Podcast Summary
Lessons from a Three-Decade VC Veteran: Brad Feld, a 30-year veteran investor, shares insights from the dot-com bubble to the latest boom cycle, emphasizing the importance of supporting founders and providing guidance throughout the ups and downs of the venture capital industry.
Investing experience and perspectives from those who have witnessed and survived through multiple venture cycles can provide valuable insights for both founders and capital allocators. Brad Feld, a three-decade veteran investor from the Foundry Group, shares his experiences from the dot-com bubble to the latest boom cycle, offering invaluable lessons and education to generations of investors. Despite the challenges and ups and downs, Brad's commitment to supporting founders and providing guidance has remained consistent throughout his career. This episode is a must-listen for anyone interested in gaining a deeper understanding of the venture capital industry and the importance of mentorship.
Unexpected start to investing journey: Starting with small investments and learning through hands-on experience can lead to success in angel investing.
The speaker's first experience with investing came about unexpectedly after selling his first company and working for the acquiring public company. He learned about investing through hands-on experience, starting with a small investment in NetGenesis in 1994. The speaker's lack of prior experience or knowledge in investing did not hinder him, as he learned by observing and participating in acquisitions. Over the next few years, he made around 40 investments, starting with small checks and gradually increasing the size of his investments. This experience marked the beginning of his successful career as an angel investor.
Angel Investing's Early Days and Small Business Hiring Similarities: Investing in people and products carefully is crucial, whether it's in the early days of angel investing or hiring for a small business. Tools like LinkedIn Jobs can help streamline the hiring process and find high-quality candidates.
The early days of angel investing were a sparse and selective process. Angel investors wrote a limited number of checks each year, carefully considering both the people and the product before making an investment. The investor in this discussion was particularly focused on forming strong partnerships with the founders and having an affinity for the product. One notable example of this was the investor's involvement with Jerry and NetGenesis, where they invested in a threaded discussion group manager product that was eventually sold to Eshare. Fast forward to today, and the hiring process for small businesses has similarities to early angel investing. It's essential to carefully consider the team members you surround yourself with, looking for individuals who have the skills, values, and experience to help you achieve your goals. LinkedIn Jobs is a powerful tool for small businesses in this regard, with its vast network and built-in targeting, screening, and rating tools making it easier to find and hire high-quality candidates efficiently.
The importance of genuine partnerships with entrepreneurs: Successful investing requires an affinity for both the product and entrepreneurs, forming genuine partnerships, and having an obsession for the problem the company is solving.
The key to successful investing lies in having a strong affinity for both the product and the entrepreneurs involved. The speaker's personal experience shows that the decision-making process becomes more complicated as the size and bureaucracy of the investment firm grows. However, he found that the vast majority of these systems and processes did not significantly improve decision-making. Instead, the speaker emphasizes the importance of forming genuine partnerships with entrepreneurs, where both parties have a mutual desire to work together. Additionally, having an obsession for the problem the company is solving can lead to successful investments. This obsession should be healthy and not destructive, and it's essential to ask oneself if one was put on Earth to work on that specific problem. Ultimately, the speaker's approach is rooted in the belief that the partnership between the investor and entrepreneur is crucial for navigating the inevitable challenges that arise during the investment journey.
The Importance of Passion, Delegation, and Learning from Failures: Entrepreneurs should embrace passion, delegate tasks, empower team members, learn from failures, and focus on potential disproportionate returns.
Passion and authentic enthusiasm are crucial for entrepreneurs, but it's essential not to confuse passion with obsession. Passion means being deeply committed and dedicated to a cause or project, whereas obsession can lead to an unhealthy fixation. Entrepreneurs should also delegate tasks and empower their team members, allowing them autonomy and independence to perform their jobs effectively. Another valuable lesson comes from Coach K, who emphasizes the importance of delegation and having a strong team. As a business leader, learning from world-class instructors like Coach K through Masterclass can provide invaluable insights and knowledge. Additionally, experiencing failures and setbacks, as many entrepreneurs and investors have, can lead to feelings of frustration, self-doubt, and even sadness. However, it's essential to remember that even in the face of failure, there can still be learning opportunities and positive outcomes. The power law, which shows that a few investments or projects can yield disproportionately large returns, can help entrepreneurs stay focused on the potential for significant success despite the risks involved.
Diversification and fighting to the end: Having multiple companies with potential for outsized outcomes in a portfolio increases returns. Investing in companies with significant impact, even if financially unsuccessful, can be valuable.
Having a diversified portfolio with multiple companies that have the potential for outsized outcomes is crucial for successful investing. While it's important to have at least one such company, having two, three, or more can significantly increase returns. Additionally, it's worth investing in companies even if the initial investment may not be recovered, as the impact and learning experiences can be valuable. The speaker shared an example of a friend who ran a financially unsuccessful company but had a significant impact on the industry and the lives of its employees. The importance of fighting to the end and doing the best job possible, regardless of the financial outcome, was emphasized. The speaker's own experience with investing in various funds throughout the late 90s and early 2000s, including during the dot-com bubble, underscored the importance of timing and the challenges of making new investments in uncertain economic environments.
Navigating the challenges of the tech industry: Stay resilient and adapt to the ever-changing landscape of the tech industry during periods of success and failure.
Navigating through the ups and downs of the tech industry involves dealing with various challenges, whether it's helping angel investments succeed or dealing with the chaos of a venture capital fund. The tech industry can bring immense successes, but also significant failures, and the pressure to succeed can be immense. During periods of market downturns, the intensity of work and the number of issues to address can be overwhelming. Despite the challenges, it's important to stay resilient and adapt to the ever-changing landscape of the tech industry. The experience of dealing with these challenges can provide valuable lessons and frame of reference for the future.
Navigating economic downturns: Clear-headed approach, deep introspection, and adaptability are crucial during economic downturns. Reality should be dealt with, and long-term success should be the focus, whether as an entrepreneur or investor. Resources like Microsoft's Founder's Hub can help overcome challenges during uncertain times.
Navigating through economic downturns and market instability requires a clear-headed approach, deep introspection, and a willingness to adapt. The speaker shares his personal experience of going through a prolonged economic downturn in 2001, which lasted for three years, and how the market's recovery was lumpy and unpredictable. He emphasizes the importance of dealing with reality, regardless of being an entrepreneur or an investor, and the need to set up companies and teams for long-term success. Microsoft's Founder's Hub, as mentioned by Lahini Aranachalam, is an excellent resource for founders, offering coaching, accelerating product development, and providing capital to help them overcome the challenges they face during uncertain economic times.
Maintaining Perspective During Intense Pressure: Remembering personal relationships and life outside of work are essential during times of intense pressure and high founder turnover. Focusing on supporting the CEO can help maintain a productive and successful working relationship.
Maintaining composure and clear thinking during times of intense pressure and high founder turnover requires perspective and a reminder that life is more than just business success or failure. Brad Feld, who has experienced such situations during the dot-com bubble and the Great Recession, emphasizes the importance of remembering that personal relationships and life outside of work are essential. He shares how his wife's feedback helped him gain this perspective and navigate through challenging times. Today, as an investor, Brad has a simple perspective: he works for the CEO and supports them wholeheartedly. By focusing on supporting the CEO, he can tailor his approach to meet their unique needs. This mindset has helped him navigate through various stages of companies and maintain a productive and successful working relationship.
Investor-CEO relationships: A peer-to-peer approach: Successful investor-CEO relationships require humility, self-awareness, and a focus on finding the best solution for the company. Investors should provide data and insights while acknowledging uncertainty and fostering a productive dialogue with the CEO.
Effective communication and collaboration between investors, board members, and CEOs is crucial for a startup's success. However, it's essential to recognize that investors and board members do not have all the answers and should not dictate how the CEO runs their business. Instead, investors should provide data and insights while acknowledging the uncertainty of their hypotheses. They should also aim for a peer-to-peer relationship with the CEO, putting the CEO in the driver's seat. This approach fosters a productive and respectful dialogue, allowing both sides to learn from each other and navigate challenges together. Ultimately, humility, self-awareness, and a focus on finding the best solution for the company are key to successful investor-CEO relationships.
Communicating reality and self-awareness during hard times: Acknowledge and share reality with team, increase gross margin, decrease customer acquisition costs, understand unique cash flow dynamics, and focus on transparency and self-awareness to improve financial situation
Effective communication and self-awareness are crucial for business leaders during challenging times. It's important to acknowledge and share reality with the team, even if it involves difficult conversations or admitting mistakes. By doing so, pressure is released, and the team can collaborate on finding solutions. In the context of a hardware business facing financial difficulties, this means increasing gross margin by raising prices and decreasing customer acquisition costs. However, understanding the unique cash flow dynamics of a hardware business is essential, as the use of customer order dollars as starting capital can lead to different challenges if products are not delivered. Ultimately, transparency, self-awareness, and a focus on these two levers can help improve a business's financial situation.
Navigating economic challenges in hardware businesses: Maintain focus, build relationships, prioritize margins, and return to traditional startup values in tough economic environments.
Navigating through challenging economic environments in a hardware business requires a different mindset compared to the growth-focused approach many venture-backed companies have adopted in recent years. This includes prioritizing gross and contribution margins, building strong relationships with leadership teams and investors, and understanding each company's unique position. The current economic climate presents opportunities for companies on solid footing to gain market share, but it also necessitates a return to the traditional startup values of diligence, strategic planning, and a focus on product-market fit. The last five years have been an aberration, and while the environment may be challenging, it's important for leaders to stay focused, maintain strong relationships, and approach the situation with a sense of perspective and resilience.
Market dynamics and entry prices matter for investment success: Be skeptical of overvalued companies and irrational market behavior, focus on understanding economic sense before making investment decisions.
Understanding the market dynamics and being thoughtful about entry prices are crucial for successful investment strategies. The speaker shares an anecdote about Len Fastler, who acknowledged his lack of understanding during the tech bubble in the late 60s and 70s. He also expresses his skepticism towards overvalued companies and irrational market behavior, such as paying exorbitant multiples of future revenue. The speaker also touches on his perspective on crypto, viewing it as speculation rather than long-term investment, and questioning the creation of wealth for early investors before consumer value is established. Overall, the speaker emphasizes the importance of critical thinking and being grounded in economic sense when making investment decisions.
Questionable practices during crypto boom: Be cautious of hype and greed during new opportunities, as they can lead to poor decisions and lack of transparency
During the crypto boom, some founders and investors engaged in questionable practices, such as selling equity or tokens prematurely, creating artificial liquidity, and engaging in round-tripping schemes. These activities lacked transparency and often lacked any real economic value, but were driven by greed and the desire to profit from the speculative market. These practices were not new, as they had also emerged during the dot-com bubble, and they often went undetected until it was too late. It is essential to approach new opportunities with a critical eye and be wary of hype and greed, as they can cloud judgment and lead to poor decisions.
Dot-com bubble and crypto market similarities: Despite criticisms and market instability, 2023 offers opportunities to build and invest in companies with real products and solid business models.
During the dot-com era, some business deals had legitimate reasons, but the inflation of equity value through costless transactions led to a bubble. Another example is the emphasis on metrics like "eyeballs" as a measure of value, which was often inflated and not a true reflection of economic value. As investors, we collectively overlooked this and used these metrics as proxies for business value instead of more tangible measures. The crypto market has faced similar criticisms, with investors attacking those who criticize crypto with personal attacks rather than logical arguments. However, the current market climate is showing signs of improvement, with more thoughtful investors and founders focusing on building real businesses. For capital allocators and founders alike, 2023 presents an exciting opportunity to build and invest in companies with real products and solid business models. The early stages are always a great time to start a company, and the macroeconomic climate should not deter founders from pursuing their passions.
Navigating Early-Stage Investing in Uncertain Times: Focus on fundamentals like gross margins, contribution, and customer references to navigate through uncertain market conditions.
The current market conditions present unique challenges for both early-stage founders and investors. For those with established companies and ample capital, it's a good time to be an early-stage investor due to the decrease in market chaos. However, for those with capital needs or companies not performing well, it's a difficult time. Companies that have raised significant funds but are not generating sufficient revenue or profits will face increased scrutiny and potential recaps, liquidation preferences, and other forms of pain. The next year is expected to be a challenging one, with many companies facing financial hurdles and potential wipeouts. Founders and investors need to focus on fundamentals, such as gross margins, contribution, and customer references, to navigate through these uncertain times.
Prioritizing Relationships in Business: Focus on experiences where the lights are on and prioritize relationships in business for success, as emphasized by the speaker and recommended by Brad Feld
Despite the demanding nature of their industry, building and maintaining meaningful relationships is essential. The speaker shares his experience of prioritizing his wife and learning from his brother's example of putting relationships first, even in the midst of intense work commitments. He emphasizes that in business, it's not just about numbers and capital allocations, but deeply personal. The speaker encourages listeners to focus on the experiences where the lights are on, and if they take one nugget of wisdom from this conversation, it would be a success. The speaker also recommends following Brad Feld for more insights and reading his blog.
