Tremendous

The Venture Studio Trap

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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?

More on tech:

Good Syndicates vs. Bad Syndicates

The Venture Studio Trap

Save Money on Stuff I Use:

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

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!

I wrote a detailed review of Misfits here.

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?

More on tech:

Starting Your Raise? Talk to Angels!

The Venture Studio Trap

Save Money on Stuff I Use:

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!

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!

I wrote a detailed review of Misfits here.

The Venture Studio Trap

July 14, 2023

What if you could have your own business, a cushy salary, and a $1 million in capital? Sounds amazing, right?

So amazing that over a hundred founders started companies through the Fractal venture studio. Based in New York, Fractal incubated over 130 startups.

But the deal wasn’t as great as it sounds. Many have found it impossible to raise money.

From a recent Business Insider report:

Founders have been passing around a Google spreadsheet, seen by Insider, that tracks the venture firms that have “blacklisted” Fractal. Firms like Insight Partners and Andreessen Horowitz, the spreadsheet says, won’t invest in companies where the founders have so little equity. A partner at the VC firm Addition “passed as soon as they heard ‘Fractal,’” a founder said in the spreadsheet.

Fractal took a massive 47.5% stake for its capital and support. This left the founders with little equity in their own company.

Unfortunately, Fractal’s model is common. There are countless venture studios, and they routinely take 40% or more of the cap table.

This makes a startup radioactive in the venture market. VC’s want to see founders incentivized, not diluted down to nothing.

First-time founders are especially vulnerable to venture studios. They don’t know how the business works and don’t have the network to warn them.

Venture studios should become accelerators or shut down. Their business model is hurting startups and achieving nothing.

After all, if a company can’t raise money and grow, who cares if you own 50%? 50% of nothing is still nothing.

Top accelerators take around 6% of a company’s equity. If the legendary YC gets 7%, what entitles you to 45%?

And if a firm also wants to lead the seed round in every company that goes through its accelerator, so be it. But that $1 million check shouldn’t give them more than another 10-20% in equity.

If your cap table is poisoned by a venture studio, it can be fixed. If the studio agrees, a new deal can be worked out where the studio’s ownership drops and the founders’ increases.

But most VC’s won’t be interested in fixing your cap table. Why bother?

There are another 20 deals in their inbox. They put you in the “too hard bucket” and move on.

If you want to be an entrepreneur, there is no way around risk. If you want a fat salary and security, get a job.

It’s telling that Fractal was started by investment bankers. Their playbook just doesn’t work in startupland.

These inexperienced investors found similarly green would-be entrepreneurs to work with. The results are ugly — and predictable.

Silicon Valley builds companies a certain way for a reason. Founders, employees and investors all need the proper incentives.

Founders should not join any program that’s going to take more than a small sliver of their equity. And before you join, make sure the program has a track record of producing billion dollar companies.

No one will bleed for a company like the founders. So when you’re ringing the bell at the NASDAQ on IPO day, no one should benefit more.

What’s your experience with venture studios? Leave a comment and let us know!

Have a great weekend everyone!

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More on tech:

The Too Hard Bucket

Starting Your Raise? Talk to Angels!

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Is Adam Neumann Coming Back to WeWork?

July 13, 2023

For many people, college is the most memorable time of their lives. Is Adam Neumann about to re-create it for adults?

From a new report in Fortune:

Neumann emerged on stage yesterday in a suit, rather than a T-shirt, I’ll note, and told us that the noncompete and nonsolicit agreements he signed with WeWork expire in October, as our own Anne Sraders wrote yesterday. But what exactly happens after that? Neumann offered a hint: “I think Flow has only two choices: compete or partner.”

Which route he plans to take remains a mystery.

Adam Neumann announced his new startup, Flow, last year. Flow is a chain of apartment buildings designed to foster a sense of community.

Neumann, always an ace fundraiser, pulled in $350 million from Andreessen Horowitz. With an expiring noncompete and a fat bank account, Neumann has some interesting options.

WeWork is currently trading at just $0.27 a share. The entire company is worth a mere $564 million.

Neumann could easily buy WeWork. All it would take is a little debt financing or some additional cash from Marc Andreessen.

Then, Neumann has a total institution. Like a college, you could eat, sleep, work and socialize all in the same place.

Call it FlowWork. Hey, Neumann is the branding genius, not me.

It might look like this:

8:00am: Wake up in your FlowWork apartment, a little hung over from building cocktail hour last night.

9:00am: Work a few floors down in a soaring, loft-style space.

12:00pm: Lunch in the FlowWork cafeteria. Ooh, lobster rolls!

1:00pm: Crank through some e-mails.

5:00pm: Time for Zumba at WeSweat! Located just three floors down, you really have no excuse not to show up.

7:00pm: Ahh, the cocktail hour. From the building roofdeck, you see dozens of other FlowWorks along the horizon, each pulsating with bass.

8:00pm: Tapas for dinner! What a great idea! That FlowWork chef never runs out of surprises.

9:00pm: A little Netflix on your midcentury modern sofa.

10:00pm: Time to bed down in those buttery smooth WeSleep sheets! Ahh, what a day!

This is not as farfetched as it sounds. Neumann’s original WeWork already had a co-living unit called WeLive.

Why not put the two together?

Young people would clamor for this. Americans report fewer friends than in the past. Old forms of community, like church and office, are on the wane.

It also might be a way for companies to finally get workers back in person. Subsidize blocks of employees all living in the same FlowWork!

Neumann’s return to the company that threw him out would be epic. And given WeWork’s powerful brand and low price, it would also make business sense.

I can’t wait for Neumann’s comeback!

What do you think is next for Neumann and WeWork?

Leave a comment and let us know!

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More on tech:

How VC’s Could Have Avoided FTX

Why I’ve Never Invested in Crypto

Masa Pivots to AI

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Photo: “WeWork Coworking Space, 333 Seymour, Vancouver” by GoToVan is licensed under CC BY 2.0.

Justice Department Closes in on Short Sellers

July 12, 2023

FBI agents raided the homes of prominent short sellers last year. Now, criminal charges may be imminent.

From a new report in Bloomberg:

Anxiety over the Justice Department’s investigation intensified several weeks ago when the head of its market integrity and major frauds unit predicted at a legal conference that the public will start seeing results within a few months. He didn’t elaborate. Since then, short sellers have buzzed over who among them might be in the crosshairs.

The Meme Stock Bear

Andrew Left, a hedge fund manager famous for shorting meme stocks, was one of the short sellers whose home was raided. As I predicted at the time, his investors have pulled out.

Again from Bloomberg:

Two years after FBI agents showed up at his California home to seize computers and phones, the short seller who terrorized more than 100 companies and riled an army of meme-stock traders is describing what it’s like to feel hunted. His pioneering firm, Citron Research, no longer has investors. He’s all but stopped pitching ideas publicly. He even wiped his once-feared Twitter account.

The Justice Department has not made any specific allegations against Left. No one has proven he’s guilty of anything.

But Left’s short positions have already cost him dearly. He took massive losses shorting GameStop Corp in 2021 and finds himself ostracized in the industry and personally.

What Is the Government Looking For?

Short sellers typically short a stock, publish a negative research report, then profit when the shares fall. While the Justice Department has not said what exact wrongdoing they’re looking for, they may be digging into those reports.

Short sellers can make false claims about a company, then quickly cover their position. This way, they make money when the stock drops.

Whether the allegations are true doesn’t matter.

Short sellers may also engage in “spoofing,” or rapidly placing and canceling orders. This can drive a stock’s price down right as the research report hits.

If prosecutors can prove that hedge funds knowingly published false research in order to profit, or manipulated markets with spoofed trades, they could be in serious trouble.

How it Ends

I find it hard to believe the government will spend years investigating an industry and not charge anyone. After all, taking down a big hedge fund manager will make a prosecutor’s career.

What’s more, short sellers might be the least sympathetic group of people imaginable. If politicians think jobs in their districts are at risk due to a short seller raid, they will act.

I expect to see criminal charges filed against some or all of the subjects of this probe within the next few months. The government takes its time but when it hits, it hits hard.

What do you think the future holds for short sellers? Leave a comment and let us know!

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Photo: Andrew Left

Starting Your Raise? Talk to Angels!

July 11, 2023

Yesterday, I had a great conversation with a founder kicking off his Series A. He had an awesome product with serious traction — but one thing was missing.

He had no idea how to price the round!

Who could blame him? Though this founder had raised money numerous times in the past, he hadn’t come to market in a couple of years.

And what a couple of years it’s been!

I explained that with his nearly two million in revenue, he’d probably be looking at a pre-money valuation of around $20-25 million. In 2021, he might’ve commanded 5 or 10 times that.

Start with Angels

Although he faces a tough market, this founder’s approach is brilliant. Chatting with angels is a great way to start your fundraise.

Founders only come to market every year or two.

But we’re here all the time! We see actual deals get done and the prices at which they happen.

How to Get a Meeting

To get in front of us, show us what you have to offer. This is a good cold message:

“Hi Francis,

I’m the founder of Uber, a marketplace for black car rides. We have $20,000 a month in revenue, growing 20% MoM.

We will dominate the $76 billion taxi market. Our rides are cheaper, easier, and more comfortable.

I’m kicking off our seed round raise. Got 15 minutes?”

I’d respond to that.

But if you just connect to random angels on LinkedIn with no clear reason, don’t expect a response.

And if you’ve already got angels on your cap table, you’re really in luck! Booking a chat with them should be easy — it’s in their interest to help you!

Ask for Brutal Criticism

Angels can also give you feedback on your pitch in a low-stakes setting. No angel, whether they invest $1k or $100k, will make or break your company financially.

Where would you rather work out the kinks — in a pitch where $50,000 is on the line, or when $50 million is?

Whether you get a check or not, ask the investor for his most unfiltered feedback. You might hear something like this:

“It’s a cool concept, but black cars are a tiny market. This isn’t venture backable. No one’s going to invest in this.”

That stings. But take that feedback and act on it.

Do a better job of explaining how black cars can compete with taxis and how the taxi market is massive. Paint a vivid picture of a future multibillion dollar company.

Moving Up the Foodchain

Once you’ve perfected your spiel with angels, move on to VC’s. Start with mid-tier funds, then the top tier ones.

By the time you meet Sequoia, you’ll have made your pitch as compelling as possible. And you’ll have spoken to so many investors, you might even have competing term sheets!

Wrap-Up

Angels give you valuable market color and feedback in a low stakes setting.

And we like helping founders! It’s what gives us meaning in our work.

Take advantage! With the right advice, you just might raise like it’s 2021.

Do you talk to angels? Why or why not?

More on tech:

Why I’ve Never Invested in Crypto

How VC’s Could Have Avoided FTX

The Trick I Stole from Benchmark

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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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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!

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Miznon: The Professors of Pita

July 10, 2023

“Smell this.”

“Oh my God.”

“Amazing right?”

I attacked the massive mushroom pita, sauce spilling down my chin. Charred, umami, wonderful.

This is Miznon, an Israeli restaurant with several locations across New York City. Founded in Tel Aviv by chef Eyal Shani, it produces some of the best Mediterranean food anywhere.

I ordered the “whole forest” of wild mushrooms in a pita. The cooks used a broad variety of mushrooms, a great way to build flavor in any mushroom dish.

Each mushroom was beautifully caramelized yet retained it’s moisture. I have no idea what the spicy sauce is, but had I been alone, I would’ve licked the tray.

The grilled scallions give the sandwich a little extra kick. It’s wonderful to see veggies given the attention they deserve.

My friend had the lamb kebab. She’s a bit of a picky eater, but the lamb disappeared in a flash.

No one can resist Miznon.

Her lamb came with beautiful grilled vegetables. An ideal compliment to the unctuous meat.

“So, you’re not going to eat that pita?”

“No, it has gluten.”

“Can I have it?”

Miznon’s pitas may be different from those you’ve had before. They are Israeli style – thicker, softer, and pillowy.

I like to fold them up like a slice of pizza and stuff them into my mouth. The tender bread’s mild flavor is also the perfect home for Miznon’s deeply flavorful meats and veggies.

The whole check for 2 people was less than 50 bucks. Good luck finding that anywhere else in New York.

We went to Miznon’s Hudson Yards location, on the mall’s fourth floor. Seating is plentiful and the environment quiet.

Miznon has 3 locations in New York, including the bustling Chelsea Market. Stop in if you want an incredible meal at a great price!

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

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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!

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!

I wrote a detailed review of Misfits here.

The Tonic of Wildness: Stokes State Forest

July 7, 2023

“We need the tonic of wildness…At the same time that we are earnest to explore and learn all things, we require that all things be mysterious and unexplorable, that land and sea be indefinitely wild, unsurveyed and unfathomed by us because unfathomable. We can never have enough of nature.”
― Henry David Thoreau, Walden: Or, Life in the Woods

As our car pulled up to the little cabin, I was full of anticipation. A whole weekend to enjoy the outdoors, greasy food, and good company.

Our Walden is Stokes State Forest. This beautiful state park is located on the northwestern edge of New Jersey, just over the border from Pennsylvania.

It’s only about 90 minutes from Hudson County, where my friend Tim* and I live. Even in July 4th weekend traffic, we made it in good time.

For this trip, we were in the lap of luxury: we had a lean-to! These little cabins give you a roof and four walls — and you never know how important that is until you don’t have it.

They even come with a lovely wood stove. But on this balmy summer evening, we wouldn’t be needing it.

Tim got the fire going faster than any city boy I’ve ever seen. On went the dogs — Thumann’s. If you haven’t had them, get some. They’re the best I’ve ever had.

Then we went non-traditional: nachos! You’d be surprised how easy they are to make over a campfire.

Just layer tortilla chips, cheese, corn and beans in a cast iron skillet. Put it on the grill for a few minutes until the cheese melts, and top with salsa and sliced serrano chilies.

¡Buenísimo!

We laughed and chatted by the fire, then headed to bed early. Those little lean-tos make for a cozy night’s sleep.

The next day at breakfast, I finally tried Taylor ham! 9 years in Jersey, and believe it or not I’d had it. It was perfect with fried eggs and leftover buns to sop up the grease.

Then we set off to hike Tillman’s Ravine. After all that sitting around stuffing our faces, getting moving was a nice change!

Tillman’s Ravine is a pleasant, easy hike. The trails are well-marked and not particularly steep.

There’s even a little waterfall!

We stopped at the Walpack Cemetery along the way. The graves are mostly old, a surprising number of them children.

“We have it so much easier now,” I thought.

We pulled back into camp, sweaty and tired. Time to grill up that special porkchop we’d been saving.

It came from Kinderhook Farm, which makes the best pork chops around. If you’re in the area, check it out!

As we sat around the fire, we mused on trips to come.

Tim’s brother just had his first child, a son. Soon, he and his dad will join us too.

“Before long, there will be a little chair there right between ours,” I said.

Our lives unfold from trip to trip. Things change, but that fire stays the same.

I hope to be out there when I’m 100.

What are your favorite memories in nature? Leave a comment and let us know!

Have a great weekend, everyone!

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

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!

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!

I wrote a detailed review of Misfits here.

*Name has been changed

Hedge Funds Have Performed Miserably for 30 Years

July 6, 2023

The hedge fund industry manages $5 trillion dollars. That money is managed so poorly you could do better throwing darts at a board.

From a Financial Times report out over the holiday weekend:

Using backtested data for the HFRI 500, hedge funds continue to be a clear laggard on a long view, returning 61 per cent in the 10 years to December 2022, versus 227 per cent for the S&P 500. Even that Vanguard 60/40 portfolio beat the hedge fund index seven years out of the 10 and returned 79 per cent over the decade.

How is 2023 shaping up? As of May 31, hedge funds were flat, year to date. US bonds were up 2.5 per cent. The S&P 500 had returned 9.6 per cent.

In 2008, Warren Buffett bet that the S&P 500 would outperform the best hedge funds in the world over the next decade. He won the bet.

It Gets Worse

But the deeper you dig, the worse the picture gets.

Hedge fund performance over the last 30 years has been abysmal. The Credit Suisse Hedge Fund Index has delivered a 7% annual return since January 1994, versus 9.8% for the S&P 500.

The Missing Million

That might sound similar, but it isn’t.

Let’s take the example of a $100,000 investment made in January 1994. Here’s what you’d get in hedge funds:

And here’s how you’d do in an S&P 500 index fund, like the ones I own through Vanguard:

Congratulations, you made an extra $953,000! In total, you came away with more than twice as much money as the hedge fund portfolio.

Fees Galore

Despite their miserable performance, hedge funds also layer the fees on thick. Most funds charge 2% of assets and 20% of gains.

To make things even worse, many investors go through a “fund of hedge funds.” You give a firm money, they pool it with other investors’ money, and then allocate it to a portfolio of different hedge funds.

That usually adds another 1% of assets and 10% of gains. You’re up to a 3% management fee and 30% of assets, every year!

No wonder hedge fund investors can’t make money.

And this, my friends, is what hedge funds are really about.

They’re vehicles for charging you fees. Nothing more.

But What About…?

There is the rare hedge fund that massively outperforms the market over the long haul. Jim Simons’ Medallion Fund is one.

Tellingly, Medallion is closed to all but the firm’s own employees.

Perhaps you can find another Medallion. But the odds are against it.

The Illusion of Success

So why do hedge funds continue to manage trillions? Because they look successful.

The managers drive sleek sports cars. They went to the right schools.

An ETF just isn’t as sexy.

Do you invest in hedge funds? Why or why not?

Leave a comment and let us know!

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