The Exchanges

Q And some elements of decentralization, and then even the likes of The Honest Company, kind of almost pure consumer place. I'm intrigued. Do you get concerned when you see VCs enter into these previously unknown markets where kind of software knowledge and domain knowledge on all the traditional software skills isn't maybe so applicable to supply chain logistics in Taiwan for The Honest Company? Do you get concerned by this?

A Um, I do. I, you know, it's less for companies like The Honest Company because I think that you see folks that have Extensive experience with those industries supporting these kind of consumer product businesses. But, you know, if I look at bioinformatics right now, there's a whole bunch of traditional software investors that are making their way into that space, including myself and Redpoint spending a lot of time there. You know, I think a lot of us are getting there by following AI and ML and looking at the broad applications of those technologies and how it can disrupt industries. And so we, you know, we come with from a, from a, from a good place. But, you know, the reality is if we just go back and look at cleantech as an example where a set of software investors and maybe, you Networking investors made their way into the clean tech industry and started investing in supporting capital intensive and operational complex businesses that were scale was the key ingredient to success and obviously did not see nearly the kind of success that the industry hoped that we would see in that sector. And, you know, I see a little bit of that now. I worry a little bit about that in terms of some of the frontier tech spaces that the venture industry is pursuing. There are a set of investors out there that I have complete confidence are making good investment decisions based on the contex…

AI assessment note: “Um, I do. I, you know, it's less for companies like The Honest Company”

Q Talking about those companies that have been funded, I mean, venture, as you will tell me, absolutely, I'm sure, has always been an industry of the haves and have-nots. So, with that in mind, I'd love to discuss then, in particular, for some companies, in terms of struggling to raise, and, and why it's so easy for some, and so difficult for others, and what really makes that the case?

A Yeah, like I said before, you know, we look at the number of deals, we were down 22% last year, but in terms of dollars, we were only down 11%. So, you know, people are clearly putting more money into fewer companies. If you look at the amount of venture capital raised over the last couple of years, that is, it continues to trend up, but I think it's, you know, people are still very, very excited about the opportunities and the companies out there. They're just becoming much more selective about where they invested and investing a lot more in those companies. So I think there's really two profiles of companies that have found it more easy or finding it still find it very easy to raise money. Those are companies with good, solid early traction, good, solid product market fit, and companies that are growing in Scaling from a revenue standpoint, ready to hit the gas and really start to expand their go-to-market team. And so these are probably traditionally series B companies and maybe a, maybe an early series C company that, that has that traction and momentum. The other companies that continue to find it easy to raise money are the companies at later stages who these, these so-called private IPOs, companies that are very large, very sizable with significant revenue and have demonstrated viable business models. And those companies are raising Massive amounts of money and continue …

AI assessment note: “there's really two profiles of companies that have found it more easy”

Q love to hear your thoughts with that in mind on The bridge round, it's often a point of contention. I'd love to hear your thoughts on whether you believe it is simply because the company hasn't hit product market fit, and it often leads kind of, as Fluggate have told me before, it's often a peer going to nowhere, or do you think it is a perfectly feasible funding method?

A I think there's two times you see bridges used. One is when a company is having a tough time raising capital, and you want to support the business and hope that they can grow into a set of metrics that will allow them to raise capital, and You know, I would say that I think the way the floodgate describes it is probably accurate most of the time. It's really difficult, I think, for companies to be able to transition through these periods, and if you've gone out and talked to a bunch of investors and they have decided that it's not something that they're excited about investing, that, you know, that is a, that's saying something about, about the idea and the opportunity, and so most, more often than not, those bridges just don't work. You know, we will do them from time to time as investors because we want to be supportive of our Companies and there are occasions where we believe that we are doing the right thing for our investors, but quite often it is, it is challenging. The second time that we see these things applied is, is really opportunistically where, you know, you're very excited about a company. It's doing very, very well. You just think there's an opportunity for the company to hit an additional set of milestones that will set it up for maybe even better and even better financing than it would otherwise, that it's not a company in trouble. It's actually a company doin…

AI assessment note: “I think there's two times you see bridges used.”

Q Can I ask, what have you gained in terms of perspective from seeing the many cycles? I'm often told as a young investor today that The true greats have really seen the market cycles and how it affects the startups. What have been your perspectives from seeing the cyclical nature of the industry?

A There's a lot that you can learn. I would tell you, though, that I think that's overplayed a bit. I think that the times have changed and evolved. The nature of startups have evolved quite a bit, and so I think it's very, very, it's dangerous to try to apply too many lessons in the past to the market of today. And so, one great example, I think it, it, it costs far less to start a company and get it up and running today than it ever did before. And so, Some of the challenges associated with fundraising environments during downturns before are probably not quite as applicable as they once were. That having been said, I think that you can see when there are hype cycles building, when there is a rational behavior that's working its way into the, both the entrepreneurial community and the investment community, and it's always good to have the perspective to understand that, you know, these things don't last.

AI assessment note: “understand that, you know, these things don't last.”

Q love to hear your thoughts with that in mind on The bridge round, it's often a point of contention. I'd love to hear your thoughts on whether you believe it is simply because the company hasn't hit product market fit, and it often leads kind of, as Fluggate have told me before, it's often a peer going to nowhere, or do you think it is a perfectly feasible funding method?

A I think there's two times you see bridges used. One is when a company is having a tough time raising capital, and you want to support the business and hope that they can grow into a set of metrics that will allow them to raise capital, and You know, I would say that I think the way the floodgate describes it is probably accurate most of the time. It's really difficult, I think, for companies to be able to transition through these periods, and if you've gone out and talked to a bunch of investors and they have decided that it's not something that they're excited about investing, that, you know, that is a, that's saying something about, about the idea and the opportunity, and so most, more often than not, those bridges just don't work. You know, we will do them from time to time as investors because we want to be supportive of our Companies and there are occasions where we believe that we are doing the right thing for our investors, but quite often it is, it is challenging. The second time that we see these things applied is, is really opportunistically where, you know, you're very excited about a company. It's doing very, very well. You just think there's an opportunity for the company to hit an additional set of milestones that will set it up for maybe even better and even better financing than it would otherwise, that it's not a company in trouble. It's actually a company doin…

AI assessment note: “I think there's two times you see bridges used.”

Q Absolutely. No, I, I do agree. Um, probably, uh, better to have a deeper due diligence process than, uh, blog posts or 20 minute VC episodes. Uh, but in terms of the raises themselves, it appeared that investors are also much less willing to take future fundraising risk. Why do you think this is in particular now?

A Yeah. It's back to what we were talking about before. I think you're seeing, first of all, I think a lot of people have been burned over the last few years on speculative business models. They, uh, we've invested in companies and we basically hope that growth would take care of all problems, that if the top line was growing, even if profitability wasn't falling, eventually we'll get there. You know, more often than not, that just hasn't been the case. And so the result is that I think, uh, later stage investors are less likely to take these risks that basically that they assume that growth will take care of all these problems. And so, You know, businesses that, that aren't converging on profitable, you need economics or have subpar gross margins. And there are many of those out there right now are scary for investors because you know that you're going to put in a certain amount of money, but that is probably dropping the bucket relative to what they need to get the profitability. And I'm essentially betting not only on the company's ability to execute, but also on the company's ability to find future investors that would be willing to take the same risks. And that is becoming harder and harder to predict. And as a result, these companies, I think, are finding it more difficult to finance themselves.

AI assessment note: “a lot of people have been burned over the last few years on speculative business models”

Q to hear your take on what are the meaningful milestones in today's environment. I completely understand that's massively varying for different elements of, um, technology in terms of consumer, SaaS, fintech, whatever it may be. So if we apply it to, say, one of your kind of areas of expertise in terms of SaaS and enterprise, what are the meaningful milestones today in, in enterprise, and where's the bar today?

A Yeah, well, it depends on the stage, too, and so there's just so, you know, so many different ways of looking at this, but I think that, You know, the general rule of thumb I have is that for what you're looking for as a part of a series A investment is demonstration of product market fit. At the end of series A, you should have been able to demonstrate that you have a product that resonates, that solves a big problem, and that customers are buying it to a certain degree. At the end of a series B investment, what I generally like to see is, hey, you've hired and started to scale your go-to-market team, and you need economics are working in a really compelling way, and you're, at that point in time, looking for additional capital just as Essentially scale up that sales team to really go for it, right?

AI assessment note: “part of a series A investment is demonstration of product market fit”

Q Talking about those companies that have been funded, I mean, venture, as you will tell me, absolutely, I'm sure, has always been an industry of the haves and have-nots. So, with that in mind, I'd love to discuss then, in particular, for some companies, in terms of struggling to raise, and, and why it's so easy for some, and so difficult for others, and what really makes that the case?

A Yeah, like I said before, you know, we look at the number of deals, we were down 22% last year, but in terms of dollars, we were only down 11%. So, you know, people are clearly putting more money into fewer companies. If you look at the amount of venture capital raised over the last couple of years, that is, it continues to trend up, but I think it's, you know, people are still very, very excited about the opportunities and the companies out there. They're just becoming much more selective about where they invested and investing a lot more in those companies. So I think there's really two profiles of companies that have found it more easy or finding it still find it very easy to raise money. Those are companies with good, solid early traction, good, solid product market fit, and companies that are growing in Scaling from a revenue standpoint, ready to hit the gas and really start to expand their go-to-market team. And so these are probably traditionally series B companies and maybe a, maybe an early series C company that, that has that traction and momentum. The other companies that continue to find it easy to raise money are the companies at later stages who these, these so-called private IPOs, companies that are very large, very sizable with significant revenue and have demonstrated viable business models. And those companies are raising Massive amounts of money and continue …

AI assessment note: “companies that are finding it more difficult are classic traditional series A companies.”

Q And some elements of decentralization, and then even the likes of The Honest Company, kind of almost pure consumer place. I'm intrigued. Do you get concerned when you see VCs enter into these previously unknown markets where kind of software knowledge and domain knowledge on all the traditional software skills isn't maybe so applicable to supply chain logistics in Taiwan for The Honest Company? Do you get concerned by this?

A Um, I do. I, you know, it's less for companies like The Honest Company because I think that you see folks that have Extensive experience with those industries supporting these kind of consumer product businesses. But, you know, if I look at bioinformatics right now, there's a whole bunch of traditional software investors that are making their way into that space, including myself and Redpoint spending a lot of time there. You know, I think a lot of us are getting there by following AI and ML and looking at the broad applications of those technologies and how it can disrupt industries. And so we, you know, we come with from a, from a, from a good place. But, you know, the reality is if we just go back and look at cleantech as an example where a set of software investors and maybe, you Networking investors made their way into the clean tech industry and started investing in supporting capital intensive and operational complex businesses that were scale was the key ingredient to success and obviously did not see nearly the kind of success that the industry hoped that we would see in that sector. And, you know, I see a little bit of that now. I worry a little bit about that in terms of some of the frontier tech spaces that the venture industry is pursuing. There are a set of investors out there that I have complete confidence are making good investment decisions based on the contex…

AI assessment note: “Um, I do. I, you know, it's less for companies like The Honest Company”

Q far too much there to unpack for a venture nerd like me. So I first have to start with, we talked about kind of the extended period of privatization there. I'd love to hear your thoughts on this, whether you think it's fundamentally bad for the ecosystem because it doesn't provide liquidity to To the LPs. And how your perspective is on this extended period of privatization for the industry?

A I'm of two minds. I think, you know, the first way I look at it is I think these companies are going after bigger opportunities than we ever have before as an industry. You know, as a result, they're in growth mode far longer than companies ever used to be. And they, these are companies that are, you know, sizable businesses that continue to grow at just extraordinary rates year after year. And I think the idea of staying private longer and funding that growth and Swinging for the fence and trying to build once in a generation kind of companies is a real, it's a fantastic thing, and I'm very excited to see companies that are making these kind of commitments to growth over the long run. I do think, however, that the problem is sometimes it allows a lack of discipline to creep into those businesses, and there's something about the bright lights of being a public company that forces discipline onto companies and ensures that they're making best use of their capital and Behaving in the most responsible way, and so, you know, I worry a little bit about the fact that you don't have that kind of bright light with, uh, sterilizing effects on some of these companies, but I think I'm willing to take the good with the bad here, and I'm fully supportive and excited to see these companies really trying to build massive, massive businesses.

AI assessment note: “I'm of two minds... I'm willing to take the good with the bad here”

Q Does that change, then, for follow-on investments?

A It doesn't. Typically, those folks constitute the team that will be evaluating follow-on investments within the, within the portfolio, and so, you know, it's incumbent upon us to make sure that our partners are up to speed on what, how the companies are doing, and, you know, for us to lean on that partner to help make good decisions, but I do think there are times where it probably would make sense And, you know, these things we've experimented with to have somebody independent, somebody that hasn't been involved with a company to come in every once in a while and take a look to make sure that we're making good financial decisions for our investors on these follow-ons, but that's not something that we put into practice.

AI assessment note: “It doesn't. Typically, those folks constitute the team that will be evaluating follow-on investments”

Q And I ask, at Series A, does that level of product market fit achievements? Does that actually translate to a, to a kind of core metric in itself in terms of, is it kind of MRR growth? Is it bookings growth? Is it kind of a certain level of negative churn? Is there elements that you particularly hone in on?

A Yeah, I mean, those are all things that we look at. We are not spreadsheet investors. You know, we don't, we don't try to The fit, all these numbers into a set of checkboxes, and then determine whether or not they're achieving these things, or they've met some minimum threshold, because every opportunity is different, and we, you know, we don't think that's an appropriate way of evaluating these things, but I do think we look at, certainly for demonstration of product market fit, we're going to look at a couple things. We're going to look at, we will look at MRR growth. We will look at whether or not there has been churn, and we'll also look at growth on existing accounts, but more importantly, what we'll try to do is draw some conclusions based on For instance, the nature of the customers that you're getting. So are you able to demonstrate an ability to build up a diverse set of customers that span industries? Perhaps another way of looking at this too, and probably the most important way is that we feel like there's some repeatability in the process. In other words, is, are we finding a common problem and a common way of positioning it and a common buyer across these organizations? It feels like, Hey, you know, if we keep doing that, we can really scale this business. And That repeatability is absolutely essential in the early stages of these companies, because it's really th…

AI assessment note: “probably the most important way is that we feel like there's some repeatability”

Q Can I ask, what have you gained in terms of perspective from seeing the many cycles? I'm often told as a young investor today that The true greats have really seen the market cycles and how it affects the startups. What have been your perspectives from seeing the cyclical nature of the industry?

A There's a lot that you can learn. I would tell you, though, that I think that's overplayed a bit. I think that the times have changed and evolved. The nature of startups have evolved quite a bit, and so I think it's very, very, it's dangerous to try to apply too many lessons in the past to the market of today. And so, one great example, I think it, it, it costs far less to start a company and get it up and running today than it ever did before. And so, Some of the challenges associated with fundraising environments during downturns before are probably not quite as applicable as they once were. That having been said, I think that you can see when there are hype cycles building, when there is a rational behavior that's working its way into the, both the entrepreneurial community and the investment community, and it's always good to have the perspective to understand that, you know, these things don't last.

AI assessment note: “it's always good to have the perspective to understand that, you know, these things don't last”

Q far too much there to unpack for a venture nerd like me. So I first have to start with, we talked about kind of the extended period of privatization there. I'd love to hear your thoughts on this, whether you think it's fundamentally bad for the ecosystem because it doesn't provide liquidity to To the LPs. And how your perspective is on this extended period of privatization for the industry?

A I'm of two minds. I think, you know, the first way I look at it is I think these companies are going after bigger opportunities than we ever have before as an industry. You know, as a result, they're in growth mode far longer than companies ever used to be. And they, these are companies that are, you know, sizable businesses that continue to grow at just extraordinary rates year after year. And I think the idea of staying private longer and funding that growth and Swinging for the fence and trying to build once in a generation kind of companies is a real, it's a fantastic thing, and I'm very excited to see companies that are making these kind of commitments to growth over the long run. I do think, however, that the problem is sometimes it allows a lack of discipline to creep into those businesses, and there's something about the bright lights of being a public company that forces discipline onto companies and ensures that they're making best use of their capital and Behaving in the most responsible way, and so, you know, I worry a little bit about the fact that you don't have that kind of bright light with, uh, sterilizing effects on some of these companies, but I think I'm willing to take the good with the bad here, and I'm fully supportive and excited to see these companies really trying to build massive, massive businesses.

AI assessment note: “I'm of two minds. I think, you know, the first way I look at it”

Q Does that change, then, for follow-on investments?

A It doesn't. Typically, those folks constitute the team that will be evaluating follow-on investments within the, within the portfolio, and so, you know, it's incumbent upon us to make sure that our partners are up to speed on what, how the companies are doing, and, you know, for us to lean on that partner to help make good decisions, but I do think there are times where it probably would make sense And, you know, these things we've experimented with to have somebody independent, somebody that hasn't been involved with a company to come in every once in a while and take a look to make sure that we're making good financial decisions for our investors on these follow-ons, but that's not something that we put into practice.

AI assessment note: “It doesn't. Typically, those folks constitute the team that will be evaluating follow-on investments”

Q And I ask, at Series A, does that level of product market fit achievements? Does that actually translate to a, to a kind of core metric in itself in terms of, is it kind of MRR growth? Is it bookings growth? Is it kind of a certain level of negative churn? Is there elements that you particularly hone in on?

A Yeah, I mean, those are all things that we look at. We are not spreadsheet investors. You know, we don't, we don't try to The fit, all these numbers into a set of checkboxes, and then determine whether or not they're achieving these things, or they've met some minimum threshold, because every opportunity is different, and we, you know, we don't think that's an appropriate way of evaluating these things, but I do think we look at, certainly for demonstration of product market fit, we're going to look at a couple things. We're going to look at, we will look at MRR growth. We will look at whether or not there has been churn, and we'll also look at growth on existing accounts, but more importantly, what we'll try to do is draw some conclusions based on For instance, the nature of the customers that you're getting. So are you able to demonstrate an ability to build up a diverse set of customers that span industries? Perhaps another way of looking at this too, and probably the most important way is that we feel like there's some repeatability in the process. In other words, is, are we finding a common problem and a common way of positioning it and a common buyer across these organizations? It feels like, Hey, you know, if we keep doing that, we can really scale this business. And That repeatability is absolutely essential in the early stages of these companies, because it's really th…

AI assessment note: “those are all things that we look at. We are not spreadsheet investors.”

Q Absolutely. No, I, I do agree. Um, probably, uh, better to have a deeper due diligence process than, uh, blog posts or 20 minute VC episodes. Uh, but in terms of the raises themselves, it appeared that investors are also much less willing to take future fundraising risk. Why do you think this is in particular now?

A Yeah. It's back to what we were talking about before. I think you're seeing, first of all, I think a lot of people have been burned over the last few years on speculative business models. They, uh, we've invested in companies and we basically hope that growth would take care of all problems, that if the top line was growing, even if profitability wasn't falling, eventually we'll get there. You know, more often than not, that just hasn't been the case. And so the result is that I think, uh, later stage investors are less likely to take these risks that basically that they assume that growth will take care of all these problems. And so, You know, businesses that, that aren't converging on profitable, you need economics or have subpar gross margins. And there are many of those out there right now are scary for investors because you know that you're going to put in a certain amount of money, but that is probably dropping the bucket relative to what they need to get the profitability. And I'm essentially betting not only on the company's ability to execute, but also on the company's ability to find future investors that would be willing to take the same risks. And that is becoming harder and harder to predict. And as a result, these companies, I think, are finding it more difficult to finance themselves.

AI assessment note: “a lot of people have been burned over the last few years on speculative business models”

Q I'd love to discuss right now, which is the current climate that we're in. I heard you say the other day that VC funding is down six quarters in a row, and that's a good thing. So, so talk to me about why you think this is happening first in terms of VC funding being down for six quarters in a row, and then why is it a good thing?

A Yeah, so I think, you know, just looking, you know, just looking, you know, just looking, In terms of dollars invested, it was down about 11%, and I think to put that in perspective, though, that we have to roll all the way back to 2006. And 2006, 2007, we saw the launch of AWS and cloud computing, which has had an enormous transformative effect on the cost of starting companies and getting companies off the ground, and also has opened up an incredible set of opportunities within enterprise information technology as companies transition to cloud. And then with the smartphone, changed the way that people interact and Assume services. It's also took us from about a billion connected users in the world to about 3.5 billion at the end of 20 16 or about 40% of the world's population. So it's dramatically expand the markets that we're going after as investors and entrepreneurs. And so coupled with those big meta trends was a dramatic increase in the amount of investing running from 2007 through the end or about mid of 20 15 when it peaked. We saw a 10 X increase in the number of very early stage investments and we saw 40% increase in the number of You know, kind of series A and series B invest. Those are just, I think the way I look at it is it just reach unsustainable levels. I think at some point in the middle of 2015, investors woke up and realized they had really big portfolios, …

AI assessment note: “result was, I think a lot of people just took a breather.”

Q Talk to me, you said about the MR. So before we dive into the quickfire, is that I'm using this purely as an education for myself now, is that levels of MR growth that make it more appealing than others, be it, you know, 10%, 15%, 20%? Is there one way you have a kind of signpost in your mind for Series A Enterprise?

A No, and I, maybe that's not the answer you're looking for, but it's, It's, it's not, because I, I honestly, I think that, as we said, every situation is different, but I think that there are all kinds of circumstances or situations that provide, or data points, frankly, to provide a lot more value than, than just MR growth. And, and again, it's back to that repeatability. If we're seeing repeatability, but maybe not, you know, kind of steady, consistent growth month over month, but we're starting to see the signs that this is really resonating with a certain set of buyers and a message that's beginning to resonate. That's far more interesting and far more valuable than me as an investor than, Company that's grown 15% month over month MR.

AI assessment note: “No, and I, maybe that's not the answer you're looking for”

Q I'd love to discuss right now, which is the current climate that we're in. I heard you say the other day that VC funding is down six quarters in a row, and that's a good thing. So, so talk to me about why you think this is happening first in terms of VC funding being down for six quarters in a row, and then why is it a good thing?

A Yeah, so I think, you know, just looking, you know, just looking, you know, just looking, In terms of dollars invested, it was down about 11%, and I think to put that in perspective, though, that we have to roll all the way back to 2006. And 2006, 2007, we saw the launch of AWS and cloud computing, which has had an enormous transformative effect on the cost of starting companies and getting companies off the ground, and also has opened up an incredible set of opportunities within enterprise information technology as companies transition to cloud. And then with the smartphone, changed the way that people interact and Assume services. It's also took us from about a billion connected users in the world to about 3.5 billion at the end of 20 16 or about 40% of the world's population. So it's dramatically expand the markets that we're going after as investors and entrepreneurs. And so coupled with those big meta trends was a dramatic increase in the amount of investing running from 2007 through the end or about mid of 20 15 when it peaked. We saw a 10 X increase in the number of very early stage investments and we saw 40% increase in the number of You know, kind of series A and series B invest. Those are just, I think the way I look at it is it just reach unsustainable levels. I think at some point in the middle of 2015, investors woke up and realized they had really big portfolios, …

AI assessment note: “Those are just, I think the way I look at it is it just reach unsustainable levels.”