invest or not. You never have to invest.

In return, the lead usually gets 20% of the profits (called the “carry”).

Even if you’ve been investing for a while, a syndicate might bring you opportunities you otherwise would miss.

These days, I do some deals through syndicates and others directly. It depends on where I find the best deal.

How to Pick Syndicates

I’m a member of around 100 syndicates. Here’s how I find the best ones:

1) Strong lead. The lead investor has to know more than I do. Otherwise, why pay them?

You want a lead who has been investing for at least five years. Make sure she has at least one unicorn.

You want to be investing alongside someone with great deal flow and a track record of success.

2) Reasonable fees.

Syndicate leads usually charge a 20% “carry.” Syndicate deals also have set-up fees. These cover the cost of forming a Special Purpose Vehicle (SPV).

An SPV is an LLC that holds all the syndicate members’ money. You need an SPV in order to gather the money and give it to the startup.

These fees are usually about 3-7% of the amount you invest. Sometimes they reach as high as 10%.

You pay these whether the deal succeeds or not.

If you’re seeing a carry higher than 20% or fees higher than 5-10%, the syndicate may be charging too much.

3) Detailed information on each startup. The best syndicates give you lots of information on each investment opportunity.

You should get a detailed deal memo with revenue numbers, figures for burn and cash in bank, and a lot more.

Many of the best syndicates also give you a chance to meet the founder and ask questions.

A good syndicate gives you ample information. A bad syndicate gives you sketchy info and pushes you for a quick decision.

4) Hold the FOMO. The worst syndicates are always trying to scare you.

You’re going to miss out! The round is closing today! This is the last time the company will raise!

This is all crap.

I’ve seen startups that “would never raise again” back in the market in a matter of months.

Syndicate leads and founders resort to FOMO when they have nothing better to sell. If they had killer revenue growth or a unique product, they’d sell that.

But they don’t, so they sell fear.

You don’t need to worry about getting into every great deal. Even one will make your career!

Take your time, evaluate each company soberly, and ghost anyone who tries to FOMO you.

My Favorite Syndicate

Now that you have a better idea what a good syndicate looks like, let me tell you about my favorite syndicate. It’s run by Jason Calacanis, an early investor in Uber, Robinhood, and Calm.

Jason’s syndicate does not deal in FOMO. Instead, it presents carefully vetted opportunities and gives you plenty of information to decide.

If you can only join one syndicate, this is it.

Wrap-Up

Syndicates help angel investors start on second base by providing access to someone else’s network. If you use them intelligently, syndicates are an invaluable tool.

Do you invest through syndicates? Why or why not?

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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.

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.