They Passed on Apple, Google and Facebook…Here’s Why

January 10, 2023

“Kid, haven’t you heard of Friendster? Move on. It’s over!”
VC Jeremy Levine passing on Facebook, 2004 (speaking to Eduardo Saverin).

Ouch.

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Bessemer Venture Partners passed on Apple, Google, Facebook and countless other highly successful companies.

In what they’re calling an “anti-portfolio,” the venerable firm explained their reasons for turning each founder down. How they arrived at these decisions can teach us investors a great deal.

I noticed a few themes:

Valuation: Bessemer passed on Apple, Airbnb and Atlassian because the valuations were too high. All went on to become massive companies.

The very best startups tend to go for a premium price. Google’s Series A valuation was around $100 million – scandalous at the time.

If you know you have one of the hottest companies in Silicon Valley, why sell cheaply?

I expect valuations to be reasonable. But focusing too much on price can lead us to “value traps.”

These companies are cheap for a reason and never go anywhere.

Founders Too Young: David Cowan had incredible luck — his friend was renting her garage to Sergey Brin and Larry Page.

The two young comp sci students were working on a new search engine called Google.

The Bessemer partner was unimpressed with these student founders. And who needed another search engine?

“How can I get out of this house without going anywhere near your garage?”
David Cowan

What if Cowan had been willing to take just a 20 minute meeting with Sergey and Larry?

Too Much Competition: Bessemer passed on Facebook and Zoom partly due to competition.

There were already so many video conferencing tools. And haven’t you heard of Friendster?

What the Bessemer partners missed is that being first doesn’t mean you win. The best tool wins, and it’s often not the first.

General Hubris: Now, we come to one of venture capital’s worst scourges.

Sometimes VC’s are so overconfident they can’t imagine being wrong.

You see that in Levine’s treatment of Eduardo Saverin when he passed on Facebook. He knows everything and this “kid” is deluded.

You see it again in David Cowan’s rejection of eBay:

“Stamps? Coins? Comic books? You’ve GOT to be kidding. No-brainer pass.”
David Cowan

We investors must always remember that we do not know the future. The best we can do is take an educated guess.

We will be wrong most of the time. And we must never forget that.

So I try to keep an open mind. And even when I pass on a company, I try to be polite.

With all these misses, you’d think Bessemer is the worst venture firm in the world, right?

Wrong. It’s actually one of the best!

That’s the magic of our industry. We can be massively wrong almost all the time, and still be a huge success.

Bessemer was an early investor in LinkedIn, Twitch, Shopify and many other iconic companies. They may have missed Apple and Google, but they didn’t need them.

I applaud Bessemer’s candor in assessing its mistakes. That’s how we learn!

What mistakes do you see investors making? Leave a comment at the bottom and let me know!

More on tech:

John Doerr’s Biggest Mistake

The Power Law (Part Two)

Entrepreneurial ADD: The Startup Killer

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Entrepreneurial ADD: The Startup Killer

January 9, 2023

Every time I get the monthly update, I’m confused. Did I really invest in this company?

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There’s a disease that will kill a startup faster than anything else. It’s called Entrepreneurial ADD.

This deadly condition involves a founder who gets distracted too easily. Rather than nailing one business model, he’s always running off in new directions.

Hot new trend? He’ll pivot the entire business to work on it.

New product showing signs of working? Trash it and build something even cooler!

Entrepreneurs have boundless enthusiasm and tons of ideas.

This can help them innovate and succeed. Or it can have them running around like chickens with their heads cut off, accomplishing nothing.

Take the example of my portfolio company. After seeing some early signs of success with one product, they pivoted to something completely different.

The founder continued to chase down every hot trend in tech. Meanwhile, revenue shrunk and cash evaporated.

Now, runway is minimal and the chances of raising more money are poor. In this environment, a cash burning company with declining revenue is not investable.

What if they had simply hammered away at their original, successful business? They might be break-even by now and raising from a position of strength, if at all.

Venture capitalist Ben Narasin notes that in decades of investing, he’s almost never seen a pivot work. How many companies pivot over and over and succeed?

Probably almost none.

Don’t abandon a winning business model for the shiny new toy! Double down on what works.

And if your model isn’t working, fix it! If a particular problem is important to you, don’t just abandon it at the first sign of difficulty.

Because guess what? The next business will be difficult too!

Do you struggle with Entrepreneurial ADD? Do some of your founders have it?

Leave a comment at the bottom and let me know!

More on tech:

Have We Reached SaaS-turation?

Is 2023 the Best Time to Invest in Startups?

The Magic of Milestone-Based Funding

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Photo: Jack Dorsey, one of the very few CEO’s to successfully pivot a company. He pivoted Odeo to Twitter. “Jack Dorsey” by jdlasica is licensed under CC BY 2.0.

Have We Reached SaaS-turation?

January 6, 2023

Like many investors, I love a good SaaS business. But have we flooded the market with so many startups that customers are about to rebel?

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I run a one-person business. Just looked at the SaaSes I pay for:

GSuite. Craft Docs. Zoom. Grammarly. Plauisble. PermanentLink. Calendly. Excalidraw. Canva. SendGrid. ConvertKit. Mailjet. GeniusLink. TubeBuddy. Feedly. GitHub. Render. MediaTemple. Netlify. Dropbox. t2mio.

Wow.
— Gergely Orosz (@GergelyOrosz) December 2, 2022

I was amazed when I saw how many subscriptions this founder was paying for…just for himself! That leads us to an interesting thread by Molly Wood, Managing Director at venture firm LAUNCH and co-host of This Week in Startups:

I suspect the days of rubber-stamping anything with SaaS on it are over, or should be. We're at saturation. SaaS-turation, even. I slay me. And apparently I also slay VC sacred cows in year one, so we'll see how wrong I am in another few, that's always a possibility, too. 🤣
— Molly Wood (@mollywood) November 16, 2022

But if we look more closely at Gergely’s example, we find something interesting. He’s actually happy paying for all these subscriptions!

A few people asking why I don't just choose one SaaS instead of two that are similar.

Two reasons:

1. (For data-related) Backup / multiple providers.

2. For everything else: because it's a business, not a cost minimization exercise.https://t.co/syx7clvX5Q
— Gergely Orosz (@GergelyOrosz) December 2, 2022

Automating so many tasks with SaaS may be why Gergely can keep this a 1 person business. Otherwise, it might be a 20 person business with way higher costs.

And while any business may look to cut subscriptions when times are tough, Gergely notes these subs are one of his smallest expenses. For him and many other CEO’s, cutting them may do more harm than good.

I agree with Molly that tech startups can be over-SaaSed. Many startups look to other startups as their first customers.

After all, startups are early adopters and can make a quick decision. That makes them an ideal first market for a SaaS product.

But in the economy as a whole, I think we’re actually dramatically unde†rusing technology.

Take SailPlan, an amazing SaaS company that tracks emissions from ships.

Competitors just provide a rough estimate after the fact. SailPlan tracks emissions in real time and can even give you suggestions of how to lower them.

And of course, lowering those emissions means lowering your fuel bill.

Before SailPlan, most emissions tracking was done with rough estimates in spreadsheets. If ships used a SaaS solution, it was basically a tarted up version of the same spreadsheet.

Shipping is an industry that desperately needs technology. And it’s not hard to think of 100 others.

Oh and by the way, Molly and I just happen to be co-investors in SailPlan! 🙂

Like any industry, I think SaaS will face headwinds in 2023. But a scalable software product, high margins and recurring revenue are a winning combination.

And with much of our economy barely touched by technology, they have a lot of room to run.

What do you think the future holds for SaaS businesses? Leave a comment at the bottom and let me know!

Have a great weekend everyone!

More on tech:

Is 2023 the Best Time to Invest in Startups?

The Magic of Milestone-Based Funding

Is SBF Laundering Money As We Speak?

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Photo: “CNET’s Molly Wood” by NVIDIA Corporation is licensed under CC BY-NC-ND 2.0.

As Fed Rates Peak, Are Markets Ready to Take Off?

January 5, 2023

In 2022, the Fed tightened its vice grip until we squealed. But as interest rates peak this year, markets are in a position for serious growth.

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It stands to reason: if someone is hitting you with a stick, the pain diminishes when they stop hitting you. To confirm this, I looked at four periods of peak interest rates from 1981 to today.

In most cases, markets jumped significantly within a year after the federal funds rate peaked.

Let’s dig into some examples….

Paul Volcker’s Hammer

Federal Reserve Chairman Paul Volcker took interest rates to eyewatering levels in 1981. They peaked at 19% that summer, a far cry from today’s 4.5%.

Markets continued to fall for about a year.

But then, something amazing happened. Volcker crushed inflation and stocks rocketed upward for almost 20 years.

A Stake Through Inflation’s Heart

Like the undead, inflation rose again in 1989. Volcker pushed rates back up to 10% by April, ramming a stake through its cold, black heart.

Markets jumped shortly after, rising about 16% in the next year.

The Go-Go 90’s

After falling to a low of 3% in 1993, the Fed hiked rates to a peak of 6% in the spring of 1995. Chairman Alan Greenspan aimed to cool a red-hot economy and prevent inflation.

Markets ignored him. Stocks went vertical, more than doubling in 4 years.

The Financial Crisis

By the mid-2000’s, the real estate market was out of control. The Federal Reserve took rates from a rock-bottom 1% to 5% by the summer of 2007.

This time, it really was different.

There was no quick rebound even as the Fed took rates to zero. In fact, it took over 5 years for stocks to recover from the financial crisis.

The financial crisis stands out as the worst since the Great Depression. Last year’s S&P 500 return of -18% doesn’t compare to the Great Recession’s -48% bloodbath.

In all, once rates peak, we usually see markets begin to climb in 12 months or less.

As companies look at a future of stable or declining rates, they’re more comfortable borrowing money and making investments. If rates peak mid-year as analysts project, I expect to see markets jump by the end of 2023.

What do you think 2023 holds for markets? Leave a comment at the bottom and let me know!

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Is 2023 the Best Time to Invest in Startups?

January 4, 2023

It was a rough 2022 in tech — layoffs, shutdowns, and stocks falling off a cliff. But 2023 promises to be a golden age for startup investors.

Here’s why I’m more excited than ever to invest in 2023…

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Valuations

In 2021, you could raise venture capital for a fruit stand.

I saw crypto startups with no product or customers raising “seed rounds” at $100 million valuations every day. Deals moved so fast that if you did any diligence, you might miss it.

Now, the market has slowed to a crawl. The vaporware startups have disappeared.

What’s left? Great companies raising at reasonable prices.

I’m often paying half as much for a company as I did in 2021. Even fast growing startups with several hundred thousand in yearly revenue go for about $10 million.

A lower entry price means more upside. And since a seed investor like me probably won’t exit for 10 years, prices could skyrocket in the mean time.

Focus

Founders today are laser focused. They’re not speaking at conferences or rolling out NFT’s.

They’re fighting to make sure their businesses survive.

Founder distraction is a giant killer of startups. For better or for worse, facing bankruptcy concentrates the mind.

I think founders and teams will perform better under this pressure, difficult as it can be.

Access

These days, I can get into any deal I want. Founders have to cast the net beyond the most famous firms in order to raise a round.

For angels and new VC’s, this is a boon. If you ask to get into any deal out there right now, it will probably happen.

There are only a few companies founded every year that matter. Our only job is to get as big a slice as possible of those deals.

That’s a lot easier to do in 2023 than it was in 2021.

Uber, Airbnb, and Block were all founded during the financial crisis. Someone is out there creating the next Uber right now.

It’s our job to find them.

How do you feel about investing in 2023? Leave a comment at the bottom and let me know!

More on tech:

The Magic of Milestone-Based Funding

Is SBF Laundering Money As We Speak?

Zero to One

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The Magic of Milestone-Based Funding

January 3, 2023

There’s a law in Silicon Valley as basic as F = ma: milestone-based funding. It’s why you can’t raise $100 million on day 1. It’s also why my positions in my strongest companies are many times larger than my weakest ones, as if by magic.

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…You show incremental progress. We’re engaged in milestone-based investing where the amount of money you raise and the valuation you’re able to get scales with the amount of proof you have delivered to investors about the company.”
David Sacks, All In Podcast #43

Milestone-based funding means that you don’t get all the money your company will ever need at once. Instead, you get a little now, go accomplish some stuff, and come back for more.

In venture’s early days, a company was financed once, and it either sunk or swam. Milestone based funding lets investors allocate their capital more efficiently.

The most successful companies need more money to grow. Meanwhile, throwing good money after bad rarely gets you anywhere.

Let’s see how this works in practice by looking at two companies in my portfolio.

A Tale of Two Startups

I invested in both Company A and Company B within weeks of each other in the spring of 2021. With high hopes, I sent in my wires and envisioned a wonderful future for both.

Well, I was half right.

Company B has increased revenue 6-fold since then. It’s expanding to new markets and signing up customers like crazy.

For Company A, the picture isn’t nearly as rosy.

Revenue hasn’t grown at all and burn is heavy. Raising more money is impossible and bankruptcy is a very real possibility.

How Milestone-Based Funding Played Out

My initial investment in both these companies was exactly the same amount. But now, my investment in Company B is almost 6 times as large.

The reason is very simple: I doubled down in Company B and did not reinvest in Company A.

Company B recently raised a much larger round at the same price as before. With amazing progress, I was happy to 6x my investment.

Add in a little dilution from this round, and my position in Company B is nearly 6 times bigger than my position in A.

If Company B continues to perform well, I’ll be putting in even more. That, plus increases in valuation, may eventually make my investment in B dozens or hundreds of times larger.

What This Means for Founders

Raise an amount appropriate to where your company is at today.

If you have only a couple of customers, you’re probably looking at around $500,000 in pre-seed. If you have $250,000 ARR, you may be able to raise a $2 million seed round.

Then, keep those investors updated on your progress. Remember, there’s more money where that came from!

Milestone-based funding is a brutal system, but it’s necessary.

I’d love to help Company A with another check. I love what they do and I want to see them succeed.

But I just can’t justify it when other startups are performing better.

What questions do you have about fundraising? Leave a comment at the bottom and let me know!

More on tech:

Is SBF Laundering Money As We Speak?

Zero to One

Why I Just Invested in Rilla, the Killer App for Outside Sales

Note: Shout-out to Fathom.fm for finding that David Sacks quote in seconds. Making audio searchable really is the future! Delighted to be an investor in this great startup.

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Photo: “David Sacks” by jdlasica is licensed under CC BY 2.0.

Latest Data: APE Fails to Deliver Hit 7.1 Million

December 30, 2022

Fails to deliver in shares of AMC Entertainment Holdings Preferred Equity (APE) reached staggering levels in December. Failed trades hit over 7.1 million shares in the latest SEC report before falling to end the period.

AMC issued these preferred shares in August as a way to raise capital. Since then, they’ve fallen steadily, losing over 75% of their value.

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Failed trades in APE shares peaked on December 2nd at 7,134,531. AMC shares also showed elevated fails to deliver, at nearly 300,000 shares.

Huge numbers of failed trades in APE preceded a substantial drop in the stock price. The shares lost 23% of their value in the next week alone.

A persistent pattern of huge fails to deliver can be a sign of naked short selling. This illegal practice involves selling short shares you never borrowed.

Naked shorting is a powerful way to crush a stock. If you don’t have to find any shares to borrow or pay interest, you can short as many as you like!

We’ve also seen persistent, massive fails to deliver in AMC’s common shares. Like APE, that has been coupled with a major fall in price.

So what’s going on?

My bet is that hedge funds are breaking the law and naked shorting AMC and APE shares. Why else would these huge numbers of failed trades persist for so long?

To get a sense of how out of line these fails to deliver are with other stocks, let’s do a comparison. Here are the fails to deliver on December 2nd for some of the largest stocks in the market:

Amazon: 40,406

Apple: 319

Berkshire Hathaway (Class B shares): 36

Google: 151,519

Microsoft: 9,233

These stocks are hundreds of times the size of AMC. And yet, AMC sees more failed trades than all of them.

Combined.

The SEC must investigate the chaos in AMC and APE shares. It’s the only way we can have a fair, efficient market for everyone.

What do you think of the failed trades in AMC and APE? Leave a comment at the bottom and let me know.

There will be no blog on Monday for New Year’s. Thanks for a great 2022 and see you on Tuesday!

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Photo: AMC CEO Adam Aron

Whole Fish and Banku, Ghanaian Style

December 29, 2022

They say it’s not what you know, it’s who you know. As I dug into the whole tilapia’s succulent flesh, I couldn’t have agreed more.

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Delicious as it is, Ghanaian food is little known in the United States. Even in the New York City area, a Google search reveals just a couple of options.

“Ghanaian food is a whole process.”
Anonymous pal

Fortunately, I had a connection. A Ghanaian friend of mine buys homecooked meals from a woman who runs a restaurant out of her house.

Turns out Travis Kalanick didn’t invent ghost kitchens!

We popped open the warm clamshell containers to reveal a massive, whole fish. The tilapia was marinated and served with two spicy sauces.

The flesh was moist and succulent. I always thought I hated tilapia, but cooked whole like this, it’s wonderful!

Alongside our plates: a massive and scrumptious-looking dumpling. These are called banku.

Banku are a staple of Ghanaian food. They’re made of fermented corn.

Banku’s mild flavor is a perfect match for spicy sauces. It’s kind of like chips and salsa.

The only downside: they’re sticky! My friend dug in with her hand, but I soon switched to a fork.

I guess I can only become so Ghanaian in one day. 🙂

Cooking fish whole as they do in Ghana yields a more tender and flavorful flesh. And never forget to eat the meat from the head — it’s the best part!

I saved the fish bones for a stock I’ll be making soon. Never let anything go to waste!

If you haven’t tried Ghanaian food, I strongly recommend it! It’s flavorful and relatively healthy — mostly protein and vegetables with a modest amount of starch.

What were your most interesting meals this year? Leave a comment at the bottom and let me know!

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Is SBF Laundering Money As We Speak?

December 28, 2022

Sam Bankman-Fried is accused of committing one of the largest frauds in history. Now out on bail, he may be siphoning off what little money his bankrupt empire has left.

ALERT: Alameda wallets are currently swapping shitcoins for BTC. They are using mixers FixedFloat and ChangeNow so seems unlikely to be liquidators. https://t.co/KAQFIO07P6
— Autism Capital 🧩 (@AutismCapital) December 28, 2022

Out this morning from Bitcoinist:

A few hours ago, former Alameda Research wallets came to life, as noted by several on-chain analysts. Oddly enough, the transfers of altcoins come just shortly after Bankman-Fried was allowed to make himself comfortable in his parents’ home, equipped with an Internet connection.

The transactions totaled about $200,000.

Whoever moved the money used tools called mixers to mix the coins with other tokens. This makes them harder to trace.

A liquidator put in charge of the Alameda assets by a court would not use a mixer. This points to the transfers being initiated by a hacker, or by SBF himself.

Shockingly, the terms of SBF’s bail don’t stop him from using the internet.

If SBF is in fact looting the last of Alameda’s assets, he’s committing another crime. This would be ample cause to revoke his bail, putting him in jail until his trial ends.

Since the bail is secured by SBF’s parents’ house in Palo Alto, his parents would also lose their home.

Most people would never consider committing fraud while on bail. They’d be worried about going back to jail, not to mention their parents’ losing their home.

But SBF isn’t most people. If he did this, the level of arrogant stupidity is astounding.

What do you think is going on with these mysterious transfers? Leave a comment at the bottom and let me know!

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Photo: FTX CEO Sam Bankman-Fried

My 2022 Reading List

December 27, 2022

Whenever I walk into the library, I think “How can I ever read all these books?”

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For me, finding the right books is hard. And something tells me you might be struggling too!

So here’s a quick review of everything I read this year! If something piques your interest, pick up a copy!

Top Pick: Nonfiction

The Power Law by Sebastian Mallaby. This is on every VC’s list this year for a reason.

Mallaby does an amazing job recounting key moments in the history of venture capital. I found the story about Accel staking out Facebook headquarters to win its Series A fascinating.

If you’re in the technology industry, this is a must read! I wrote a series of posts about it here:

THE POWER LAW (PART ONE)
THE POWER LAW (PART TWO)
THE POWER LAW (PART THREE): ANGELS AND VC’S
THE POWER LAW (PART FOUR): THE FIRST VENTURE DEAL

Top Pick: Fiction

Howl and Other Poems by Allen Ginsberg. Ginsberg is my favorite poet, so a friend gave me this slim volume as a very thoughtful gift!

I find the Sunflower Sutra particularly beautiful. Ginsberg tells us “we’re all beautiful golden sunflowers inside.” This reminds us to value ourselves and not get too caught up in the day to day!

The Rest of the List

Playing for Keeps by David Halberstam. An excellent account of how Michael Jordan came to dominate the NBA.

Jordan was intensely competitive and hard working. But he was also unusually coachable.

I’m never going to rival Jordan on the court, but his example is instructive in any field.

The Lean Startup by Eric Ries. The classic text on launching an MVP and iterating your way to success.

Little did I know that later in the year, Eric and I would wind up co-investors in the same startup!

More on The Lean Startup in this post.

Amp it Up by Frank Slootman. The Snowflake CEO provides great insights on leadership in this engaging and brief volume.

He includes tricks for increasing intensity like asking why a task can’t be completed tomorrow instead of next week. More in this post.

The Founders by Jimmy Soni. A deep dive into the founding of PayPal, one of the most iconic tech companies of our time.

Soni includes fascinating tidbits like how PayPal was originally designed to beam money between Palm Pilots. More in this post.

Hunting the Unabomber by Lis Wiehl. Ted Kaczynski is the mirror image of many of the successful founders profiled on this list.

Like many of them, he was precocious and Harvard educated. But he despised technology and its effects on society.

He also showed early signs of being disturbed, laughing as he tried to scald his mother with spaghetti sauce as a child. Perhaps some people are just born with problems.

Into the MIrror by Norman Mailer and Lawrence Schiller. Robert Hanssen was the highest ranking US official ever to become a spy for the Soviet Union.

This is the fascinating story on how he went wrong, and how the government caught him.

Founder by Amos Elon.

Mayer Amschel Rothschild founded the Rothschild banking dynasty. It became one of the most powerful families in Europe.

But the first Rothschild was born in a dank Jewish ghetto. He was orphaned at 13 and faced extreme discrimination throughout his life.

Rothschild grew his business by going out and finding customers, unlike most bankers. Once he had them, he was a loyal partner, always putting their needs first.

I’ve read this book four times now — it never gets old!

Revolutions: A Very Short Introduction by Jack Goldstone. This book covers revolutions from the ancient world to today, digging deep into their causes.

One surprising insight was that poverty alone doesn’t produce revolutions. A destitute populace is no match for a government’s armaments.

Elites also need to withdraw their support from the regime.

Zero to One by Peter Thiel. In contrast to The Lean Startup, Thiel advises founders to create a highly differentiated product 10x better than alternatives rather than a barebones MVP.

I’m not sure who I agree with. But Thiel’s book is a must for any entrepreneur or investor.

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.

Photo: Author Sebastian Mallaby