Podcast Summary
Tech industry cycles: bubbles, corrections, and opportunities for great founders: Great founders can succeed in any tech industry phase, whether it's a bubble or a correction. Belief in their idea, market, product, and team is crucial.
The tech industry experiences distinct cycles of overfunding and correction, and great founders can succeed in any phase. Mark Suster, a venture capitalist with Upfront Ventures, discussed his experiences during the dot-com bubble, the financial crisis, and the recent tech boom and bust. He noted that during the dot-com bubble, there was excessive funding and high prices, leading to a significant correction. However, even in downturns, new opportunities emerge, and great founders can build successful companies. Suster emphasized the importance of alignment, whether it's between founders and board members, board members with each other, or founders with a mission. Despite the ups and downs of the industry, the key is for founders to believe in their idea, market, product, and team, and pursue their vision relentlessly.
Starting a business in a less capital-abundant market: Easier talent acquisition, less competition for customers, and ability to charge fair prices during less capital-abundant markets. Utilize platforms like LinkedIn for hiring top talent.
The market conditions for starting a business can significantly impact a founder's experience. While it may seem counterintuitive, starting a business during a less capital-abundant market can provide opportunities to build a better business. This is due to easier talent acquisition, less competition for customers, and the ability to charge fair prices. Conversely, rushing to raise capital in a compressed timeframe can negatively impact relationships with investors and hinder the selection process. Furthermore, the current economic climate offers a unique opportunity for startups to attract top talent, making it an ideal time to find and hire all-stars. Utilizing platforms like LinkedIn can help streamline the hiring process and connect with a vast pool of potential candidates.
Leverage LinkedIn's free job posting feature for better hires: Make informed hiring decisions and consider long-term implications, using LinkedIn's free job posting feature for increased engagement and better candidates.
LinkedIn's free job posting feature is a valuable tool for businesses looking to hire better candidates faster. The podcast discussed how LinkedIn has been a great partner for years and offers a free job post, resulting in increased engagement and better candidates. However, making the wrong hiring decision can be problematic, leading to potential issues down the line. To mitigate this risk, some venture capital firms employ a "barbell strategy," investing in seed rounds and then skipping A and B rounds to focus on early growth. The venture capital landscape has seen significant changes in recent years, with a massive increase in funding for later-stage rounds. This trend has led to larger fund sizes for venture capital firms to write larger checks and keep up with rising valuations. It's crucial for businesses to make informed hiring decisions and consider the potential long-term implications. Post your job for free on LinkedIn (linkedin.com/angel) and take advantage of this valuable resource for your hiring needs.
Investing based on hype can lead to losses: Avoid blindly following market trends, research and make informed decisions to mitigate potential losses.
Blindly following the herd in investing can lead to significant losses when the public market corrects. During periods of market hype, investors pile into perceived winners, causing valuations to inflate. However, when the market corrects, these valuations can plummet, leaving investors with substantial losses. It's crucial for investors to make their own decisions based on their research and due diligence rather than blindly following others. Additionally, investors should take an active role in the investment process, getting to know the founders and making informed decisions based on their investment profiles. The example given illustrates the importance of this approach, as an investor who paid a high price for a struggling company later regretted their decision and agitated for a sale, causing potential harm to the company and other investors.
Investor misalignment impacts progress: Proper cap table alignment and stakeholder engagement are crucial for maintaining focus and ensuring everyone is working towards a company's goals.
Misalignment among investors can significantly impact a company. In the discussed scenario, early-stage investors wanted to cut costs, lengthen runway, and fix issues, while late-stage investors pushed for a sale. This disagreement led to board fights and distraction, affecting the company's progress. On a personal note, the speaker emphasized the importance of proactive healthcare, sharing his experience with a full-body MRI scan at Pre-new-vo. He encouraged everyone to take care of themselves and offered a discount to listeners. Reflecting on the entrepreneurial world, the speaker highlighted the importance of proper cap table alignment and keeping all stakeholders engaged and incentivized towards the company's goals. This alignment ensures everyone is "rowing in the right direction" and rooting for the company's success.
Importance of board alignment during startup crises: Maintaining calm composure and clear decision-making skills during crises is essential for CEOs and founders. Building strong relationships with board members helps prevent infighting and finger-pointing during adversity, ultimately leading to opportunities for growth and service.
Alignment among board members is crucial for navigating the ups and downs of a startup. Comparing it to flying, long hours of routine can be boring, but unexpected crises can cause panic. Personal relationships among board members help them work through difficulties together, preventing finger-pointing and infighting. When adversity strikes, those who have been through it before remain calm and focused, working together to find solutions and move forward. Over time, these intense moments become opportunities for true service and growth. For CEOs and founders, maintaining calm composure and clear decision-making skills during crises is essential. Building strong relationships with board members is an investment that pays off in the long run.
Staying Calm and Focused During Crisis with Supportive Leadership: Evaluate investors based on their crisis performance, seek out shock absorbers, and understand the implications of changing public market valuations.
During times of crisis, having a calm and focused mindset, as well as predictable and supportive leadership, can make all the difference for a company. The speaker, who has ADHD, shared how his chaotic brain helps him stay calm in crisis situations and emphasized the importance of evaluating potential investors based on their performance during difficult times. He encouraged founders to seek out investors and board members who can act as shock absorbers and provide valuable insights based on their experience with multiple companies. The speaker also highlighted the current shift in public markets and the importance of understanding the implications of changing valuations for startups.
Valuation fluctuations and founder challenges: Founders face challenges in securing desired valuations due to fluctuating valuations between funding rounds, influenced by anchoring and market conditions. Focusing on extending runway and aligning interests with investors can help.
In the world of venture capital, the valuation of a company can fluctuate significantly between funding rounds. The speaker mentions an example where the 20-year average valuation was 6.3 times NTM (Net Present Value), but the 10-year average was 17.5 times NTM. This discrepancy can create challenges for founders looking to raise funds at a desirable valuation. Late-stage investors may only pay 15 times NTM if a company is growing rapidly, but founders need to ensure they have enough time and resources to reach that growth level to avoid a down round. The concept of anchoring in behavioral psychology plays a role in decision-making, as previous valuations can influence future expectations. In conversations with founders, the speaker emphasizes the importance of aligning interests between investors and founders, and encourages founders to focus on extending their runway by cutting costs and growing revenue to increase their chances of securing favorable funding. The speaker also shares their firm's decision framework, which emphasizes the importance of having a long-term perspective and being adaptable to market conditions.
Focusing on one investment thesis per partner and funding earlier for competitive edge: VC firms can maintain ownership and compete effectively by focusing on one investment thesis per partner, funding companies earlier, and utilizing tools like OrgSpace to plan and adjust.
Successful venture capital firms must make strategic decisions to maintain ownership and compete effectively in the market. One such decision made by this particular firm was to focus on one investment thesis per partner and fund companies earlier and faster. By doing so, they could maintain their desired ownership percentage and secure deals before larger competitors with more resources did. Additionally, the use of tools like OrgSpace, a people software for software, allows startups to effectively plan and adjust to different scenarios, giving them a competitive edge. Reflecting on past investments, it's important for firms to evaluate their decision-making processes and learn from their successes and mistakes. Age can also play a role, as experience and perspective can provide valuable insights.
Identifying emerging trends and backing the right team: Success in venture capital requires identifying trends before they're mainstream, having the correct timing, and backing diverse teams with a deep understanding of the product and team.
Being successful in venture capital requires identifying emerging trends before they become mainstream, having the correct timing for investment, and backing the right team. The speaker emphasizes the importance of having a young and diverse team to tap into different networks and circles. During the crypto craze, the speaker made a conscious decision not to invest in the trend because they didn't fully understand it and believed they missed the timing. Instead, they focused on trends in computational biology and healthcare, which they had identified earlier and were now seeing significant progress in. It's essential to be persistent and patient in identifying the right trends and timing, as missing the mark even by a few years can result in missed opportunities. Additionally, it's crucial to understand the product and the team behind it before investing.
The power law in venture capital: Focus on creating exceptional products and teams as one successful outcome can significantly impact a venture capitalist's overall performance.
Venture capital involves taking calculated risks on trends, timing, and teams. The power law in venture capital means that a few successful investments can make up for the majority of losses. In the speaker's experience, they backed teams with great potential but didn't end up backing the ultimate winner, such as with TextPlus and WhatsApp. Founders should understand this power law and focus on creating exceptional products and teams, as one successful outcome can significantly impact the venture capitalist's overall performance. For instance, investing $3 million in a company that turns around and gets acquired for $9 million results in a loss for the venture capitalist since the expected return is much higher. Therefore, every investment opportunity represents a valuable shot on goal.
VCs prefer mission-driven founders: VCs seek founders with a mission, leading to potential outlier returns, but potential misalignment during early exits is addressed through 'feed the family money' concept.
Venture capitalists like to back entrepreneurs driven by a mission rather than just the prospect of a quick exit or financial gain. This approach, often referred to as the missionary versus mercenary approach, can lead to outlier returns for the fund. However, there's a potential misalignment between the founder's and VC's interests when an early exit occurs. Historically, founders couldn't sell their secondary shares until the entire company was sold, but this practice put pressure on founders and could lead to disappointing outcomes for VCs. The concept of "feed the family money" was introduced to address this issue, allowing founders to access some funds for personal needs while keeping the majority focused on the company's growth. The VC who shared this discussion was an early advocate for this shift in industry thinking.
Transparency and fairness in secondary sales: Founders should offer secondaries to all employees for structured and orderly secondary sales processes, avoiding toxicity and misalignment within the company.
Alignment is crucial for the success of a company, especially during periods of growth and potential secondary sales. However, the process of secondary sales and valuation can be complex and contentious, with investors carefully considering the potential risks and rewards. The speaker emphasizes the importance of transparency and fairness in these transactions, suggesting that founders should consider offering secondaries to all employees, not just select individuals. The speaker also warns against the potential negative consequences of secretive or unfair secondary sales, which can lead to toxicity and misalignment within the company. Ultimately, the goal should be to create a structured and orderly process for secondary sales that benefits all stakeholders. Examples of successful and unsuccessful secondary sales were not provided in the discussion.
VC-Founder Relationship: Balancing Self-Interest and Company Success: In a bull market, some founders may prioritize personal gain over staff, while some VCs may engage in self-dealing. Current trends favor investor-friendly terms, so founders should build runway for negotiation flexibility. Both parties must prioritize long-term company success.
The relationship between venture capitalists (VCs) and founders is not inherently good or bad, but rather a reflection of the human nature present in both groups. In a bull market, some founders may prioritize increasing their personal share of the company at the expense of their staff. This behavior is not exclusive to founders, as some VCs may engage in self-dealing and unfavorable terms for founders. The current market trend is shifting towards investor-friendly terms, with participating preferred, dividends, and payment in kind becoming more common. Founders are advised to build as much runway as possible to maintain flexibility in negotiations. Overall, it's crucial for founders to be thoughtful and considerate in their dealings with VCs, and for both parties to prioritize the long-term success of the company. Mark Suster's insights from his experience as a VC provide valuable perspectives for founders seeking investment.
Testing Founders: VCs evaluate resilience and relationship-building skills: VCs assess founders' resilience, follow-up skills, and ability to build relationships during the intro and hiring process to determine their potential for success.
Building relationships and demonstrating resilience are crucial in securing investment from venture capitalists (VCs). The process of getting an intro from someone they know is not only a test for accessing VCs but also a skill required for various aspects of business growth. VCs receive numerous inquiries and assessing which ones to prioritize relies on the ability to identify promising founders. The first test for VCs is a founder's ability to get an intro and hire a co-founder. This shows their capacity to recruit and make decisions efficiently. The second test is the cadence of recruiting and shipping product. Consistent progress in hiring and product development indicates a strong team and a focused business. VCs evaluate founders based on their performance patterns over time. They look for resilience, follow-up, and adaptability. A founder's ability to bounce back from setbacks and maintain a positive attitude is essential. The same is true for VCs, as their actions during the courting phase can give insight into their reliability and commitment to the partnership.
The importance of a capable founding team and quick product velocity: Having a team of innovative, productive founders is crucial for a startup's success. Quick product development sets a company apart from competitors and keeps customers engaged.
Having a team of capable founders who can produce a product and maintain a high product velocity is crucial for a startup's success. Hiring velocities are also important, but often overlooked. It's essential to have people who can bring innovative ideas to the table and turn them into a reality. The ability to produce a great product quickly sets a company apart from its competitors and keeps customers engaged. Remember, no one wants to wait around for a slow-moving team. Keep pushing forward and stay focused on your product and hiring goals. Good job, Mark! We'll catch up again next time. Bye for now.
