The Trick I Stole from Benchmark

July 5, 2023

Benchmark Capital might be the greatest venture firm on the planet. I stole a trick from them — and you can use it too!

This morning, I was chatting with a great young founder. We got past all the numbers and on to a real conversation.

He opened up to me about some a–hole investors he’s dealing with. I couldn’t believe some of their behavior.

And then, our time was up.

Here’s the trick…

I didn’t schedule any meeting right after ours. In fact, I almost never schedule back-to-back meetings.

How could I tell him I had to leave?! We were just starting to have a great conversation!

I just kept kibitzing with him until we finished what we were talking about. At the end of our call, I had a much better understanding of him as a person.

Benchmark avoids back-to-back meetings whenever possible. I read about that trick in the wonderful book The Power Law and stole it for myself.

Our business is all about the great founders. The one in 1,000.

When you meet someone great, you want to have the freedom to chat and kick around ideas at length. The conversation goes where it goes.

This helps me truly understand people. It also helps me build relationships.

You can’t always get to know people in 30 minute chunks. Sometimes, it takes longer.

I always want to have time for those great founders.

So if we book a meeting and I pick a weird time, this might be the reason. I want the freedom to chat with you longer if we need to.

We angels and VC’s are in a service business. We are here to help founders.

We do that best when we make every conversation a priority and treat each person with respect.

Part of that is keeping our calendars in check.

Give this a try and you’ll be amazed at the great conversations you have! And you never know…one of them might lead to an incredible investment.

How do you handle meetings with founders and investors? Leave a comment and let us know!

Great to be back! 😊

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More on tech:

How VC’s Could Have Avoided FTX

Why I’ve Never Invested in Crypto

Late Stage Startups Face Bleak Funding Environment

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How VC’s Could Have Avoided FTX

June 30, 2023

Sequoia Capital lost $115 million investing in FTX. Partner Alfred Lin says they’d do it again.

From Bloomberg:

“I looked at the work we did 15 different ways,” Lin said Thursday at the Bloomberg Technology Summit. “We probably would have made the investment again.”

Sequoia’s business lies in trusting founders and taking calculated risks, he said, and the lesson learned is sometimes the investments won’t deliver.

“It stinks,” he said. Then again, the $115 million investment Sequoia lost on FTX was just 2% to 3% of its global growth fund, he said, adding that the firm was “still very excited about the concepts of crypto.”

Alfred Lin is a legend. But here’s why I think he’s wrong…

A venture capital firm investing a substantial sum should do due diligence. They owe it to the people who trusted them to invest their money.

Even a cursory diligence process should’ve uncovered huge problems at FTX. Those problems would easily be enough to stop any investment in the company.

From a CNBC report:

[New FTX CEO John] Ray, who helped shepherd Enron through its own bankruptcy, minced no words about the state of the company or the behavior of the former executive team, describing it as one of the worst examples of corporate controls he’d ever encountered. It was a damning remark from someone who has 40 years of legal and restructuring experience.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

The losses for investors may reach as high as $8 billion. But with nonexistent or deficient accounting, auditing and disbursement systems, it will take Ray and his forensic investigators “some time” to uncover the truth.

VC’s with a strong diligence process log into a company’s Quickbooks. They make sure the numbers add up.

They also comb through bank statements, looking for unusual expenses. The odd employee mansion would certainly qualify.

The big firms that invested in FTX, like Sequoia and Softbank, have large teams of people and massive budgets. They can easily afford a few accountants and lawyers to dig through financials.

I know firms that do this when they’re investing $500,000. Surely Sequoia’s nine digit investment should trigger at least the same level of diligence.

Without diligence, a VC’s investors have no security for their money. The firm also gets a reputation as light on diligence, which will have every huckster beating a path to their door.

So what happened to Sequoia and all the other top firms that put their money with this criminal?

They succumbed to FOMO, just like everyone else. After all, if they took time for diligence, they might lose out on the deal!

FOMO is the ultimate killer of investment returns. It gets us rushing headfirst into rotten investments, incinerating our capital.

We have to be willing to miss deals. We have to maintain standards.

Since an angel investor like me doesn’t have the right to deeply diligence a startup’s books, I partner with lead investors I trust. I know their diligence process is thorough and I can rely on it.

It’s okay to make mistakes, in investing or anything else. But we have to learn from them.

The lesson of FTX is that no matter how special a deal seems, always kick the tires.

Do you agree with Alfred Lin? Leave a comment and let us know!

The next blog will be on Wednesday, July 5. Have a great holiday weekend, everyone! 🎆

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Why I’ve Never Invested in Crypto

Late Stage Startups Face Bleak Funding Environment

Masa Pivots to AI

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Why I’ve Never Invested in Crypto

June 29, 2023

“Did you own a lot of crypto?” my lunch companion asked?

“Actually, I never put a dime into that.”

“That’s impressive.”

Since the market peak in 2021, crypto has been crushed. What was supposed to be the future looks increasingly like the past.

The NASDAQ Crypto Index of major tokens is down by more than half.

FTX has collapsed, and Binance may not be far behind. Even Coinbase stock is down nearly 80%.

In 2021, I saw countless crypto startup deals.

Each one sounded like an incredible opportunity. If I didn’t hop on this trend now, I might be left behind!

But then I dug just a bit beneath the surface.

Company after company had no product in market. That means no customers and not a single dollar coming in the door.

Except from fundraising.

Pre-launch companies raised at $100 million valuations or more, day after day.

Meanwhile, I was investing in companies with real products and customers at much lower prices. Startups with hundreds of thousands in revenue were available at prices below $20 million.

I realized that a lot of crypto startups are just fundraising exercises. They create hype, pull in checks, and take them to the nightclub in South Beach.

Okay, maybe I wasn’t seeing anything promising in crypto startups. But how about the tokens themselves?

I researched Solana, Elrond and others. Some of the technology was impressive.

But as I considered buying Solana in the fall of 2021, its market cap was around $100 billion.

“In anything speculative, I want to see the possibility of a 100x return,” I told a friend. “So what, Solana is going to be worth $10 trillion? I don’t think so.”

Despite the innovative tech, the price seemed obscene. Over time, markets came around to my opinion, and the price fell 90%.

Before I dislocate my shoulder patting myself on the back, let me explain something. This took no special insight.

I just applied to crypto the same criteria I apply to all my startup investments.

I want to see a product in market with real customers. I want to see a few hundred thousand a year in revenue, growing fast.

I want to see a real business.

If a crypto company hits those benchmarks, I’d be happy to invest. But good luck finding one.

My hunch is that crypto is over. I expect to see all those hot 2021 crypto deals become zeros.

It’s been 14 years since the introduction of bitcoin. We’ve yet to find a use case aside from speculation

Meanwhile, in just a few months, LLM’s are widely used across the world.

My lesson here: focus on the business. Don’t focus on hype, FOMO, or the actions of the crowd.

If you buy slices of great businesses at reasonable prices, you can win. If you throw money at every passing fad, you’re toast.

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

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Late Stage Startups Face Bleak Funding Environment

Masa Pivots to AI

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Hedge Fund Andurand Loses Majority of Fund

June 28, 2023

Pierre Andurand was sure oil prices would soar in 2023. He placed massive bets. Now, one of his funds faces an existential crisis.

From a report out this morning in Bloomberg:

Oil trader Pierre Andurand’s losses deepened this month, with his hedge fund slumping to its worst-ever phase of decline.

His main Andurand Commodities Discretionary Enhanced Fund, which makes leveraged bets, fell by another 7% this month through June 23, extending this year’s losses to about 51%, according to an investor letter seen by Bloomberg News.

Andurand buys energy options, hoping to profit on huge price swings. This year, he expected oil to surge due to China’s reopening.

Instead, the price has fallen on a tepid global economy. This resulted in huge losses for the star trader.

Commodity options are notoriously risky. A small swing in price can quickly wipe out a leveraged position.

Andurand has never taken losses this large. Despite many years of strong performance, a loss of the majority of the fund could spook investors.

The key is psychology. If people see you down by more than half, they assume you can go down all the way.

And they certainly don’t want to be there when it happens.

Hedge funds under pressure frequently see huge withdrawals. This leaves the fund hurriedly selling positions at whatever price it can get.

In such a downward spiral, the best employees leave as well.

Perhaps Pierre will make another risky bet that saves the firm. But that may only delay the day of reckoning.

The most successful investors over the long term buy great assets and hold them forever. That’s the group I want to be in.

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

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Correction: An earlier version of this article estimated Andurand’s losses at over $1 billion.

After publishing the article, I heard from a representative of Andurand. They explained that while one fund is down over 50%, Andurand manages four funds.

Since Andurand refused to disclose the size of each fund, it’s impossible to estimate the dollar losses here. So, I removed references to any specific dollar amount.

Since the fund that took the large loss is the main fund, per Bloomberg reports, I assume the loss is quite significant. But without more transparency from Andurand, we cannot know the exact size of the loss.

I always strive to bring you the most accurate, up to date information. When more information becomes available, I will let you know about it right away, as I have in the past.

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Late Stage Startups Face Bleak Funding Environment

June 27, 2023

Late stage startups are running out of options. For every $3 they want to raise, just $1 is available. From a new Pitchbook report:

The capital landscape during H1 has not seen significant improvement for late-stage and venture growth companies. The capital supply and demand dynamic is still skewed, with late-stage companies experiencing a particularly pronounced imbalance. Demand for capital in the late-stage sector is about 2.84x more than the available supply—a stark difference compared to the 1.29x overextension observed in the venture-growth stage.

Getting to Breakeven

These startups are valued in the hundreds of millions of dollars, if not more. Many have tens of millions in revenue, every year.

With cash like that coming in the door, there ought to be a path to breakeven!

I know we sound like a broken record, but investors big and small have told companies to cut burn for over a year now. Many did, making hard decisions to lay off staff.

Now, those startups are in a strong position.

Once they hit breakeven, they no longer need to raise money. If they decide to do so, it’s on their own terms.

The Punitive Funding Environment

But for startups that refused to adapt, the picture is grim. If they can raise money at all, the terms are often punitive.

Nearly 1 in 10 funding rounds now includes a liquidation preference above 1x, up from almost none a year ago. You can bet that figure is a lot higher at the late stage, given capital scarcity.

If a VC invests $50 million at a 3x liquidation preference, that means he gets back $150 million before anyone else gets anything. If the company exits for $150 million or less, he gets it all.

Nothing for founders, nothing for employees, nothing for early investors.

When employees find out about this, the best tend to leave. After all, their options may now be worth nothing.

What’s more, the company becomes hard to finance in the future. Take that cap table to the next investor, and they’re going to squint and say “What is this mess?”

Late Stage Outlook

Don’t expect the late stage funding market to ease up any time soon.

At the peak, the vast majority of capital came from crossover hedge funds. Those funds are largely out of the market, licking their wounds.

Meanwhile, VC’s are raising fewer new funds. This means they’ll have to dole out their existing capital more slowly.

Wrap-Up

Getting to profitability is tough. It can involve saying goodbye to great employees.

But it beats the alternatives.

A startup’s ultimate goal is to become an independent, public company.

This means it will have to get to profitability anyway. Public markets aren’t buying unprofitable tech these days.

No time like the present!

What are you seeing in the late stage market? Leave a comment and let us know!

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How I Research a Startup

Masa Pivots to AI

The Perfect Pitch

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How I Research a Startup

June 26, 2023

I’m finalizing my biggest ever investment in a startup. Let me take you inside the research process I used to make this decision.

Read the deal memo and deck. Simple, but you’d be amazed how many people don’t do this!

I read all materials, often multiple times. I extract key passages and take notes on them.

Find growth rate and burn multiple.

For every company, I want to know how much money is coming in the door.

I also want to know how fast the revenue is growing. I calculate growth rates for the last 6 and 12 months.

For seed stage, I want to see a company tripling year over year. Around Series A, that may slow to double as the numbers get larger.

Growth is great, but we also want to make sure startups are capital efficient. If they’re burning $10 to get another dollar in revenue, they don’t have a viable business model.

So I take the most recent month or quarter’s ARR increase and divide it by that period’s burn. This produces the burn multiple.

I got a burn multiple of 1.6 for this startup, a very strong result.

Calculate market size. I do what’s called a bottoms-up TAM.

I take all the potential customers and multiply that by the cost of the product. In this case, it’s a SaaS product used by in person stores.

I found that at least 2 million such stores exist in the US. At the startup’s average pricing of $4200 a year, this yields a healthy $8.4 billion potential market in the US alone.

I like to see that potential market around $10 billion or so. This gives me a chance of hitting a major outcome.

Demo.

The demo is really undervalued. You can’t judge a product from a bunch of slides.

I want to see the product in action. And if it’s a consumer product, I want to use it myself.

Is it pretty? Is it easy to use?

If so, it just might sell!

Meet with the founder. This step is crucial.

When I meet with a founder, I usually already have most of the financial information. What I’m looking for above all is to get a feel for a person.

I want to know his personal connection to the company’s mission. Will he give up if things get tough?

I often like to ask, “Who do you admire?” This founder smiled as he mentioned Elon Musk.

That gives me a sense of the scale of his ambitions.

I also ask myself who this person reminds me of.

In this case, he reminded me of two other founders I’ve met with, Brett and Aaron*. He calmly fielded questions and answered with enormous detail, just as they did.

Brett and Aaron both run billion dollar companies. Maybe this founder will too!

Research competitors.

I look into the competitors the founder mentioned. But I also look for ones he may not know about.

In this case, I saw no serious competition. But even if there had been, it doesn’t mean the deal is a no-go.

It just means they need a great strategy to win.

Research co-investors. The first question I get from most investors when I send them a deal is “Who else is investing?”

I don’t operate that way. I make my own decisions.

But I do want to know who else is in a deal. If top investors are joining, it’s a small plus.

Decision Time

I read over everything in the research document I’ve compiled. What’s the overall picture of this company?

In this case, I had a great founder taking on a huge, untapped market. His traction was impressive, reaching millions in revenue in just 3 years.

Since I first invested two years ago, he’d done everything he said and more.

So I decided to re-invest!

My last step is to write a short memo on why I’m investing. I keep it to a couple of hundred words.

This forces me to be clear on why I’m making an investment. Win or lose, I can go back and check the quality of my thinking.

In total, the whole research process took me a little over five hours for this company. That’s on the high side for me — I usually spend about 4 hours on research before saying yes to a startup.

For companies that don’t make the cut, the decision could come in just a few minutes.

But when I’m on to something good, I like to dig deeper. But I also keep in mind that eventually, I have to make a decision and move on to the next bet.

In the end, we can’t control outcomes. All we can do is improve our process.

My hope is that with enough carefully considered bets, I hit that home run.

How do you research a startup? Leave a comment and let us know!

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*Not their real names

More on tech:

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Office Towers: The New Dead Malls?

June 23, 2023

When I was little, my mom and I used to love strolling through the Park Plaza Mall in Oshkosh, WI. Crowds of shoppers bustled past neon signs for Younkers and Maurice’s. Today, all of that is gone.

All that remains are a few tomblike offices. The once-crowded corridors are so empty that a dance school practices in them.

Is this the future of office space?

The Fall of the Office Tower

From a new report in Bloomberg:

In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it. A new Hong Kong skyscraper is only a quarter leased

A tipping point is coming: In the US alone, about $1.4 trillion of commercial real estate loans are due this year and next, according to the Mortgage Bankers Association. (Other estimates are a bit lower.) When the deadline arrives, owners facing large principal payments may prefer to default instead of borrowing again to pay the bill.

The value of office buildings are projected to fall by 35% from the peak. Recovery may not come until 2040.

And You Thought Remote Work Was Bad

Remote work is killing the office tower. Only half of workers in New York are back in the office, according to building security company Kastle Systems.

As bad as remote work has been for offices, AI may be even worse.

Many tech companies have hiring freezes today. With AI making each employee more efficient, those hiring freezes could last for years.

Fewer, more productive employees means people waste less time coordinating with each other. It’s also a lot cheaper.

AI hiring freezes mean that even if workers do come back to the office, there will be fewer of them. The demand for office space stays depressed.

So What Do We Do With Them?

The aging 70’s and 80’s towers filled with grey cubicles are done. They’re the new dead malls.

The obvious solution is to redevelop them into apartments. But that’s difficult and costs a fortune.

The deep floor plates mean that for an apartment to have any light, it must be extremely narrow. Prospective residents won’t like that.

What’s more, landlords have to add new internal walls and huge amounts of plumbing. This is enormously costly.

Given the costs and difficulties of conversion, only a couple percent of Manhattan office space could be converted to apartments, according to an estimate from Moody’s Analytics.

So what happens to these buildings?

Many probably sit vacant until demand returns, years from now. Others may be demolished.

And maybe in the mean time, dance troupes can use all those empty conference rooms for practice.

What would you do with these empty office buildings? Leave a comment and let us know!

Have a great weekend everybody!

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Negotiate Like an FBI Hostage Negotiator

June 22, 2023

Jack Welch was one of the most famous CEO’s of his time. So how do you buttonhole him at a book signing and get him to speak at a class he’s never even heard of?

“Is it a ridiculous idea for you to speak at the negotiation class I teach at USC?” Chris Voss asked.

Chris wasn’t offering a dime. And he’d never even met Jack before.

But sure enough, Jack turned up that fall and spoke to Chris’ students!

Chris Voss is the former FBI lead hostage negotiator. In his superb book Never Split the Difference: Negotiating as if Your Life Depended on It, Chris helps us apply those negotiating lessons to our business and personal relationships.

I had the pleasure of seeing Chris speak this morning at an event in New York. Here are some of my favorite insights from today…

Getting to No

Getting to Yes was an international best seller. But it’s the wrong approach, according to Chris.

When someone tries to get me to agree to something, I get nervous. Where is this leading, and what’s it going to cost?

We’re uncomfortable saying yes. And if you’re making someone uncomfortable from the outset, good luck building a relationship.

“No one tries to get you to say yes if they’re not taking you someplace.”
Chris Voss

Instead, try to get the person you’re negotiating with to say no.

Chris wanted Jack Welch to say no to his question. That kept Jack comfortable and in control.

Comfortable enough to do exactly what Chris wanted!

I’ve already used this on one person so far today. 🙂

Connecting with Sales Prospects

Chris was on the phone with a man whose son had been kidnapped in Haiti. He had just a few minutes to show this distraught father that he was in good hands.

So he explained that Haitian kidnappers were not killing victims. Instead, they were releasing them in just a few days.

And sure enough, a couple days later, the boy walked free.

The minute you meet someone, they decide if you’re worth dealing with. How do you show them both competence and empathy with their situation?

By showing that you know what they’re up against!

Let’s say I’m talking to a founder I just met. Why should she deal with an angel she doesn’t know?

I can build a relationship between us if I can show I understand her struggles.

I might say something like this:

“Many startups are having a harder time selling as corporate budgets contract. Meanwhile, if you’re not doing generative AI, the fundraising market is a mess.”

Even if I’m wrong about the founder’s challenges, she can correct me. At that point, she’s on my side helping me, and we’ve begun to build a relationship.

Wrap-Up

None of this stuff is a trick. Instead, Chris offers ways to empathize, build relationships, and work together with others.

“As long as you sincerely try to show people that you heard them, they will forgive you for mistakes and will always be willing to deal with you again.”
Chris Voss

I strongly encourage you to read Chris’s book. I plan to reread it again soon!

What do you struggle with in negotiation? Leave a comment and let us know!

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Masa Pivots to AI

June 21, 2023

Just when we thought AI couldn’t get any hotter, it got hotter. Yesterday, Masayoshi Son announced plans to take the industry by storm.

From a report out overnight in CNBC:

SoftBank Group chairman and CEO Masayoshi Son on Wednesday said that the Japanese investment firm plans to shift from “defense mode” to “offense mode” and wants to capitalize on the AI boom.

“Now, the time has come to shift to offense mode,” Son said during a shareholders’ annual general meeting.

Softbank has more money than just about anyone.

Despite some high profile losses, its second Vision Fund still tips the scales at $30 billion.

And Masa is about to fill up his piggybank.

Softbank owns 100% of Arm, a British chipmaker. Arm has filed for an IPO which will put billions in Masa’s coffers.

That money will be heading straight into AI startups.

Already, the market for early stage AI companies is dangerously overheated.

Just last week, Mistral AI raised over a hundred million dollars at a $260 million valuation. It has no product or customers.

In fact, the company is just four weeks old.

Once Masa dumps a few tens of billions onto the market, the Mistral AI round may look quaint.

Masa has made some incredible investments, like Alibaba. But Softbank also has a history of giving too much money to startups at excessive valuations.

Perhaps the most famous is WeWork. Softbank invested over $10 billion at valuations as high as $47 billion.

Today, WeWork is worth just $163 million.

I expect Softbank to repeat its mistakes with its AI investments. Look for huge checks going into fledgling companies at eyewatering valuations.

I already find the AI market difficult to invest in.

Many companies have amazing tools but few if any paying customers. And that amazing product is quickly upstaged by an even better one weeks later.

Add in sky high valuations, and it’s a great way to lose your money.

As Masa trains his firehose of cash on the market, these dynamics will only intensify.

I will continue to invest in great AI companies at reasonable valuations, as I always have. And I’m also taking a special look at non-AI companies with great businesses that provide real value to customers.

If no one else wants them, I’m happy to back up the truck.

What do you think of Masa’s pivot to AI? Leave a comment and let us know!

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More on tech:

Heading Off the AI Cliff

The Perfect Pitch

How I Pick Companies and More at the Single Family Office Summit

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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.

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

Short Sellers Lose $120 Billion in 2023

June 20, 2023

A major rally this year has punished short sellers, leading to massive losses.

From a report out overnight in The Wall Street Journal:

Short sellers have incurred roughly $120 billion in mark-to-market losses this year, including $72 billion in the first half of June, according to S3.

“There are still many investors and hedge funds who think that this rally is ready for a pullback,” said Ihor Dusaniwsky, managing director of predictive analytics at S3. “Or at least that several of the highflying stocks will lose steam and revert back to the mean.”

The AI-driven rally in big tech stocks is responsible for most of these losses. Jumps in heavily shorted meme stocks have meant even greater pain for the hedge funds and institutions betting against markets.

Increasing interest rates also mean that holding short positions is more costly.

To short a stock, a trader must borrow the shares and sell them.

The trader pays an interest rate for borrowing the shares. Those short interest rates rise along with the federal funds rate.

I hate short selling as a strategy.

Best case scenario, you make 100% on your money. Worst case, your potential for loss is unlimited.

Moreover, you’re swimming against the general rising tide of markets. And that short position is costing you in interest.

Every day, humans are innovating. Together, they form companies and create incredible new products.

And here in the United States, they do it in the world’s best legal and cultural environment for business. Betting against them is foolish.

If we zoom in on the market and look at some of the most successful companies, the picture becomes even clearer.

Let’s take Nvidia. Nvidia began as a small supplier to videogame console makers, going public in 1999.

Since then, its stock is up more than 900-fold. A return like that always beats a short sale.

Prophets of doom will always be with us. But I’m betting my money on a bright future.

What do you think 2023 holds for markets? Leave a comment and let us know!

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