Tag Archives: VC

Business, Technology

“How Can I Be Helpful?” Gets Put to the Test

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VC’s ask “How can I be helpful?” so often it’s become a cliche. But as SVB collapsed, some investors did everything to save their companies as others stood pat.

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From a report out today in Forbes:

Over that frantic weekend, venture capital firms scrambled to respond to the crisis. Some found creative ways to ensure their founders would have access to cash on Monday, at times offering up their partners’ personal funds. More set up contingencies to make loans if necessary, then hoped it would never come to that. Still others chose not to make such an offer, or failed to reach a consensus at all.

Conversations with about 20 investors and founders suggested that non-traditional investors like [Sam] Altman, or smaller, individual-driven firms like Jason Lemkin’s SaaStr Fund, appeared to move the fastest, alongside several bigger firms that got creative in their problem-solving, including First Round and Redpoint. Most established firms, however, didn’t impress.

A few brave investors wired their founders money from their own checking accounts. This could’ve cost them millions, depending on company size.

Fortunately, deposits remained safe, and those investors have likely already been made whole. But in the moment, they had no way of knowing that.

But most investors just wanted to know if they were at risk:

When Alex Lorestani, CEO of startup Geltor, which provides vegan proteins for beauty-product makers, started receiving emails from his investors last Thursday, most of them were one-liners. “They just asked, ‘Hey, are you exposed?’”

When Lorestani informed employees, then his 100-plus investors, however, help came from unexpected places: a fellow founder with some cash to spare, and newer firm Fifty Years, smaller than many with a $90 million fund.

As an individual angel investor, I’m not in a position to bridge a whole company. So, like many smaller investors, I tried to help in a different way.

I did my best to give founders the most reliable info I could find, fast.

I also made sure not to annoy them in a tough time! If they get an email from every single person on their cap table all at once, they won’t be able to do anything else!

Turns out, only one company so far had SVB exposure. They got some of their money out on Friday, and the rest this week.

Like so many startups, they’re headed to Chase.

I couldn’t save companies all by myself. But if I could even provide just a tiny bit of help in that tough time, I was very happy to do so.

When it was all over Sunday night, I bought myself flowers to celebrate.

Founders should make a list of these great investors like Jason Lemkin at SaaStr and Ela Madej at Fifty Years. Give them preference in getting on your cap table.

You won’t regret it.

How did you see investors respond to SVB?

Leave a comment and let me know!

Have a great and more restful weekend, everyone! 🙂

More on tech:

Where Should Startups Put Their Money Now?

Executives Dumped Shares Shortly Before First Republic Rescue

SVB Fallout

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Business, Technology

Venture Funding Down 65%

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Raising money just got harder. Global venture capital funding fell 65% in February from a year prior, according to a new report from S&P Global Market Intelligence.

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As an investor, I see the funding freeze every day. Many startups I meet are completely out of money and facing liquidation.

Here are some trends I’m seeing in today’s market:

Fewer Deals Getting Done

In general, I see a lot fewer deals happening.

Everyone has slowed down, from big VC firms to syndicates to individuals. Deal volume seems to be down by around half.

Even when a great company is raising and the deal gets done, it often doesn’t fill up.

Valuations Are Down

In 2021, I routinely saw seed stage deals at $25 million, $50 million, even $100 million!

Now, a typical seed stage deal is more like $8 to $12 million. I don’t see many above $18 million.

Strong seed stage companies usually have about $200,000 to $500,000 a year in revenue.

Poor Business Models Are Unfundable

In 2021, all you needed was growth. No one cared how you got it.

Today, growth has to be cash efficient. If your unit economics aren’t solid, it’s hard to raise.

Let’s say it costs you as much to acquire a customer as you’ll ever make from them. A business like that can never be profitable.

VC’s don’t want to throw more money at a broken business model.

Pre-Revenue Companies Are In a Tough Spot

If you have no revenue, you’re totally dependent on outside funding. That funding is now much harder to get.

What’s more, you don’t have a revenue track record to show investors.

Getting those first customers just got a lot more important.

Profitability Is the Trump Card

If you can tell a VC you’re profitable in 2023, you’ll impress him. You also won’t need his money.

That’s a great position to be in, especially in a down market. You can dictate the terms or just wait until markets recover.

2023 belongs to the founders that can control their own destiny.

What are you seeing in markets today?

Leave a comment and let me know!

More on tech:

Beware Pre-Revenue Companies

Build in a Small Town!

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

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Business, Technology

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

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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:

Sequoia Dumps Citizen: Ruthless, or Reasonable?

Let’s Double the Human Population

Don’t Go Into Debt to Fund Your Startup

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Business, Technology

Sequoia Dumps Citizen: Ruthless, or Reasonable?

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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

Business, Politics, Technology

Where Is Bao Fan?

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Bao Fan did everything right. Despite being one of China’s top tech investors, Bao kept a low profile and hewed to the Communist Party line. Then, he disappeared.

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From an article out this morning in The New York Times:

…on Valentine’s Day last week, rumors started circulating that Mr. Bao had gone missing. His company later confirmed his disappearance in a regulatory filing.

China’s tech world is watching closely what will happen to Mr. Bao, who knows or has worked with nearly every mover and shaker in the industry. He is not as well known outside the business world but is just as symbolic of the industry’s rising presence in China as Jack Ma, co-founder of Alibaba, who has largely vanished from public view after falling out with the government in 2020.

There’s no one quite like Bao Fan in the United States. Half investment banker, half venture capitalist, Bao was intimately involved in almost every major Chinese tech company.

He brought together warring startups to create giants like Didi and Meituan. Bao prospered, and so did the companies he helped.

His influence reached so far that people said, “If you don’t know Bao Fan, you haven’t made it.”

But new Chinese leaders took a darker view of Bao’s success.

The government began investigating one of his top lieutenants, Cong Lin. China’s government has implied that Bao is assisting in that investigation.

But no one knows where Bao is. Or if he’s even alive.

Clearly, Bao could’ve helped an investigation while retaining his post. It’s more likely he’s being abused and intimidated and as an example to others.

Indeed, China’s tech industry is watching closely:


A tech founder who had worked with Mr. Bao on deals wrote on social media that entrepreneurs were like “frightened birds.” “Confidence is slow to build but quick to dissipate,” he wrote. “Without confidence, who will build factories, start companies and invest in the future?”

Many Chinese entrepreneurs are quietly leaving the country with their millions.

More and more, you will see rich business owners leaving China, along with ambitious young people. Why spend a lifetime building a business if the government can just take it away?

Dictatorship is the ultimate single point of failure. One bad man in the wrong spot, and your country goes down in flames.

Xi is that man. But the Communist system is what gives him the power he has.

From an interview in The Japan Times:

“This is part of the evolution of the Communist Party,” said Drew Thompson, a visiting research scholar at the Lee Kuan Yew School of Public Policy at the National University of Singapore. “Private entrepreneurs — high-profile, wealthy people — are increasingly incompatible with ‘common prosperity’ and the direction that Xi Jinping has taken.”

What do you think the future holds for Chinese tech? Leave a comment and let me know!

More on tech:

Top VC Firms Have Great Returns…Right?

Google is Losing the AI Race

Consumer Startups: What Works and What Doesn’t

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Business, Technology

I See Negative Gross Margin Businesses

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I recently met with a startup that’s dead broke. They’re convinced that if only they could raise another round, everything will work.

It won’t. Here’s why…

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Some startups are negative gross margin businesses. Think of this as the old cliche, “We lose money on every one, but we make it up in volume.”

Let’s say I’m going to start an Airbnb killer – Frankbnb. If Frankbnb charges $100 a night to stay in the average room, that’d be a great deal!

But how do I get hosts to accept that low price? What if I paid hosts $200 a night and ate the difference?

Everyone would be so happy! Guests and hosts would flock to my platform, and I’m off to the races.

Sounds great, but actually it winds up more like this:

Why doesn’t this work?

Because with a negative gross margin model, you can’t stop losing money. Ever.

Every guest costs you $100 a night. The more guests you sign up, the better you think you’re doing.

But in reality, each one digs you deeper into the hole.

Obviously, the real Airbnb doesn’t do this. It charges guests, then gives a percentage of that to hosts, keeping the rest.

We investors complain about negative gross margin businesses all the time. But we created them.

Easy VC funding meant startups could always raise another round. Growth was all that mattered.

In 2023, reality is hitting unsustainable startups like a ton of bricks. VC’s are laser focused on margins and burn.

Negative gross margin businesses will either adapt rapidly or die.

Look closely at your startup. Do you make money on each new customer?

If not, take a hard look at your business model before it’s too late.

Are you seeing lots of unsustainable growth? Leave a comment and let me know.

There will be no blog on Monday in honor of President’s Day. See you Tuesday.

Have a great weekend everyone!

More on tech:

Dawn of the Dead VC’s

Top VC Firms Have Great Returns…Right?

From Design to Code in Seconds with AI

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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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Business, Technology

Dawn of the Dead VC’s

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“This situation must be controlled before it’s too late! They are multiplying too rapidly.”

The Dawn of the Dead, 1978

That friendly VC you met on Zoom might not be what he seems. He might be…the undead!

Zombie venture firms are firms that can’t raise a new fund. So, they have no money to make new investments.

Zombies proliferate in every down market. But they’re not easy to spot.

They continue taking meetings and even diligencing companies. But the check never comes.

As a founder, you don’t have time to waste with the undead. So how do you spot them?

Let’s assume you’re raising a Series A. Here are some red flags to look for, from Danielle Morrill’s excellent blog:

• They haven’t made any series A investments in the past 6 months
• They haven’t invested outside their existing portfolio in the past 3 months
• They haven’t made ANY investment in the past 3 months (after a more regular pace in the past)
• They tell you they’re re-focusing on later stage deals, or raising a new fund


If someone says he’s a Series A investor but never makes any Series A investments, you’re wasting your time. And with runway more precious than ever, you can’t afford it.

There’s also nothing wrong with asking the VC to connect you to the founders of their recent investments. You should diligence them just as carefully as they diligence you.

After all, this could be a ten year relationship!

Making sure you’re talking to active firms matters most in a down market.

New managers raised tons of new funds at the peak. Many invested at the top of the market and will struggle to show returns.

Even worse, investors in venture (known as Limited Partners or LP’s) are pulling back. They’ve been clobbered in the public markets and have little spare cash.

Bad returns and a weak LP market means many newer venture funds are walking dead.

But no one wants to be embarrassed! So zombie VC’s often act like normal ones, taking meetings and diligencing deals.

In reality, they’re counting the days until their firm is no more.

I have compassion for the zombies — it’s a hard position to be in. But as a founder, the VC’s problem isn’t your problem, and you have no time for it.

Stick to the active players, raise your round, and get back to work!

Have you met a zombie VC? Leave a comment and let me know!

More on tech:

Top VC Firms Have Great Returns…Right?

From Design to Code in Seconds with AI

Consumer Startups: What Works and What Doesn’t

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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.

More on Fundrise in this post.

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

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Business, Technology

Top VC Firms Have Great Returns…Right?

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CalPERS did everything right. It won access to some of the finest venture firms: NEA, Khosla. The returns? Terrible.

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New data is pulling back the curtain on VC returns. For the $440 billion California pension fund, many venture investments have notched poor results.

From a report out this morning in Business Insider:

The CalPERS fund’s $75 million bet in 2001 on a venture fund managed by the Carlyle Group lost money. That same year, the $75 million it invested in a fund from the VC giant New Enterprise Associates yielded a dismal internal rate of return of 2.7%. A $25 million investment in DCM’s 2000 fund had a 1.9% IRR. 

Its $260 million investment in two Khosla Ventures funds in 2009 yielded an IRR of 11.8% for the early-to-midstage fund and 6.9% for the seed-stage fund. Those figures were both below the 14.7% benchmark for that year…

A fund that returns about 2.3x qualifies for the elite, top quartile. Over a 10 year fund life, that’s around 9% a year.

The funds CalPERS invested in badly missed their benchmarks.

What Went Wrong?

I have a few theories:

1) Adverse selection.

CalPERS has to report the returns of the funds it invests in. This means it’s locked out of some of the very best firms.

Again from Business Insider:

It did not help that CalPERS was locked out of top firms like Sequoia, Benchmark, and Accel because they did not want their performances publicly disclosed in filings. 

2) Too much money. Nice problem to have, right?

Not always.

You often get higher returns by investing in smaller, early stage funds.

But a startup that’s barely off the ground only needs so much cash. Give them $100 million, and they won’t know what to do with it.

This means that you can only put so much capital to work at the early stage.

But CalPERS has billions to deploy! They’ll never get there by giving $5 million at a time to little seed funds.

This pushes them to the late stage and locks them out of some of the best returns.

3) Rotten valuations. CalPERS investments in 2001 did particularly poorly.

The NASDAQ started falling in early 2000. But it didn’t bottom out until late 2002.

Meanwhile, growth stage startups generally follow the NASDAQ with a lag. So those valuations may not have bottomed until 2003 or later.

This means that for many of the later stage investments CalPERS made, the prices were likely inflated.

Wrap-Up

So, should we run like hell from venture? Not quite.

Venture returns are still higher than any other asset class.

But CalPERS has only invested in a very small number of venture funds. They haven’t placed enough bets to hit a winner.

Institutions should invest in more funds across vintages. Some are laggards, but others shoot the lights out.

You have to stay at the table long enough to win.

What do you think of investing in venture capital?

Leave a comment and let me know!

More on tech:

The Hard Thing About Hard Things

How I Decide to Double Down

From Design to Code in Seconds with AI

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Photo: Khosla Ventures founder “Vinod Khosla” by jdlasica is licensed under CC BY 2.0.

Business, Technology

How I Decide to Double Down

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Many startups I invested in are coming back and asking for more. So how do I decide to double down — or cut my losses?

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Here’s how I approach follow-on funding:

Performance

I want to see startups triple revenue year over year after I invest. This level of growth shows they’re finding product market fit.

The best companies grow fast. Meanwhile, those with weak products or a poor sales strategy struggle to sign new customers.

But growth has to be efficient. I like to see a startup burning no more than $2-3 to add $1 of new Annual Recurring Revenue (ARR).

New Investors

Are any new investors joining this round? Or are existing investors just hoping to save a failing company?

If the founder could not find a new investor who wanted to make a bet on the business, that’s a strong negative signal.

Runway

This fundraise has to give the company enough money to ride out today’s tough market. I like to see startups raise enough cash for 24 months or more.

If the founder is only raising a small round to survive another couple of months, it’s likely a bridge to nowhere.

The Founder

Has the founder shown good leadership in these tough times? Has he taken responsibility for mistakes and kept investors updated?

If so, that makes me a lot more likely to open the checkbook.

How Much to Invest

I recently re-invested in a startup I first backed in 2021. They increased revenue by 5x in a year and brought in a new lead at a higher valuation.

Re-investing was a pretty easy choice. But how much should I put in?

I Invested about 2.5 times as much as my initial check. If the company keeps performing like this, I want to do about the same in their next round.

In all, I like to invest 4-5 times as much money in follow-on as I do in the first investment.

This lets me concentrate capital in winners. I also avoid major exposure to companies that are struggling.

The Human Factor

It’s very hard to say no to a hard working founder who’s trying his best.

Unfortunately, it’s also our job. If we don’t want to make tough decisions, we shouldn’t be in this business.

Even if I can’t re-invest, I’m happy to support the founder in other ways. I can introduce them to potential employees and business partners, provide advice, etc.

Done right, follow-on funding is a super power.

It increases my exposure to the best companies while minimizing my exposure to struggling ones. It gets money to the companies most likely to change the world.

How do you think about follow-on investments? Leave a comment and let me know!

More on tech:

The Hard Thing About Hard Things

I Like Big TAM’s and I Cannot Lie!

GPT-Powered Search with Perplexity AI

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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.

More on Fundrise in this post.

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

Misfits Market

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I wrote a detailed review of Misfits here.

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

Business, Technology

How I Source Deals (Part 2)

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We investors have no function except to find and help the next Google. But, uh, where is it?

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Finding the great companies of the future is a huge part of our job. I look at 150-250 companies every month.

I choose one.

Since I wrote about sourcing deals last fall, my approach has changed a lot. Here’s how I’m finding great startups now:

1) Pitch events. There’s nothing like being in person, right?

Wrong. The best pitch events I attend are usually virtual.

Founders from anywhere on earth can attend. My latest investment is in an incredible company based in the UK.

I never would’ve met that founder at a New York pitch event.

My favorites are Remote Demo Day and LAUNCH Accelerator Demo Day, both put on by Jason Calacanis’ venture firm. Stonks also has some great events.

For in person tech events in NY and SF, check out Gary’s Guide.

2) Portfolio company founders.

For me, this is the highest signal intro I can get. Any meeting with a founder recommended by someone I’ve already invested in goes to the top of my list.

This also is a great strategy for founders to approach investors. Find some founders they’ve already invested in and ask for an intro.

You may already know some of their portco CEO’s!

3) Venture firms. Great deals are currency.

Whenever there’s space in the round, I send out deals I’m doing to a number of venture firms in my network. This helps the startup and the VC’s if they find a great deal.

In return, they introduce me to some founders they’re investing in. These entrepreneurs are pre-vetted by smart investors, making my job way easier!

4) Seedscout. Seedscout is a really cool new platform that lets founders request intros to investors.

This is especially useful for founders who aren’t in Silicon Valley or New York.

I made an investment in an incredible Utah SaaS company I met on Seedscout. I never would’ve met them otherwise.

I like the platform so much I actually invested in Seedscout itself!

Seedscout is free for investors. Check it out!

5) Syndicates. As I approach the two year mark as an angel, I’m doing fewer and fewer syndicate deals.

Four out of my last 5 new investments have been direct. Over time, I’ve built a network that helps me find great deals on my own.

That has two huge advantages.

You’re not at the mercy of whatever a syndicate lead decides to send you. And you don’t have to pay anyone 20% of your gains!

But for a new angel without a great network, syndicates are an absolute must.

The best one is Jason’s, here. Flight VC, an arm of Gaingels, also has some great deals.

I am still happy to do syndicate deals if that’s the best deal available. 80% of something beats 100% of nothing any day!

How do you source deals? Leave a comment and let me know!

More on tech:

HOW I SOURCE DEALS

I LIKE BIG TAM’S AND I CANNOT LIE!

GOOGLE IS LOSING THE AI RACE

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Fundrise

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Photo: Google founders Larry Page and Sergey Brin. “File:Google page brin.jpg” by Ehud Kenan is licensed under CC BY 2.0.