The Exchanges

Q I don't have, like, data that I'm drawing analysis from, but I'm just drawing analysis from, you know, 15 companies that I meet a week. Prices at the early stage are going nowhere. They are staying strong. And a lot of people are saying, well, the multi-stage funds have so much dollars in dry powder. That actually, maybe early stage will be immune from this. Do you think that's possible?

A I think it's playing out exactly as the past couple crises, and it was kind of predictable. What happens is, here, here's the waterfall, right? Okay, public markets multiples correct, and you're, let's say you're like a mutual fund, and you do pre-IPO rounds, and companies aren't trading at 30 times revenue anymore, they're trading at seven times, and some companies trying to sell you shares at 30 times, you're gonna say, no way, You know, I can't lose money on my investment, right? So they're the first to react, those folks who do those types of rounds. And then, you know, the Series C investors, they say, I know the Series D investors, those mutual funds aren't going to pay up, so I have to get a markup, so I'm going to price down. That takes a few months. And then the Series B investors, six months later, say the same thing. And then, you know, here we are a year and a half, two years after the correction, and the seed investors get the memo. It takes time. It's what happened After the dot-com bubble, it happened after the financial crisis, it took a little time, but, you know, I think it is beginning to happen. Now, are prices gonna go in seed and, and series A back to, you know, in series A levels where, you know, great companies were done at one and a half pre? No. Not happening.

AI assessment note: “it took a little time, but, you know, I think it is beginning to happen.”

Q Have you ever had a bridge round work? Blunt me. We, we both, I, I, despite my use and good looks, I've been doing this for eight years, I've never had a bridge around work. Still the optimist, but have you ever had one? And actually, do you not now think it's probably a bridge to nowhere, 99% of the time?

A In general, they're not necessarily the best use of capital in terms of a bridge round. I think that's what the math would show. Now, in my career, have I seen one work? Yes. Um, at RRE, there was a bridge round we did for what is now a very famous fintech company that got the company to a sale. Um, ironically, though, in retrospect, that was just a good company. Um, and they should have just raised more money and kept calling. That company was Venmo. Um, and so, you know, it's probably not about whether it's a bridge round. Like, if it's a good company, give them a lot of capital, and if it's not, zero. That's, that's probably the right decision framework.

AI assessment note: “Now, in my career, have I seen one work? Yes.”

Q Have you ever had a bridge round work? Blunt me. We, we both, I, I, despite my use and good looks, I've been doing this for eight years, I've never had a bridge around work. Still the optimist, but have you ever had one? And actually, do you not now think it's probably a bridge to nowhere, 99% of the time?

A In general, they're not necessarily the best use of capital in terms of a bridge round. I think that's what the math would show. Now, in my career, have I seen one work? Yes. Um, at RRE, there was a bridge round we did for what is now a very famous fintech company that got the company to a sale. Um, ironically, though, in retrospect, that was just a good company. Um, and they should have just raised more money and kept calling. That company was Venmo. Um, and so, you know, it's probably not about whether it's a bridge round. Like, if it's a good company, give them a lot of capital, and if it's not, zero. That's, that's probably the right decision framework.

AI assessment note: “Now, in my career, have I seen one work? Yes.”

Q I don't have, like, data that I'm drawing analysis from, but I'm just drawing analysis from, you know, 15 companies that I meet a week. Prices at the early stage are going nowhere. They are staying strong. And a lot of people are saying, well, the multi-stage funds have so much dollars in dry powder. That actually, maybe early stage will be immune from this. Do you think that's possible?

A I think it's playing out exactly as the past couple crises, and it was kind of predictable. What happens is, here, here's the waterfall, right? Okay, public markets multiples correct, and you're, let's say you're like a mutual fund, and you do pre-IPO rounds, and companies aren't trading at 30 times revenue anymore, they're trading at seven times, and some companies trying to sell you shares at 30 times, you're gonna say, no way, You know, I can't lose money on my investment, right? So they're the first to react, those folks who do those types of rounds. And then, you know, the Series C investors, they say, I know the Series D investors, those mutual funds aren't going to pay up, so I have to get a markup, so I'm going to price down. That takes a few months. And then the Series B investors, six months later, say the same thing. And then, you know, here we are a year and a half, two years after the correction, and the seed investors get the memo. It takes time. It's what happened After the dot-com bubble, it happened after the financial crisis, it took a little time, but, you know, I think it is beginning to happen. Now, are prices gonna go in seed and, and series A back to, you know, in series A levels where, you know, great companies were done at one and a half pre? No. Not happening.

AI assessment note: “and then, you know, here we are a year and a half, two years after the correction, and the seed investors get the memo.”

Q Can I ask, what does your data show? You mentioned the data there and you mentioned the two downloads that you saw this week. What does it show you and what are you seeing from what you see internally?

A I think you have to Sort of cleave startups into two camps. There's the ones that sort of lived in a bubble somehow. Maybe they hadn't raised in 20 or 21, or maybe they're just coming up and raising, you know, a series B, let's say, for the first time, um, versus the ones that raised in 20 and 21 at, uh, artificially high prices, and there could be some hangover effect. So, you know, in the public markets, Software companies, multiples there have corrected to what we saw in 2016, 1718 to normal multiples. So the question is, is that happening in the private markets? And the data we're seeing, the answer is yes. We've, we announced multiple deals last year in 2022, where they were priced at something like 10 to 15 times forward ARR. You know, and that, that, that's just those specific companies. It depends on all the specifics of a company, of course. You know, pricing is an art. But those were like not dissimilar prices. That's about where things were getting priced before COVID. And so for these companies that don't have the hangover from COVID, from those valuations, say in 21, things are back to normal. And so then the question is, what happens to that cohort of companies that raised in 20 and 21? And that's the open question, and that's what we need to see, and we're going to find out.

AI assessment note: “And the data we're seeing, the answer is yes.”

Q How do you advise founders when they say, I love that, but I'm worried about shopping it, and I'm constantly nervous that the VC will feel like I've shopped their term sheet. How do they get multiple without the feeling of shopping a term sheet?

A That's a really perceptive question, and I think that comes down to the relationship. Don't get to know the potential VCs, you know, two weeks before you raise. Spend time with them. Get chemistry. Make sure you want to work with them. Develop trust, and then if you go to those venture investors and say, thank you for your offer, you know, I'm running a process, and I'm collecting term sheets, and they're all due by Friday. I appreciate you putting this on Tuesday, but I need to, you know, maximize the value Uh, for my company, for every shareholder, and thus, you know, we're gonna see how many offers we get because that's my job as CEO. I think the VCs will respect that and trust you, um, and realize you're doing the best thing for your company.

AI assessment note: “I'm running a process, and I'm collecting term sheets, and they're all due by Friday.”

Q Can I ask, what does your data show? You mentioned the data there and you mentioned the two downloads that you saw this week. What does it show you and what are you seeing from what you see internally?

A I think you have to Sort of cleave startups into two camps. There's the ones that sort of lived in a bubble somehow. Maybe they hadn't raised in 20 or 21, or maybe they're just coming up and raising, you know, a series B, let's say, for the first time, um, versus the ones that raised in 20 and 21 at, uh, artificially high prices, and there could be some hangover effect. So, you know, in the public markets, Software companies, multiples there have corrected to what we saw in 2016, 1718 to normal multiples. So the question is, is that happening in the private markets? And the data we're seeing, the answer is yes. We've, we announced multiple deals last year in 2022, where they were priced at something like 10 to 15 times forward ARR. You know, and that, that, that's just those specific companies. It depends on all the specifics of a company, of course. You know, pricing is an art. But those were like not dissimilar prices. That's about where things were getting priced before COVID. And so for these companies that don't have the hangover from COVID, from those valuations, say in 21, things are back to normal. And so then the question is, what happens to that cohort of companies that raised in 20 and 21? And that's the open question, and that's what we need to see, and we're going to find out.

AI assessment note: “And the data we're seeing, the answer is yes. We've, we announced multiple deals”

Q I totally agree. Can I ask, you know, the first thing often to go in the cuts is marketing spend, customer acquisition, kind of growth funnels. Um, how do we see marketing spans hit in this kind of, uh, leaning of company budgets and this reduction of spend?

A You know, I had a board meeting this morning with the company called Attentive and, uh, sat down with the CEO, Brian Long, who's just a fantastic founder. We talked about this very topic. Um, how do you think about marketing during a downturn? Um, and how do you lean in? And, and one of the tweets I had was about going on offense, and we'll think about that specifically related to marketing spend. And the truth is you, the marketing spend that you have now is so much more powerful Then the marketing spend you had say during 21. Why? Your competition has pulled back. They're not bidding on keywords. So the CAC is down. Competitors may have entirely pulled from the market. So you may not need the same level of dollars to achieve the same objective. And then the other question you have to ask yourself is, okay, if we were going to grow 70% and we pull some marketing back and save a bunch of burn, and now we're only going to grow 45 or 50%, What difference does it make? Is there a really strategic reason that growing 70% is so much better? Is it actually a land grab? Can you quantify that you won't be able to get those customers back in a year or two if you decide to hit the accelerator after raising your next round?

AI assessment note: “Your competition has pulled back. They're not bidding on keywords. So the CAC is down.”

Q How do you advise founders when they say, I love that, but I'm worried about shopping it, and I'm constantly nervous that the VC will feel like I've shopped their term sheet. How do they get multiple without the feeling of shopping a term sheet?

A That's a really perceptive question, and I think that comes down to the relationship. Don't get to know the potential VCs, you know, two weeks before you raise. Spend time with them. Get chemistry. Make sure you want to work with them. Develop trust, and then if you go to those venture investors and say, thank you for your offer, you know, I'm running a process, and I'm collecting term sheets, and they're all due by Friday. I appreciate you putting this on Tuesday, but I need to, you know, maximize the value Uh, for my company, for every shareholder, and thus, you know, we're gonna see how many offers we get because that's my job as CEO. I think the VCs will respect that and trust you, um, and realize you're doing the best thing for your company.

AI assessment note: “Spend time with them. Get chemistry... I'm running a process, and I'm collecting term sheets”

Q No, I, I totally get you. Can I ask, you know, you said now is the calm before the storm. So much poetry in this tweet thread. Um, what is now the calm before the storm?

A I just, the way I back into the math says that there's a lot of companies that are going to be raising the end of this year and next year, and what's going to happen is there's only so many hours in a day for the investors who do, say, A, B, and C rounds that are going to be following on to these things, and if everybody comes to market at once, people are going to have to be selective, they're going to have to triage their time towards whatever they think is the best company, and You know, it's just the effect of too many companies, too little time. And so I think, unfortunately, some founders might not get the attention, the time that they deserve to look at those rounds or maybe do the hard things like down rounds. And once again, that's why I'm trying to give the advice. Don't raise at the last second, get out in front of it.

AI assessment note: “there's a lot of companies that are going to be raising the end of this year”

Q offense, I find a lot of founders still on the offense with regards to valuation. And you said, um, focus on survival, not on valuation. What's your advice to startups raising today? Again, I'm, I'm assuming this very hypothetical role of being in your portfolio. Clearly hinting at something. Uh, and, uh, so my question is, like, how do you advise me? Survival, not on valuation sensitivity. What's the advice?

A Listen, as a CEO, your number one job As you know, for a portfolio company is not running out of cash. And so the best way if you're going to go out and raise or you need more capital is to get a bunch of term sheets, right? Convince people to put money in. Don't anchor those potential investors. It needs to be at the last round. It needs to be at X or Y. Go out and get term sheets, bid them against each other. If you only have one bid as a founder, only one term sheet, you've lost leverage. Um, to the extent you can get multiple term sheets, Then you have leverage and you control your own destiny.

AI assessment note: “Don't anchor those potential investors. It needs to be at the last round.”

Q say about startups raising two years of cash in 21, 22. And needing to raise in 23, 24. Transparently, I have 50 companies, and I didn't have a single one raising until Q-three, 24. Now, I'm, I'm, that's not me, like, bragging, that's just, like, them extending runway, and, like, making it work until then. Am I wrong here? Because I'm not seeing this need to raise in 23 now.

A Well, first of all, if all startups in the U.S. and Europe and abroad Have cash through 25, feel like your portfolio? God bless. That's fantastic, and I can just, you know, fly to Hawaii and sit on the beach for a while, but the data we're seeing coming across our desks, the data we're seeing at IVP suggests otherwise. Um, we're seeing, I would call it a trickle, but like a noticeable uptick from Q-four in deal flow, and we saw two potential down rounds this week. So like what I tweeted in my thread, we have the data to back it up. You know, I think it's a question, does it become a flood in the second half of this year and what happens next year? Fair enough. Those are predictions. Um, but we are seeing the market correct in real time and companies begin to come back to market right now.

AI assessment note: “the data we're seeing at IVP suggests otherwise.”

Q And predictions are always fun. I've always learned that venture investors make the best armchair macroeconomists. Uh, and so, uh, I, I, I like to do predictions. Uh, why do you think this will be, you said this will be worse than the GFC. I was like, wow. Why do you think this will be worse?

A In the lead up to the great financial crisis, um, mortgages were going bananas. You had LBOs going bananas. Investors and venture weren't to the same degree. You didn't see companies in the public markets in tech or the privates trading at You know, hundreds of times revenue. I think the dot-com era was too fresh in people's mind for that to happen, but this time it did, so the hangover is going to be worse because, you know, you were pre-product and you raised at 300 on a bunch of hype, and now you're at a million ARR, but you had to cut burns, so you're only going to go to two next year. What happens to that company? Is that an up round? Is it even a flat round? It's probably more a down round. We already covered that the psychology for a lot of VCs is not to do down rounds. And so, man, those are tricky situations. And that's where I think a founder needs to be super proactive about figuring out the capital needs for the company and how to adjust that price in a way that's not gonna, you know, prevent them from raising that next round.

AI assessment note: “this time it did, so the hangover is going to be worse”

Q As I said, I thought it was the most brilliant breakdown. I want to just ask you a couple of things before we dive in. You said about not going back to 2021. What does that actually mean? Does that mean 20% discounts, 50% discounts, structured rounds? We see everyone says, so like, what does that mean? What do these look like for those companies?

A So I would say discounts are the wrong way of framing it because you're just anchoring on something that was totally irrational in 20 or 21. Um, it's all about the fundamentals. Is this a good business? What's the quality of revenue? The unit economics? Uh, the founder quality. And then, yeah, you have to think about what's the exit potential for this business and the probability. And in 21, those fundamentals, for whatever reason, right, macro interest rates, whatever it is, I'm not a macro economist, people became unmoored from that. Diligence was being done in 24 hours by a lot of firms. Like, that sort of thing, I think, was actually unhealthy for the business, and I hope it doesn't come back.

AI assessment note: “discounts are the wrong way of framing it because you're just anchoring on something”

Q kind of the survival steps. I have Jason Lampkin on the show. Not too long ago, and he said anyone who joined a billion dollar startup as an employee in the last, uh, two or three years, I can't remember what his time frame was, but to say two years, uh, they won't make any money from their equity in 99% of cases. Do you think that's a fair assessment?

A Oh man, maybe I'm an optimist, but I think it's a lot better than that. Why? Um, well, yeah, the initial equity grants could be underwater, but there's a couple things going on. One is, those preferred rounds, that's a different thing than the . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The other thing is, it is in the power of the board and the CEO to figure out how to incentivize people going forward and make sure that employees are incentivized to stay and have upside, and so you can get creative there, and that's incumbent upon, you know, the companies to make sure their talent's not going to leave, because if their equity is totally upside down, you know, the best ones are going to be gone real soon.

AI assessment note: “maybe I'm an optimist, but I think it's a lot better than that.”

Q off the table in some winners where I probably should have done over the last years, and that was a big mistake looking back. How do you determine when's the right time to take some Off the table. I find, you know, everyone's like, lean into your winners. Bullshit. The best strategically lean out in stages along the way, I find. How do you determine when and how much to?

A Oh man, this is probably the hardest part of venture capital is deciding when to sell. And I'll be honest, I think it's been a learning experience for me, for the whole industry. Um, and, and the key is you don't have to get it perfect. And so that means not trying to time things all at once and doing it in stages and de-risking over time. This keeps you from, you know, making some really big mistakes, but you know, I do think you probably, if there's gonna be a couple things you look at, one is gonna be the specifics, the fundamentals of the company. How much do you believe in it? How is it valued? You know, how are they doing? And then the second thing is keeping in mind macro. If you really think a company's overvalued and the market's overvalued, you know, then you're gonna have a bias to action and a bias to sell. Um, you know, how do I feel right now? It feels like things are pretty fairly valued in the public markets. So I wouldn't be in a rush to sell everything that's not bolted down. Um, we did feel a little bit like that in 21, and so we took a disproportionate amount of liquidity in 21. But now, you know, it's kind of like, it really depends on your conviction and the individual name.

AI assessment note: “one is gonna be the specifics, the fundamentals of the company... second thing is keeping in mind macro”

Q have hit the numbers that they said they would, and then it's difficult to come back. I do always say that to founders, like, it's really hard to go to Tom in January, and then come back in March, or May, or June, whenever it is. That second, you kind of know it's a smelly fish. Brilliant analogy. Um, do you agree with that? It's really difficult to come back.

A You're absolutely right. There are downsides to going out to market and not raising, but you have to ask yourself two questions. One, which is worse, a slight stigma from not raising the first time or going out late and not raising and have no backup plan. Because in reality, I think that's a little bit of the dilemma. You have to choose one path. And the second thing though, Why go back to the same investors? Segment your investor list that you're going to canvas and go to one set of investors, you know, that first time where you're kind of testing the market, but don't go to everybody and have a second set of investors. Um, you know, if that fails, so tier them, don't contact them all at once. Go, go in waves.

AI assessment note: “You're absolutely right. There are downsides to going out to market and not raising”

Q said, though, was, and it's related, but it's like, you need econ over growth. Uh, again, I'm relating actually to Jason Lampkin, but he said, no. Today, we want both. Do you think, like, one is enough? And actually, for founders listening, if they go, okay, unit econ, and then growth really takes a hit, and it goes from, you know, good to pretty average, Does that excite investors though?

A So you're right. You do need both, but it's a question of timeframe, um, and, and trade-offs, right? Because they're not mutually exclusive. So as I was saying before, you know, you can have a debate. Should we grow 70% or 50%? Um, you know, if it's zero percent, that's pretty austere. That may really hurt your chance of raising capital. But it might be the right answer because if your product is broken and you're just pushing a rock up a hill because customers don't like it, maybe you should grow zero percent, refactor the product, you know, and be out of the market for a couple months and then go back to market and then hit the accelerator. So, you know, I think you really have to look at the specifics. Um, but the thing is, it's not a permanent decision. You could always grow again and show investors, yeah, you know, Hey, listen, our blended growth rate was only 25%, you know, over the last six months. But the first three months, we've refactored our product. And then the second set of three months, we were growing super fast. We were growing, you know, 50 or a hundred percent. And so people care about the most recent data points, not the oldest data points. And you got to show them that.

AI assessment note: “You do need both, but it's a question of timeframe, um, and, and trade-offs”

Q I totally agree. And so if we speak about getting out in front of it, quite often they'll go back to their initial investors, their existing investors. And I've got many friends who are partners at A, B, and C firms, and they're underwater with existing portfolio company re-ups, extensions. How does this change reserves and reserve management?

A It isn't a big deal during good times. It's pretty easy, because companies can raise capital, and you're really like, you know, how much money can we make on our incremental investment, right? That's the psychology we've all been in for the last few years. But all of a sudden, it changes during the darker times, right, where it's, If I don't put money in, there's going to be, you know, the company's either going to go out of business or there'll be a pay to play, and I lose basically all of my ownership. Pay to play means if you don't put in money in the round as an investor, your existing investment just gets crushed. It gets diluted massively. I think the trick is for investors, especially those who didn't live through the dot-com bubble or the great financial crisis, when they're putting together these bridge rounds, really just going back to basics and saying, What is this a bridge to? What are the milestones we're going to accomplish? Because too often, especially when I was an early stage VC, I saw bridges to nowhere, you know, that would give companies a month or two of runway and, you know, on some unfounded hope that they would sell the company within a month or two. Um, a good bridge round at least six months. So I would ask really hard questions about any bridge round that's, you know, measured in weeks or a month or two.

AI assessment note: “all of a sudden, it changes during the darker times, right”

Q offense, I find a lot of founders still on the offense with regards to valuation. And you said, um, focus on survival, not on valuation. What's your advice to startups raising today? Again, I'm, I'm assuming this very hypothetical role of being in your portfolio. Clearly hinting at something. Uh, and, uh, so my question is, like, how do you advise me? Survival, not on valuation sensitivity. What's the advice?

A Listen, as a CEO, your number one job As you know, for a portfolio company is not running out of cash. And so the best way if you're going to go out and raise or you need more capital is to get a bunch of term sheets, right? Convince people to put money in. Don't anchor those potential investors. It needs to be at the last round. It needs to be at X or Y. Go out and get term sheets, bid them against each other. If you only have one bid as a founder, only one term sheet, you've lost leverage. Um, to the extent you can get multiple term sheets, Then you have leverage and you control your own destiny.

AI assessment note: “Don't anchor those potential investors. It needs to be at the last round.”

Q there. I, speaking of kind of unit economics being fantastic in those cities, I'm intrigued. You said about kind of going on a fence and we spoke about it in related to marketing budgets. How do founders know when to go on a fence? They've been through this cutting spree. When do they go on a fence, and how do they strategically think about that with their boards as well?

A I think it's like Maslow's hierarchy of needs. If you have enough cash that you're not worried about survival, then you can think about how to go on offense. So if you've cut to get efficient, you've raised more money, you're not worried about running out of money, then you can think about, you know, all these tactics. Um, and there's a lot of them, but you know, I think one of them is hiring great people and you may be able to hire people you couldn't hire before. For that engineer who, you know, probably would have taken that job at Google, um, but, you know, now Google has a hiring freeze, and so that person's in the market, and so your product team can go on offense by hiring better people. Um, your marketing team can go and spend in channels that you couldn't pay for before because the tax were too high, and now you can broaden your reach. So I think you can examine every single part of your business for offense.

AI assessment note: “If you have enough cash that you're not worried about survival”

Q say about startups raising two years of cash in 21, 22. And needing to raise in 23, 24. Transparently, I have 50 companies, and I didn't have a single one raising until Q-three, 24. Now, I'm, I'm, that's not me, like, bragging, that's just, like, them extending runway, and, like, making it work until then. Am I wrong here? Because I'm not seeing this need to raise in 23 now.

A Well, first of all, if all startups in the U.S. and Europe and abroad Have cash through 25, feel like your portfolio? God bless. That's fantastic, and I can just, you know, fly to Hawaii and sit on the beach for a while, but the data we're seeing coming across our desks, the data we're seeing at IVP suggests otherwise. Um, we're seeing, I would call it a trickle, but like a noticeable uptick from Q-four in deal flow, and we saw two potential down rounds this week. So like what I tweeted in my thread, we have the data to back it up. You know, I think it's a question, does it become a flood in the second half of this year and what happens next year? Fair enough. Those are predictions. Um, but we are seeing the market correct in real time and companies begin to come back to market right now.

AI assessment note: “the data we're seeing at IVP suggests otherwise”

Q No, I, I totally get you. Can I ask, you know, you said now is the calm before the storm. So much poetry in this tweet thread. Um, what is now the calm before the storm?

A I just, the way I back into the math says that there's a lot of companies that are going to be raising the end of this year and next year, and what's going to happen is there's only so many hours in a day for the investors who do, say, A, B, and C rounds that are going to be following on to these things, and if everybody comes to market at once, people are going to have to be selective, they're going to have to triage their time towards whatever they think is the best company, and You know, it's just the effect of too many companies, too little time. And so I think, unfortunately, some founders might not get the attention, the time that they deserve to look at those rounds or maybe do the hard things like down rounds. And once again, that's why I'm trying to give the advice. Don't raise at the last second, get out in front of it.

AI assessment note: “there's a lot of companies that are going to be raising the end of this year”

Q And predictions are always fun. I've always learned that venture investors make the best armchair macroeconomists. Uh, and so, uh, I, I, I like to do predictions. Uh, why do you think this will be, you said this will be worse than the GFC. I was like, wow. Why do you think this will be worse?

A In the lead up to the great financial crisis, um, mortgages were going bananas. You had LBOs going bananas. Investors and venture weren't to the same degree. You didn't see companies in the public markets in tech or the privates trading at You know, hundreds of times revenue. I think the dot-com era was too fresh in people's mind for that to happen, but this time it did, so the hangover is going to be worse because, you know, you were pre-product and you raised at 300 on a bunch of hype, and now you're at a million ARR, but you had to cut burns, so you're only going to go to two next year. What happens to that company? Is that an up round? Is it even a flat round? It's probably more a down round. We already covered that the psychology for a lot of VCs is not to do down rounds. And so, man, those are tricky situations. And that's where I think a founder needs to be super proactive about figuring out the capital needs for the company and how to adjust that price in a way that's not gonna, you know, prevent them from raising that next round.

AI assessment note: “In the lead up to the great financial crisis... this time it did”

Q Do you think the LPs do push back when they do come back to market earlier and say, actually, we didn't budget for this and we can't make that commitment happen?

A Unfortunately, I think that is gonna be the, the comeuppance that a bunch of funds suffer. Um, LPs are gonna say no. You know, we, at IVP, we've been around for 43 years. Um, we are very careful about our deployment, and we really didn't go all that fast in 21, and we didn't slow down that much in 22. This is, like, something we've been harping on as a firm, um, just tirelessly, but for a while, it, it didn't feel like, you know, That was necessarily the winning strategy when everybody was trying to be an index fund, putting money to work as quickly as possible. You know, there were times when we were like, man, are we doing the wrong thing by just being super selective and not trying to index the world?

AI assessment note: “Unfortunately, I think that is gonna be the, the comeuppance that a bunch of funds suffer.”

Q slow. To the point where some LPs were saying, why aren't you doing more? Um, which I'm now pleased about. My question to you is actually on, like, books and value of books. I'm an LP in funds, um, they're not marking their books down very much and very reactively, Tom. Um, do you think managers are marking their books down at all or aggressively enough for the LP class?

A I can't speak to what most venture firms are doing, but I think Everybody should have done some sort of markdown in the past 12 months for their, for their venture investments. It's just, it's absolutely gravity, and gravity may have, uh, not been effect in 21, but it's certainly back, and it's dragging things down. You know, to what degree? Well, that's going to depend. Um, because you, you can't look at every private startup and say, how much would it be worth if it were public, right? Because, By definition, the public markets wouldn't accept these things. That's why they're still young and private. So it's definitely an art. But if I had, if I were an LP in a venture fund, and things were marked up, um, or the same, you know, today versus 12 months ago, I would ask some good questions.

AI assessment note: “Everybody should have done some sort of markdown in the past 12 months”

Q have hit the numbers that they said they would, and then it's difficult to come back. I do always say that to founders, like, it's really hard to go to Tom in January, and then come back in March, or May, or June, whenever it is. That second, you kind of know it's a smelly fish. Brilliant analogy. Um, do you agree with that? It's really difficult to come back.

A You're absolutely right. There are downsides to going out to market and not raising, but you have to ask yourself two questions. One, which is worse, a slight stigma from not raising the first time or going out late and not raising and have no backup plan. Because in reality, I think that's a little bit of the dilemma. You have to choose one path. And the second thing though, Why go back to the same investors? Segment your investor list that you're going to canvas and go to one set of investors, you know, that first time where you're kind of testing the market, but don't go to everybody and have a second set of investors. Um, you know, if that fails, so tier them, don't contact them all at once. Go, go in waves.

AI assessment note: “You're absolutely right. There are downsides to going out to market and not raising”

Q said, though, was, and it's related, but it's like, you need econ over growth. Uh, again, I'm relating actually to Jason Lampkin, but he said, no. Today, we want both. Do you think, like, one is enough? And actually, for founders listening, if they go, okay, unit econ, and then growth really takes a hit, and it goes from, you know, good to pretty average, Does that excite investors though?

A So you're right. You do need both, but it's a question of timeframe, um, and, and trade-offs, right? Because they're not mutually exclusive. So as I was saying before, you know, you can have a debate. Should we grow 70% or 50%? Um, you know, if it's zero percent, that's pretty austere. That may really hurt your chance of raising capital. But it might be the right answer because if your product is broken and you're just pushing a rock up a hill because customers don't like it, maybe you should grow zero percent, refactor the product, you know, and be out of the market for a couple months and then go back to market and then hit the accelerator. So, you know, I think you really have to look at the specifics. Um, but the thing is, it's not a permanent decision. You could always grow again and show investors, yeah, you know, Hey, listen, our blended growth rate was only 25%, you know, over the last six months. But the first three months, we've refactored our product. And then the second set of three months, we were growing super fast. We were growing, you know, 50 or a hundred percent. And so people care about the most recent data points, not the oldest data points. And you got to show them that.

AI assessment note: “You do need both, but it's a question of timeframe, um, and, and trade-offs”

Q So when the storm hits, we've got thunder and lightning, it doesn't look good, Um, to carry that metaphor, um, what do the GPs do? How does this change what investors want in companies, and also how does it change deployment cadence?

A The deployment cadence is probably the first thing, and that's already changed. I think GPs saw that happening pretty quickly. So, 21, there were a bunch of funds that deployed their capital in nine to 12 months. And you say, well, why, why is that a bad thing? Why not just keep doing that? Well, because when you raise a fund, you generally tell your LPs, hey, it's going to take us, you know, two or three years to deploy The capital before we go raise our next fund, and so that LP needs to allocate a certain amount of funds. Um, let's say they're an investor in your fund, and they put, you know, five million in, and they think they're going to put another five million in three years from now, but nine months later, you said, hey, I need another five million. That depletes the books of the LP pretty quickly. Now, LPs start pushing back, and they say, I'm not going to commit if you come back in nine months. That's going to change Deployment cycles and VCs know that's already happening in the LP's minds. So they, they're now saying, okay, I have to hit the brakes and I'm going to go back to that three year deployment cycle. And so that's dividing the dry powder out there by a third.

AI assessment note: “The deployment cadence is probably the first thing, and that's already changed.”

Q Not at all, but I want to start with a little bit on you, okay? So how did you make your way into the world of venture, and then how did you Come to be a partner at IVP today.

A My dad was a serial entrepreneur. And mind you, these were like small three or four person companies. This was not anything big. But I think growing up around that energy, going into some big corporate job was just never really an option. And I, I also grew up in the eighties and nineties, like at the dawn of the internet, hacking around on PCs and started a website in the nineties. And I just, I knew I needed to be in technology. That was kind of the option, right? Like I knew it was going to be entrepreneurship plus technology. And so I went to Stanford in 1999, discovered venture. As they say, it was love at first sight and wanted to find my fastest way into the career.

AI assessment note: “went to Stanford in 1999, discovered venture. As they say, it was love at first sight”