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Build in a Small Town!

March 7, 2023

For decades, if you wanted to build a startup, you had to be in Silicon Valley. But today, the best place might just be Tennessee.

Or Omaha. Or Little Rock.

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In today’s market, building away from the coasts offers some huge advantages:

1) Lower burn. This is critical in today’s tough fundraising market.

When I meet with companies in NYC and SF, they often have massive burn rates. Part of the reason is high cost of living.

If you rent is $2000 or $3000 a month, you have to pay yourself and your team more. But what if you could rent a 1 bedroom for $750?

In Biloxi, MS, you can!

This means your seed funding will last much longer. That gives you precious time to find product-market fit.

2) Exposure to different opportunities.

I recently met with a company in a small town in the Midwest. They’re building SaaS for meatpacking.

No one in New York or SF is going to think of that. After all, we don’t have much of a meatpacking industry!

The middle of the country simply has different industries than the big coastal cities. And they need tech too!

Would you rather sell a unique, valuable tool to meatpackers or try to sell the 10th team collaboration app to an over-SaaSed startup?

3) Global teams. In the past, you had to be in Silicon Valley or New York because that’s where the talent was.

Now, remote work is common. A startup based in Iowa could hire a developer in SF and a product manager in Brazil.

This levels the playing field, big time.

4) Fundraising is on Zoom. Today, I met with founders in Nigeria, Canada, New York and DC.

Many of the investors are still in the Bay Area and New York. But the founders are everywhere.

Even as COVID recedes, fundraising has stayed on Zoom. It’s so efficient, I don’t think we’ll ever go back.

This means that a Kalamazoo startup and a Palo Alto startup are on similar footing. They both pop up as boxes on the VC’s screen!

If you have a great product and lots of happy customers, investors will take you seriously.

Wrap-Up

There are still some advantages to being in a tech center. You can meet investors at in-person events and learn from other founders.

But balanced against the high costs, you’re better off in the heartland.

Where do you think is a better place to build, SF/NYC or a smaller town? Leave a comment and let me know!

More on tech:

Everything You Always Wanted to Know About Venture (But Were Afraid to Ask)

Don’t Go Into Debt to Fund Your Startup

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Everything You Always Wanted to Know About Venture (But Were Afraid to Ask)

March 6, 2023

What does everyone get wrong about angel investing? What’s the future of Twitter? I dug into that and more recently at Starta VC!

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A bunch of smart young interns at Starta peppered me with questions for an hour. Their knowledge and depth of thinking really impressed me.

Here are some of my favorite moments:

3:38: How the book Angel led me into angel investing

7:52: Misconceptions about angel investing

9:12: Founder power struggles

11:40: Running out of money isn’t the #1 killer of startups

18:20: How I evaluate founders

42:27: The only reason VC’s exist

44:15: How to network and why

45:40: Opportunities in the down market

52:11: What happened to Clubhouse?

54:56: Twitter prediction

These young people are the future of our industry. The future is bright.

What parts did you like? What did I get wrong?

Leave a comment and let me know!

More on tech:

Let’s Double the Human Population

Don’t Go Into Debt to Fund Your Startup

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Let’s Double the Human Population

March 3, 2023

Sounds crazy, right? But doubling our population is the goal of one of the hottest new startups, Figure. The catch: half will be robots.

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Figure emerged from stealth yesterday, unveiling a humanoid robot. It plans to build one for every person on earth, doubling our productive capacity.

💫 WE’RE LIVE 💫

Today, Figure emerges from stealth.

We’re building autonomous humanoid robots.

One robot for every human on the planet.

Here's what the future will look like: pic.twitter.com/McEXbHtRpo
— Brett Adcock (@adcock_brett) March 2, 2023

Figure is addressing a very real problem: slowing population growth. Worldwide human population is expected to peak in 2100.

Some countries are already shrinking, including China and much of Western Europe. For countries like Japan and Russia, deaths outnumber births by 2:1 or more.

But whether population is rising or falling, jobs must be done. For many countries, the solution may be robots.

Figure’s robot mimics a small human. It’s 5’6”, 132 pounds and walks about the same speed we do. Being shaped like a human lets it operate smoothly in an environment built for mankind.

Is this creepy?

Yeah kinda. But unless humans decide to have more babies, it’s hard to see an alternative.

In the near term, human workers (just the need to specify tells us something) are likely to view Figure as a threat. Indeed, Figure aims to drastically cut labor costs.

From the company’s website:

Today, manual labor compensation is the primary driver of goods and services prices, accounting for ~50% of global GDP (~$42 trillion/yr), but as these robots “join the workforce,” everywhere from factories to farmland, the cost of labor will decrease until it becomes equivalent to the price of renting a robot, facilitating a long-term, holistic reduction in costs.

This means much lower wages for manual laborers.

But I’m optimistic that humans will find safer, more creative and better paid work. After all, YouTubers and yoga instructors barely existed 10 years ago.

Regardless of desirability, making 8 billion of anything is incredibly hard.

Let’s take another big, complicated product: cars. Global automobile production is only about 80 million per year — just one percent of the number of robots Figure hopes to build.

Whether Figure succeeds or not, I’m certain about one thing. VC’s are going to eat this up. I can practically hear the armored cars pulling up in front of Figure HQ now, ready to dispense billions.

There’s no down market for stuff like this. It’s a giant opportunity and involves the current hot thing, AI.

I just wish I had a slice!

Do you think Figure’s robots are creepy, awesome, or creepy and awesome?

Leave a comment and let me know!

Have a great weekend everyone!

More on tech:

From Design to Code in Seconds with AI

ChatGPT for Medicine

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Don’t Go Into Debt to Fund Your Startup

March 2, 2023

In 2023, startups are hitting the wall. Many are down to their last few dollars. But how about a loan?

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Going into debt is a mistake I am seeing more and more founders make.

Debt comes in a variety of forms. Founders use bank loans, SBA loans, and even credit cards to fund their businesses.

But you should not go into debt for an early stage startup.

Avoid Debt Like the Plague

Most early stage startups fail. Best case scenario, about 70% of my seed stage bets are going to 0.

For me, that’s fine. I can afford to lose the money. But for a founder, an indebted startup going to 0 can be disastrous.

Most business loans require a personal guarantee. That means that if you borrow money and can’t pay, the lender can (and will) come after you personally.

This means you could lose your bank accounts, 401k, even your house. No startup is worth that.

Losing your business is hard. You’ll be emotionally drained and forced to look for a job.

You don’t want to add personal bankruptcy to those problems.

What About Venture Debt?

Venture debt is different.

Venture debt can work for some later stage companies with large and predictable revenues. But it’s not a viable path for an early stage startup.

What’s more, venture debt generally doesn’t involve a personal guarantee. If the company blows up, you can walk away.

But Early Stage Startups Raise Convertible Debt!

Perfectly true, although SAFE’s are more popular these days. But convertible debt works very differently from most business and credit card debt.

Convertible debt operates more like equity.

You don’t pay the interest in cash. Instead, you just give the investor extra shares.

And if the company doesn’t make it, the founder can walk away. There’s no personal guarantee.

Wrap-Up

I don’t want to see you lose your business. But we have to admit, it’s possible.

If that happens, you want to be free to walk away and start over. Clean slate.

What you don’t want is to compound a bad situation with losing your house and all your money.

Be very careful with debt. And always work with an attorney who knows tech startups inside and out.

Win or lose, you must live to fight another day!

Do you see startups going into debt in this tough market?

Leave a comment and let me know!

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Dawn of the Dead VC’s

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The Kosher Kings of Reserve Cut

March 1, 2023

Tiny tacos hit the table, oozing with juices of unctuous brisket. Good thing I got here early!

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Reserve Cut is a kosher steakhouse in the Financial District. Despite the emphasis on beef, Reserve Cut has something for everyone, from vegans to sushi lovers.

It was time for another taco. How can I grab one without anyone noticing?

Better to ask for forgiveness than permission.

Next from the kitchen was a form of sushi I’d never seen. Rice was compacted and crisped to form a substrate for immaculate salmon.

Oh and there’s green stuff too! Scrumptious salad in fact — but no one else at the table seemed to notice. 🙂

The table grew tense with anticipation as the hour of reckoning approached. Entree time!

I had to be that guy. I ordered fish at a steakhouse.

No shame in my game — the Chilean sea bass was cooked to perfection. The chef knew exactly when to kill the heat, yielding a flesh flaky, tender and juicy.

The sauce was a silky smooth lemongrass citrus concoction. Acid is always a good pair with fish.

Feeling all healthy, I took the natural next step. I ordered a chocolate lava cake with vanilla ice cream.

As I cracked open the cake with my spoon, a river of fudge cascaded across the plate. Carefully, I scooped it up, grabbed a bit of cake, and surgically topped it with ice cream.

The perfect bite.

Reserve Cut is just off Wall Street and everything on the menu is kosher. But even for us Gentiles, it’s a heck of a meal.

What are your favorite steakhouses? Leave a comment and let me know!

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Goldman Sachs Under Federal Investigation

February 28, 2023

Goldman Sachs is under multiple federal investigations of its consumer business. The Consumer Financial Protection Bureau and the Federal Reserve are probing areas from credit cards to bank accounts.

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From a new report in the trade journal PYMNTS:

…in its annual report — filed Friday (Feb. 24) — Goldman amended its earlier statement to say it was cooperating with the CFPB “and other governmental bodies relating to investigations and/or inquiries concerning GS Bank USA’s credit card account management practices.”

But that’s not all:

The news comes a little more than a month after reports that the Federal Reserve was investigating Marcus, Goldman Sachs’ consumer business. A report by the Wall Street Journal citing unnamed sources said the Fed is examining the bank’s oversight of the consumer business, its management and governance, and how it handles customer problems.

These investigations could result in huge fines or worse. However, no wrongdoing has been proven thus far.

What we do know is that Goldman is losing a fortune on its consumer bank. Losses total over $3 billion at several units since 2020 alone.

Consumer banking was supposed to help Goldman diversify.

Its mainstays of mergers, IPO’s and trading are boom and bust businesses. But consumers tend to keep their bank account and credit cards in the same place for many years.

Instead, Goldman is posting its worst quarterly results in a decade. Add that to numerous scandals and Goldman is looking like the weak man on Wall Street.

Now that multiple federal agencies are poking around inside Goldman Sachs, there’s no telling what they’ll find. I’m willing to bet there’s more chicanery we don’t yet know about.

I was always reluctant to open a Marcus account, despite the great rates. Doing business with a company with such a checkered history scares me.

I guess I’m not alone.

What do you think investigators will find at Goldman?

Leave a comment and let me know!

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Photo: Goldman Sachs CEO David Solomon. “Unleashing the Potential Of Women Entrepreneurs Through Finance and Markets” by World Bank Photo Collection is licensed under CC BY-NC-ND 2.0.

Sequoia Dumps Citizen: Ruthless, or Reasonable?

February 27, 2023

When a startup is struggling, what’s the duty of investors? This question is front and center as Sequoia has walked away from controversial startup Citizen, cutting it off from funding and resigning from the board.

From a report out this weekend in the Financial Times:

Sequoia Capital has resigned from the board of controversial crime-tracking app Citizen after it told the company it would not participate in its latest attempt to raise capital amid a funding crunch for tech start-ups.

[Sequoia partner Mike] Vernal resigned from the board earlier this month after Citizen’s management approached venture investors with a proposed deal to raise new funds and recapitalise the business by restructuring its debt and equity, said two people close to the deal.

The deal will virtually wipe out Sequoia’s investment. The firm’s decision to stop funding Citizen has some in Silicon Valley crying foul:

One of the people close to Citizen said Sequoia’s decision was “ruthless” and that, as its earliest backer, it had “abandoned” the company in its hour of need.

Across Silicon Valley, venture capitalists are carrying out an “internal triage” of the “companies that matter . . . and those where the [return on investment] makes continuing to invest irrational”, the person added.

There is no public information on Citizen’s performance. But clearly, it’s not doing well

Successful startups don’t see their equity wiped out.

So Sequoia is faced with a tough choice. Should it give more money to a struggling company, or cut its losses?

It chose the latter. And since Sequoia will no longer be a meaningful investor in Citizen, Vernal naturally stepped down from the board.

The “hour of need” hand-wringing misses the point. No one is entitled to venture capital.

If a company isn’t performing, how can Sequoia put more of its investors’ money where it’s likely to be lost? Sequoia has a responsibility to the universities, pensions, and charities it works for.

We also have no idea what internal dysfunction may exist at Citizen. Its founder has shown poor judgment in the past:

In 2021, its founder Andrew Frame faced scrutiny for offering a reward to find a man wrongly suspected of arson. Prior to Citizen, Frame created a similar app called Vigilante that was banned by Apple over content concerns.

Declining to re-invest doesn’t mean Sequoia won’t support Citizen in other ways. The firm can provide advice, introductions, and more.

But this is business, and capital goes to the people who can best use it.

Whenever you get a dollar from an investor, assume it’s the last. Find paying customers and get your company on firm footing.

Then, VC’s will be begging to invest. And you can be the one to choose.

What do you think of Sequoia’s decision?

Leave a comment and let me know!

More on tech:

Sequoia Cutting Back on China Investments

The Hard Thing About Hard Things

I See Negative Gross Margin Businesses

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Photo: Citizen Founder & CEO Andrew Frame

Sequoia Cutting Back on China Investments

February 24, 2023

No US venture firm is bigger in China than Sequoia Capital. But as tensions rise, even Sequoia is pulling back.

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From a report out this morning in The Wall Street Journal:

Sequoia Capital has started screening some investments its China arm is considering in technology companies there for U.S. national-security concerns, according to people familiar with the matter, as Washington steps up efforts to stop American money from funding China’s development of sensitive technologies.

Sequoia doubled down on China as recently as last year, raising a record $8.5 billion to invest there. But now, the firm is pulling back:

Between 2021 and 2022, Sequoia China made at least 20 investments in Chinese semiconductor and related companies. Since the screening process was implemented in the autumn of 2022, the firm hasn’t made any investments in Chinese semiconductor or quantum-computing startups from its new funds, which were raised in July 2022.

As dominant as Sequoia is in America, it’s even bigger in China. The firm has a piece of almost every major Chinese tech company, from Bytedance to JD to Meituan.

Even as Sequoia faces scrutiny from US regulators, China may also crack down on its investments. After all, does an increasingly nationalist CCP want foreigners owning some of China’s most important technology?

Personally, I never invest in China. The country lacks the rule of law.

This means no matter how well I do, the government can come and take it all away in an instant.

Don’t believe me? Consider the sudden ban of education tech companies, driving their stocks to near zero overnight.

It’s unwise for US investors to put money in China. But there are advantages for the US government in letting it happen.

Major investors like Sequoia usually have information rights and a board seat. They’re privy to tons of confidential information about a company.

Having that information in the hands of a US firm could serve our strategic interests.

In all, I think China’s tech sector is toast. Top entrepreneurs are leaving and investors are spooked by a Communist government run amok.

There are plenty of other promising markets out there.

Would you invest in China? Why or why not?

Have a great weekend everyone!

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Photo: “China’s Growth Context: Neil Shen Nanpeng” by World Economic Forum is licensed under CC BY-NC-SA 2.0.

The Meatball of the Gods at Pasta by Hudson

February 23, 2023

The steaming pastas arrived, creatively nestled in Chinese takeout containers. I thanked my personal God as I dove into the best meatball in New York.

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Pasta by Hudson is an outstanding little Italian restaurant in Chelsea.

Inside, there are just two tables. It’s always the holes in the wall that have the best food!

Pasta by Hudson does everything themselves. They even make their own dry pasta, which I have never seen anywhere else.

You can taste the difference. In my classic bucatini with meatball and tomato sauce, I could practically see the garden where the tomatoes and basil were grown.

The meatball was rich, juicy, and deeply flavorful.

And putting cheese inside? Genius.

My friend tucked into her shrimp scampi. Naturally, I had to beg for a bite.

The pasta was spicy, oily, delicious. The shrimp were still tender — a rarity in restaurants.

And by the way, the portions are huge. When she couldn’t finish hers, I selflessly offered the lady my assistance.

I love Italian food, but I hate most Italian restaurants. They’re long on ambience and short on actual food quality.

Some have degenerated so far that they simply reheat premade food! This is an insult to our ancestors.

At Pasta by Hudson, they really care. That’s where I want to be.

And it doesn’t hurt that the owner, Brandon Fay, has a big smile and a hearty welcome for everyone who comes through the door. This man is doing what he was born to do.

Pasta by Hudson offers a wide variety of pastas from carbonara to bolognese. I particularly love the salmon and tomato pastas.

And if you’re low carb, I don’t know a better salad in New York! Sauteed mushrooms, fresh mozzarella, balsamic — chef’s kiss.

It’s telling that the same level of care goes into a humble salad as the most complex dish on the menu.

Pasta by Hudson even has pizza! I can never resist the macaroni, but I really must try the pies some day.

If you want to eat some of the best Italian food in New York City at an incredible price, Pasta by Hudson is for you. Bring your appetite!

What’s your favorite Italian in New York? Leave a comment and let me know!

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