A Different Approach To VC

I wrote this to my partner the other day. I’m not going to provide the context. It doesn’t matter. It could have been about almost anything in the startup sector right now.

“the biggest thing that is wrong with the startup sector right now is entrepreneurs and their teams are too focused on valuation and not enough focused on business fundamentals”

There are a bunch of reasons why we’ve ended up in this place and my friend Bryce talked about some of them in his talk at XOXO. He posted the transcript of his talk this week. It’s a good read.

But in case you aren’t going to click through and read it, here are a few choice quotes from it:

  • I think there’s something that comes with being an outsider in an insider’s game.
  • Once you start taking other people’s money, it becomes very difficult to stop taking other people’s money.
  • they are building for investors and not necessarily building for customers
  • So we can’t talk about venture capital without talking about Unicorns, right?
  • 99.93 percent of companies are using a product, venture capital, that really doesn’t work for them.
  • you have entrepreneurs building companies, building customer bases, designing interactions with their users in order to make themselves appealing to venture capital
  • Turns out when you invest in things that VCs won’t, you end up with a bunch of companies that VCs don’t want to invest in.
  • what if we surrounded our founders with other people who weren’t focused on fundraising and valuation, but focused on revenue and customers?
  • Rather than make people move, we decided to let people bloom where they are planted.
  • The reality is we tried and weren’t able to pull it off.
  • Just last week, our largest investor passed.

Bryce is not having an easy time raising a dedicated Indie.vc fund. Neither did Brad and I when we raised the first USV fund in 2004. We got 20 passes for every yes.

I’m a contrarian and that tells me that Bryce is on to something. As you might imagine, the Gotham Gal and I said yes when Bryce asked us.

#VC & Technology

Comments (Archived):

  1. JimHirshfield

    But there’s also the effect just before an A round where you start to get revenue coming in. And you wonder “should we raise that A round? Or can we grow the company from the revenue?” When you make that assessment, you know you’re going to be tied to a much much higher target exit price if you take the outside funding. I suppose that can be where things get misaligned and valuation chasing trumps building the best product for your clients.

  2. jason wright

    capital is grossly overvalued.

    1. JimHirshfield

      Yogi Berra said that, right?

      1. jason wright

        he may have, but i just thought it. great minds think alike?i’m not claiming copyright 🙂

      2. Girish Mehta

        “I never said most of the things I said” – Yogi Berra

        1. Vasudev Ram

          Include me out.

    2. fredwilson

      Well maybe. But one could argue at the valuations that are being paid the days capital is trash

      1. William Mougayar

        “at this valuation, capital is trash”….oh i love that quote.

        1. Richard

          Valuation means keeping your eyes on the game for 162 games. Congrats on the jays!

          1. William Mougayar

            Exactly. I remember 1993 when it last happened!

        2. Matt A. Myers

          I wonder if we can state the opposite, where instead of saying the capital is overvalued – say something along the lines of “the company is trash” or perhaps even just “we don’t value the entrepreneur (enough to be fair to them).”

          1. William Mougayar

            Not really . A fair valuation is fair for everybody.

          2. Matt A. Myers

            Not really? it depends on how you come to a fair valuation, no? If a VC decides ideas are worthless, then that’s a pretty shitty starting point for the entrepreneur, perhaps unfair, no?

          3. William Mougayar

            We’re talking about valuations, not VCs passing on a round which btw doesn’t mean they think your idea is worthless

      2. JimHirshfield

        “Take out the valuation and the trash……Or you don’t get no seed stage cash…Yackity yack, don’t talk back”

      3. Matt A. Myers

        Both exist — taking advantage of those who VCs can with overvaluing capital, and then entrepreneurs perhaps taking advantage of VCs to raise huge rounds to scale certain metrics quickly, perhaps with metrics that fit however not allowing time to see how markets; Uber, Lyft, and Hailo all come to mind when thinking of variations of approaches.Why not come to a middle ground? http://avc.com/2015/10/a-di

  3. Jordan Thaeler

    Sometimes you need capital to corner a market, as bottom-up organic growth is too slow

    1. JimHirshfield

      Is that a reference to trickle up economics?

      1. Jordan Thaeler

        I’m not that clever

  4. Stephen Voris

    In theory, this is what banks were for (in my understanding, anyway). In practice, it’s nice to see there’s an alternative. Not everyone wants their money to be invested merely in getting more money, after all.

  5. William Mougayar

    In Carlota Perez parlance, have we overshot into excess and exuberance?Let’s be specific: isn’t this happening more in Silicon Valley than elsewhere?And who is to partially to blame for engraining these thoughts, funding and priming the entrepreneurs’ pump?Same kind of startups I see in SV asking twice the valuations of outside of SV, on average.I’m a relative outsider too, getting late into the VC game (but w a ton of operational experience), and I’m seeing and hearing crazy valuations and attitudes.When you ask an entrepreneur – where are you going & where do you see yourself a year from now, and the first thing you hear is “I want to get a big Series A or B”, or “we’re looking at a valuation of xtz$”, run.

    1. awaldstein

      This is a top down cycle in an infrastructure defined by the investors themselves not the entrepreneurs.Not clear what your point of view is on this?

      1. William Mougayar

        My POV if it was too subtle is:- this behavior is perpetuated by some VCs themselves- monkey see, monkey do. – Silicon Valley’s culture is to blame for this. Other ecosystems are more level-headed on the whole.

        1. awaldstein

          Agree on the first.Who cares if SV is to blame honestly?Once you get out of the insulated world of tech VCs there is no pervasive culture that I see talking to a lot of family funds.

          1. William Mougayar

            Agreed that outside of tech, VC money is harder to get and VCs are more hard-nosed about their investment, but the SV culture spills over the rest to the ecosystem, and that’s a fact we can’t ignore.

          2. awaldstein

            I care about this from the investor pov and its a cycle that they are trapped in.Change has to happen on the funding side and maybe what Bryce is doing will spur that.

        2. JamesHRH

          Its endemic to any financial market.Returns matter the most.

    2. LE

      And who is to partially to blame for engraining these thoughts, funding and priming the entrepreneurs’ pump?Blame goes to the press, the media and to bloggers. No question about that.Let’s say someone who runs the new startup that everybody talking about, say for example, “Slack”, is sitting next to someone on an airplane who doesn’t know what Slack is. The head of Slack can’t talk about anything but the product. Can’t mention the valuation, the investors and so on. There name is meaningless outside the valley and tech. How much excitement would they be able to get for that product and what they are doing? Not much. Otoh if they were building an airplane or a big building most likely the average person would find that impressive on it’s face.The press, media, bloggers create all of this artificial importance and hype it’s that simple.

      1. William Mougayar

        Well, I think some of the VCs funding these high valuations are also part of the blame, encouraging that thinking indirectly.

  6. John Pepper

    As part of a panel discussion at FSTEC in DC On Tuesday i said something to the audience of mostly restaurant IT leaders that I had not planned to. I shared that we all need to be wary of the many technology companies who try to penetrate our businesses (literally on an hourly basis) who don’t have our needs or our customers needs in mind but instead their own needs to raise the next round. The proposed pricing structures of many of these startups don’t necessarily reflect thoughtful value creation to the end user or to the company/client but instead primarily a way to prove to future investors that they deserve more capital. Certainly not everyone, but enough to keep a cautious eye when signing yet another “it’s only $100/month/location” or “$25/month/user” contract. Restaurants and other businesses that pay for these services only have so many they can choose from before the economics break, and fast.

    1. jason wright

      trojan horse stampede

    2. Anne Libby

      Companies I work with ask about service offerings relating to managing people — benefits/payroll, recruiting, performance management.My feeling is that there’s lots of sensitive information being gathered and stored there.I rarely recommend or ding a particular service. I always point out that the unsexy firms that the upstarts want to “disrupt” have a known track record for managing the risk of holding sensitive information…

      1. LE

        Agree. And turns the saying “nobody ever got fired for choosing IBM” on it’s head. Watson must be rolling in his grave. (Once cliche deserves another..)As far as “disrupt” it’s quite possible to do many things if you are willing to cut corners and/or not care going forward what happens to your users when you have to make the hard choices of stopping a particular service or offering or letting go people who keep that product or service working. I actually think this is more of a tech thing than a startup thing. Tech is notorious for taking advantage of their base of clueless users it’s baked into the mindset. This started with the IBM PC clones where products were shoved into the channel without regards to how well they actually worked. Imagine how much Windows sucked when it came out. Unusable for all but the hardiest. Otoh, an auto company, for example, would never discontinue a car line without having some discussion of end of life and a way for customers to continue to get their cars serviced. Not forever but certainly for a reasonable amount of time. Nor would a typical company making toasters or refrigerators.

        1. Anne Libby

          Lol, IBM. And, yes. There’s also an idea of “we want to give the business to another startup.” That’s a great value to have.You just want to be able to think through the risks. And to remember when “you don’t know what you don’t know” could bite you in the backside. To your point, if a vendor is “disrupting” by storing sensitive information in a google spreadsheet…

  7. Val Tsanev

    I have been saying that point for months now, this obsession with investors, VCs and unicorns needs to end ASAP and founders should shift their focus on customers, revenues and PROFIT.

  8. LIAD

    Imagine a world where the only things disclosed to investors during fundraising and released in funding announcements is SOM and NPS score.Would shake shit right up.

  9. William Mougayar

    Some entrepreneurs who are flush with VC cash start to focus on getting big, fancy or cool offices with furniture, perks and benefits, before they even get to Product/Market fit; and those kinds of niceties make them forget about being scrappy and lean. Then they think another VC will throw them a lifeline, because they can. Or they take a debt loan, because they can. Then bad stuff starts to happen.

  10. creative group

    The valuations appear to be based upon the pie in the sky. Investors are greedy. They don’t want to be the one left out of the next big thing. When a well established VC with a track record of successful funding returns big gains it becomes difficult for other VC’s not to take a look at the pitch. The evaluation of a company that sells the pie in the sky without revenues, operational product, etc.wouldn’t get off the ground with a traditional bank.The basic criteria for securing a bank loan isn’t as important to investors. The question becomes why not? That is why the masses view this sector as King makers. The massive investments by VC’s choose who is successful or fails. Would enjoy viewing the failures to understand what was pitched to secure millions on the pie in the sky ideas. Our space of commercial investing could have used those funds more productively then the pie in the sky pitches that failed.

  11. bsoist

    My favorite line from the talk…Because, apparently, you can solve all of your problems with money.Thinking like that is the root of the problem, in my opinion.

    1. JamesHRH

      Absolutely a core tenet of any financial market.

  12. Aviah Laor

    But how can one beat the economy of scale? It keeps winning. High valuations are just the increased bets on the same old economy of scale. The economy of scale comes in two tides: the first tide brings prosperity, the second tide sucks the money into a thin layer, with despair and unemployment for the rest. The tech sector and the Internet are entering, fast, into this second phase. It’s the industrial revolution all over again, with smarter machines. Unfortunately, it’s almost impossible to beat the economy of scale. Maybe Kickstarter, or OpenBazzar (still a mystery how they got VC money).

  13. Simone

    No need to lavish the wrong entrepreneurs with cash in US.Australia, Europe etc. are starving for money and mentors.Plus, not all VCs are after long term goals. Most ride the trend and make easy money. People will be people – VCs and entrepreneurs.

  14. phoneranger

    99.93 percent against!! Sounds like a short.

  15. Matthew Moisan

    I believe this is a very important conversation. The goal of many entrepreneurs seems to be obtaining VC funding, rather than building a sustainable business. But, to be frank, that cycle is driven by the VC community.

    1. leapy

      Lots of seed (and friends & family) investors see VC funding as external validation.

      1. Matthew Moisan

        Agreed; and in my opinion, this is flawed logic.

        1. Mike Bestvina

          What’s great about markets is that some people will eventually lose.

    2. Anne Libby

      In a way. But most businesses are built without VC. I think we forget that here. (sometimes.)

      1. Matthew Moisan

        I agree completely, but that doesn’t change the fact that there is a vortex of thought around VC investment, even for the companies that don’t need or want this backing.

      2. Cam MacRae

        We also forget that businesses that don’t need VC money take VC for the intangibles cf. Atlassian

        1. Matthew Moisan

          A mantra I often hear, if there is money on the table – take it, because when you need it, you will not be able to obtain it.

          1. Cam MacRae

            Indeed, but that is quite a different matter.It would be interesting to know exactly how much Mike and Scott have been helped along the path to their listing, say by being connected with the right investment bankers, etc., because they took a pile of money they didn’t need in return for a little sine qua non…I suspect the amount to be non-trivial. I may be quite wrong; it wouldn’t be the first time.

        2. bryc3

          That’s a big piece of what we wanted to test in messaging and execution- VC intangibles w/o much of the VC emotional and operational overhead.

          1. Cam MacRae

            I wish you every success, mate.

    3. LaVonne Reimer

      It also seems to apply to some of the tech companies that like to acquire startups. No VC? Your tech must not be very interesting. Bye.

      1. Matthew Moisan

        Equally true – and somewhat relationship based. Oh, you know Mr. [blank] VC, you must be good.

  16. Raman Sud

    I think you said it “dead right”, and without thinking deeply about it, I believe this has to do with the entire ecosystem – entrepreneurs, and the venture capitalists. The focus has shifted over the years from having an environment where the majority of the entrepreneurs could interact with the venture community, share and make partners in bringing innovative and “risky” ideas to fruition; to an age of show me your adoption and here’s how rich a valuation you’ll get (present company excluded, I’m going to assume).

  17. Mariah Lichtenstern

    In addition to your notes, these points stood out to me. Thanks for sharing.* “At least, that was the belief but there wasn’t a lot of data to support it.” Ironic how that is so often the case…isn’t it?* “The fascinating thing as I stepped back was how, rather than try to create new ways or approaches to potentially double or triple the number of these types of companies a year we’ve ended up creating and entrepreneurial industrial complex bent on finding the four.” An innovative approach to improving the innovation ecosystem does make sense…* “We’ve create archetypes for entrepreneurs and narratives about ambition for what these Unicorns are supposed to look like. And, if you don’t fit the profile you don’t get venture capital because you have no chance of delivering that kind of return.” Which goes back to the data irony…

    1. Joe Cardillo

      Really nicely said – and I think evidenced in part by the uptick of posts on Medium from VCs and entrepreneurs justifying foolish behavior. I’m a big fan of learning, but there are a lot of “What [A/B testing or other basic tactic] taught me about how to run a company, make bets, spend someone else’s money, etc.” out there. The bubble isn’t a money bubble, or a bubble of startups, it’s a bubble of perceptions and belief.

      1. Douglas Crets

        This is accurate.

  18. pointsnfigures

    The entrepreneur that tells me how much money I am going to make compared to the entrepreneur that sketches out a vision of why they will do what they want to do. If they can execute, money is a byproduct of that vision.

    1. Cam MacRae

      In other words you invest in the people, right?

      1. pointsnfigures

        At seed, you always invest in people first.

    2. LE

      Like a guy trying to get in a girls pants, I guess the difficulty is knowing the ones that are intelligent enough to know the right things to say vs. the ones that are genuine.That said from my personal perspective it’s never a turnoff if someone is motivated by money. A motivation is a motivation. Being motivated by money is a legitimate motivation no better or worse than any other motivation.When I do some things for example I am motivated solely or mostly by money. Other things that I do I am motivated by doing a good job and the right thing and producing quality. However the fact that money matters to me doesn’t mean that I can’t do something where there are many reasons why I act a certain way.

  19. Gregg Freishtat

    Think both entrepreneurs and VC’s share the blame for this shift from passion about building companies to passion about exit values and valuations. I can’t tell you how many VC’s have looked me in the eye and said – “I am not sure how this one deal can return our fund” — Not sure that is any healthier than entrepreneurs wasting time to produce metrics solely for VC’s as opposed to doing whats best to build a great business. The venture business has changed and with it so have entrepreneurs. When VC’s were looking for 3-5 times return in 3-5 years — it was a lot easier as an entrepreneur not to focus so much attention on valuation and be consumed with building the best company and providing great products to happy customers…..

  20. Salt Shaker

    The fact Bryce’s way of thinking has become antithetical is pretty outrageous.Adam: “Fundamentals matter”Eve: “No shit”#lunacy

  21. guest

    A major problem of the industry is that VC portfolios are valued by follow-on financings. And of course these paper returns are what VCs use to demonstrate their value and/or raise their next fund with LPs. That is a major contributing factor to the dynamic of entrepreneurs chasing valuations – they’re being encouraged to by their VC/investing partners – whether explicitly or implicitly.

    1. bryc3

      Yes, this is a huge and under appreciated dimension to the Entrepreneurial Industrial Complex I touched on in the talk. The VC/LP dynamics play a significant and defining role in the game as its being played today.

  22. JLM

    .I can tell you exactly where a huge part of the problem is coming from: a total and complete abandonment of business planning fundamentals both from the perspective of the entrepreneur and the venture capitalist (board of directors).The planning disciplines are grounded in building a company not in the development of a product. They are different things.I have been at the CEO advisory/coaching business for about three years and I see it constantly.No Vision, Mission, Strategy, Tactics, Objectives, Values, Culture, business engine canvas, business process graphic, dollar weighted org chart, pitch deck, elevator/taxi/boardroom pitches — MISSING IN ACTION.THE good news is that as soon as the work gets done, I see a powerful alignment of the team emerge and the power of alignment is everything. Huge.There is nothing as fundamental as fundamentals. It is not hard to do. It does not do it by itself. It takes some work.VCs and boards of directors should be insisting on this level of planning. They are not.Ready, aim, fire — not fire, ooops!JLMwww.themusingsofthebigredca…

    1. Cam MacRae

      “Ready, aim, spaghetti” as our CSM used to say before administering 1000 push ups per unauthorized discharge.

    2. Richard

      On the other hand….without getting too technical, the standard deviation of 19.28 for small caps stocks shows that during that 10-year period, their returns fluctuated as much as 19.28 percentage points in either direction from their average return 68 percent of the time, but they could have deviated by as much as 38.56 percent.Isn’t it reasonable that s startup should have a valuation volatility 10x-100x of that of a publically trades small cap.

      1. JLM

        .Would it be rude to ask for a list of your meds?JLMwww.themusingsofthebigredca…

        1. Richard

          Astragalus.My point is that some time it guts and intuition that motivates the launch of a filet of fish sandwich at Hambuger stand.Bigger point is most startups are just way out of the money call option. But anyone who doesn’t see that things (new economy) are different this time isn’t paying attention.

          1. JLM

            .There is no substitute for planning. This is the most basic consideration in business. There is no substitute for planning,JLMwww.themusingsofthebigredca…

          2. Richard

            How do you plan the first 5 years of Twitter?You can say that Mark Zuckerberg planned to start fB at Harvard, but the reality is that it was the other way around he was at Harvard and started Facebook.If he was at palm beach community college, my bet is that he would have made it work from there.

          3. Jess Bachman

            Maybe Twitter would be in a better position now if it had better planning.Some things will succeed inspite of their lack of planning and vision. That doesn’t mean they couldn’t have been 10x better with planning.

          4. LE

            If he was at palm beach community college, my bet is that he would have made it work from there. Nope don’t agree. Anything is possible but not likely.Having a degree from a top college like Harvard opens doors and creates a halo. Having the cache of Harvard absolutely positively helped get adoption of that product in other schools and helped Zuck land funding, employees and press coverage.Branding matters. Harvard and being associated with it does make a difference. Don’t kid yourself.

          5. Richard

            I agree, and for 99% of startups you are right, but I have a hunch he is the 1% and smarter (within this space) than most people give him credit for. How! The right family, the right education, the right confidence, the right humity.

          6. Joe Cardillo

            I agree. Also worth noting, as sigmaalgebra partially points out, FB may be a model for the mid-stages of a startup, but Zuckberg was lucky early, not necessarily skilled, a la http://www.businessinsider….

          7. sigmaalgebra

            Zuck was highly interested in computers although he didn’t really know why he should have been. Like a silly young man, he played with his “hot or not” Web site.Then he was really lucky: Computing and the computer users were really ready for just that just there just then. Then so were lots of colleges. Then with some tweaks, so were lots of young people. Then all over the world. Then for lots of people for lots of reasons, including for business.Zuck didn’t plan in any meaningful sense even 1% of the current market cap of Facebook (FB). What’s the word I’m looking for? Oh, yes, here it is: luck. Gee, it rhymes!So, here’s the Silicon Valley (SV), Sand Hill Road, VC/LP, popular extrapolation of that: Look for the next big thing in social, local, mobile, location, sharing, big server farm, cloud, membership apps. See traction significant and growing rapidly but where the founders are short on cash and can be talked into signing a business deal really good for the VC/LPs.Okay.Nearly as promising an extrapolation: Look for rhymes.Problem: There are lots of important problems to be solved, but the FB approach is good for only a tiny fraction of such problems. So, we have, right, SnapChat, Instagram, and some flops and not much more. Why? Me-too is so easy to do. “No real work about it.” Can talk LPs into liking it, at least for a while.Then there’s lots of investment capital left over with no good place to go, so too much of it goes for, whatever the heck.Solution: Take on some significant problems. Sure, easy to think of such problems and, then, to fumble solving them. Try not to do that. Instead, for some of the significant problems, can make them relatively easy and routine with some good, new research results, and that approach has been the best path for innovation for ballpark 100 years.Problem for SV: They don’t know how to evaluate the research or the projects. Problem for the entrepreneurs: They could use some funding before the traction ‘stage’.Muck. SV, that rhymes. Try that! Then think of some more — NSFW? SV, you’ve tried lots worse than that — go for it! Ah, just because it was tried once and got hacked, just try again! Just tell your LPs that there’s no way it can’t work; after all, it’s “the oldest profession”! SV, I’m just trying to help in some ways you have a chance of understanding!

          8. LE

            Yes. But here’s the thing. You can’t plan in a world where you are figuring it out as you go along. Especially when you are newly hatched and don’t even know what you don’t know. You can do planning theater of course. You can talk a good game I guess.Related: This is actually part of Trumps message when he tells people that it’s impossible to describe how he will do what he will do. And he is right because many of the things people might want to know such as “what will you do if Putin does this or Assad does that” can’t be planned or described in advance. This is not getting a dental education and becoming a periodontist where it’s all layed out.To many unknowns, to many potential forks. It all depends. Otoh of course Trump had a plan when he built Trump Tower or that golf course in Scotland. Or the casino. (Then his top exec got killed in a heli crash and that killed his plan..) But those were solid things based on more knowns than unknowns.So although I agree 100% with “there is no substitute for planning” in the case of some of these startups I question the value given who is doing the startups and what they know and what they are trying to do. (Charlie Sheen had more experience with Airlines in the first “Wall Street”).Random clip from Wall Street, couldn’t find the one I wanted (where he talks about marketing and Blue Star airlines …)…https://www.youtube.com/wat

    3. LE

      The planning disciplines are grounded in building a company not in the development of a product. They are different things.The yiddish word to describe is “shpilkes”https://en.wiktionary.org/w…From Yiddish שפּילקעס ‎(shpilkes, “needles”)Noun: shpilkes pl ‎(plural only)A state of impatience or agitation.

    4. Ryan Frew

      To quote an AVC frequent visitor: I agree with you more than you agree with yourself. I at least agree about the line in which you say, “a total and complete abandonment of business planning fundamentals”. Then you go on to discuss other things, though, that VCs LOVE and that good startups typically have, like culture. I don’t think there’s much shortage of that – there’s just a shortage of sound business models. How many bubbles do we have to endure before everyone wakes up and realizes that there is no replacement for positive cash flow?

    5. LE

      The planning disciplines are grounded in building a company not in the development of a product. They are different things.Words to describe are “penis envy”. Or “keeping up with the jones”. And “jealousy”.Quite difficult and impossible to exist in an environment with competition on various levels (customers, employees, vendors) and be more honest than the competition and keep your head screwed on straight. Quite difficult doesn’t mean impossible of course.. Combine that with a generally younger group of people and the outcome is as expected. It’s a powerful pull. This is what they are immersed in, this is what they read about. I was helping some people as I described the other day with stunning academic credentials. And they are doing their version of “the shitty photo sharing startup” (it’s not photo sharing but in no way takes advantage of their stunning academic credentials that I would die for..) All going for the brass ring. Some will succeed. Hopefully the shoe shine boy will make out as well.Look, you built that tall building and were proud of that tall building. You had something to show for your hard work. Much of that existed in your own mind. Most likely very little of the rest of the world cared about that building. But it floated your boat. (And I am talking as someone who thinks the same as you are and likes things like that tall building, finely made as you have described. I am sure the mechanical systems room was kick ass as well as the facade, all freshly painted with a nice clean painted floor..)My point is simply that the value system that they are immersed in, and what they read about, creates rewards based on things that can be measured. Fund raising is a thing that can be talked about so it becomes important. It’s digital. Analog things are not as easily talked about and don’t create great headlines. You can’t easily measure quality [1] and value if they don’t immediately contribute to the bottom line in a way that people can write about these things.[1] “JLM builds tallest building in Austin” gets coverage but “JLM builds finely crafted building in Austin” does not.

      1. Vasudev Ram

        Insightful comment.

    6. awaldstein

      I don’t agree that lack of understanding is endemic or that this is the biggest problem.But I do agree that without an understanding of the fundamentals you are a bad risk.Important to clarify that understanding and managing by business fundamentals in early stage companies especially is not the same as following a plan. It is a criteria for making prudent decisions.

    7. Jim Ritchie

      I’ve been in Silicon Valley since 1988, so through 3 cycles. What is very different today is:1) The sheer amounts of money being raised. I have no idea how most of these companies can actually deploy this capital to achieve any IRR. Food “tech” companies raising $10s to $100s of millions of dollars? All of them will be out of business in 5 years. The list goes on and on.I was early on at a software company called Wind River, joined at $5M revenue, we grew that to $400M+, 1,500 employees, 10s of thousand of customers, IPO and $5B+ valuation at its peak…total VC money raised $3M.2) The overall lack of experience of the founders and hence why there is no real business planning. JLM nailes this. In the past you had a very few outliers that started companies right out of undergrad or in their early 20s. Yes we had Gates and Jobs, but Woz had experience, and Zuck, but there are just a couple of these 4 sigma outliers a generation.Most successful companies in the Valley have been started by people with at least 5-15 years experience and/or advanced business or technology degrees. I’m talking about real technology companies like Cisco, Adobe, Applied Materials, Intel, etc. Even the Google guys were mid-late 20s and they had to bring in an experienced guy to run the business for years.0% interest rates are primary reason for all this dumb capital washing around late stage VC. I’m already hearing from many sources, including a buddy of mine that is a software analyst in a $5B hedge fund and has been around as well, that money is drying up in these late stage crazy high valuation deals. He thinks 3-6 more months and that door will be effectively closed.

      1. LE

        It is often easier to make a gamble “chance to win big” on something that is unknown than it is to gamble on something that is known. As such, someone who is older and hasn’t hit it big is disadvantaged over someone who is younger and right out of college, even given the same exact college. In a way follows the same rules as real estate. A listing gets stale while something new (which hasn’t proven to be a negative yet by being on the market to long) has a big advantage over the classic listing. We can call it the positive the result of the “lack of negative halo”.The cliche perhaps applies “better to be thought a fool, than to open your mouth and remove all doubt..”.

    8. Vasudev Ram

      >Ready, aim, fire — not fire, ooops!Reminds me of:Visual Basic programmer’s motto: Ready? FIre! Aim …Also worked on it some earlier, so know there is some truth to it, though the saying is exaggerated for effect. Also, that kind of misfire – heh – can happen in any language – it’s more because of the programmer than because of the language, though some languages make it easier / harder to shoot yourself in the foot. [1].)[1] For programming language aficionados:Shooting yourself in the foot in various programming languages:http://www.toodarkpark.org/

      1. Vasudev Ram

        >Shooting yourself in the foot in various programming languages:I particularly like the ones for Concurrent Euclid, Haskell., Motif, MS-DOS, Perl. Some others are good too.

    9. Taylor Brooks

      Entrepreneurs can (and should) go through the planning rigor you suggest.But as long as media and the culture celebrates fundraising in favor of building a business towards profits, not much will change.

      1. Vasudev Ram

        Right, the media and the culture are a big reason for it.Incidentally this same issue exists in the Indian startup scene too, to a good (bad?) extent. (Possibly even more so than in Silicon Valley – because, the field being newer here, there is very little of constructive criticism. Also yes-man and fanboy mentality.) Founder teams start thumping themselves on the chest (I mean publicizing and self-glorifying) just because they raised a round of funds (often with no prototype or anything tangible yet.) Though possibly of late the trend might diminish a bit due to more awareness of the issue – which is good if so.

    10. Donna Brewington White

      Trying to do all the planning while still getting the product/service right seems overwhelming since product/service = revenue = making payroll/keeping the lights on — at least for those of us who are bootstrapping. Yet, I remember what you told me. “Take an hour for planning on a regular basis. Be disciplined. Be consistent.” (paraphrased) Eating the elephant one bite at a time.

  23. sigmaalgebra

    The biggest thing that is wrong with the information technology startup sector right now and for a long time is that venture partners and their teams are too focused on simplistic, superficial considerations and determined to ignore, and certainly not to be focused on, fundamentals of innovation and project and business success.So, on average the venture funded projects are poor, and, as below, so on average is the ROI.Here I concentrate on the role of innovation.Even when there has been good progress on innovation, e.g., a peer-reviewed paper of original research with the crucial, core, powerful, valuable innovation for by far the best solution to a major problem, the venture partners will just ignore the paper and everything about it. Then they will also ignore fast, proprietary algorithms for doing the calculations.So, entrepreneurs, with only meager funding, have to give far too little attention to the work of serious innovation and have to be limited to some fast, intuitive idea, e.g., social, local, mobile, sharing, membership apps, with only the technology from routine software skills at the level of high school self-teaching, trade school, or junior college. Everything else in a research library is to be ignored or regarded with contempt.Indeed, there are strong voices in the venture capital community that ridicule formal education, including college, and more so for Master’s and Ph.D.Solid, done research results are a negative. Research is not to be funded. Development is not to be funded. Effective project planning is regarded as irrelevant or impossible and is ridiculed and ignored.Thankfully for progress in medicine and for US national security, the US NIH, NSF, and DARPA take research very, very seriously and successfully. So does Intel. HP is still trying to. So did Bell Labs — transistors, solid state lasers, i.e., two of the absolutely crucial, central pillars of current computing.Where there is serious innovation, in business, especially for US national security or medicine, what happens in the thinking of information technology venture capital is, in comparison, naughty children playing with matches.One result: On average, ROI is low, e.g.,http://www.kauffman.org/newhttp://www.avc.com/a_vc/201…E.g., recently a CEO complained that Yale didn’t have even one course on Android software development. Right: Such software development is supposed to be routine. Or, if Google wants people to write code for Android, then Google should document how to write such software. It’s their product; if they want people to use it, then they should document how to use it. E.g., no doubt the MIT mechanical engineering department has no courses on how to repair the Eaton supercharger on a recent high-end Corvette. But no doubt Corvette has some maintenance manuals and training, at least for the shops of Chevrolet dealers. Documenting Google’s products is not the job of Yale.For Yale, it is a research university, not an arm of Google or a trade school, and it’s getting its students into leading edge research so that they can have careers creating and using such research. After the research comes innovation. Then, …, is the time for routine software development.The CEO, instead, was jumping from just some intuitive business idea all the way to product software development and, then, wanted Yale and its students to pay for the needed technical training. Nope.So, not only did the CEO struggle with training for Android development, much worse, he ignored nearly everything important about innovation. Not a promising CEO.E.g., now athttp://www.princeton.edu/We…are several lectures on nuclear fusion reactors. Some of these lectures mention a lot of software development, e.g., commonly still in Fortran. The research is highly innovative, but the software development is regarded as next to routine. That is the right approach.With some high irony, Peter Thiel, who has ridiculed college educations, is said to be funding some projects in nuclear fusion. Maybe Thiel regards applied physics as an appropriate source of innovation, which, of course, it is, but apparently, like essentially all of Silicon Valley, does not regard information technology as an appropriate source of innovation.Uh, Peter, go back to school, say, at Stanford. For the basics of innovation in information technology, study the work of Stanford professors C. Loewner, H. Royden, K. Chung, D. Luenberger, and P. Diaconis. At Yale study, say, B. Efron. At MIT, study, say, D. Bertsekas. At Berkeley, study L. Breiman, both his early work and his later work. Elsewhere study the work of J. von Neumann, A. Kolmogorov, P. Halmos, R. Hamming, J. Tukey, R. Bellman, and more.Why? In information technology, we take in data — now there’s lots of data. Then we manipulate that data — now computing lets us do a lot of manipulations. Then we get out the valuable information we want — e.g., for ad targeting, health and wellness monitoring, diagnosis, directing sales staff to leads, recommendation, scheduling, planning under uncertainty, whatever information we want to know.But how to do the manipulations? That’s where need innovation and the work of the authors above.What I’m saying here, does everyone on Sand Hill Road know that? Nope. Why not? Because only a small fraction of those people can be at the leading edge of powerful, valuable, innovation. Peter, if you want to fund innovation, then you need to be able to evaluate it, and for that, just go back to Stanford.Yes, Peter, only a tiny fraction of the projects that fill you e-mail in-box are such as I describe, but that small fraction, that you and the rest of Sand Hill Road are missing, has a huge fraction of the potential ROI of Silicon Valley.Peter, you are “digging in the wrong place”, maybe where it’s easy to dig but not where the gold is.Then at Stanford, do some research and get that evaluated. Stanford can do that; they really, really can evaluate research, and do it well. Darned near anything that can be put on paper now, Stanford, Berkeley, MIT, Princeton, Harvard, etc. really can evaluate it. Then, Peter, learn how to evaluate research.Peter, for just a start for you, here’s a simple one: Optimization is important, right? It says how to do the best, say, for your rocket backpack, how to get the best thrust to weight ratio with constraints on cost and minimum flight time. More generally, optimization was the main stimulus for the crucial question of P versus NP.Uh, optimization can say how best to manipulate data to do the best possible, say, to schedule the fleet at FedEx — big bucks to be saved there. How to design a large data communications network — more big bucks to be saved. E.g., T. Magnanti, Dean at MIT, gave an A. Goldman lecture on that problem. Much of the stimulus for the famous book by Garey and Johnson on P versus NP was from Bell Labs trying to solve that problem.Okay, we like optimization.Well, back there at Princeton was H. Kuhn and A. Tucker, and for optimization they found some conditions, the Kuhn-Tucker conditions. They need the constraints to be suitably well behaved. For that there are some dozens of constraint qualifications (CQ). Some of those are easy to check; some are more difficult; and some of them imply some others. One of the CQs is from Kuhn and Tucker. Another one is from W. Zangwill. So, are they independent? Hmm ….There’s a famous paper in mathematical economics by Arrow, Hurwicz, and Uzawa (right, poor Uzawa has yet to get his prize) based heavily on the Kuhn-Tucker conditions that encountered a closely related question but didn’t have an answer.So, back in grad school, I took on a project to answer that CQ question. Took me about two weeks. A lot of fun. And I found the answer — the two CQs are independent. And I also answered the question in Arrow, etc. I got some course credit, and that was the last I needed for my Master’s.For that work, I needed a counter example, and for that I needed some tricky constraints, and to say that those constraints could exist I cooked up a new theorem and used it. The theorem and some of its consequences are a bit surprising. The work was correct; I published it in a good journal.Good innovation? Nope: The work was okay research which is really good, often crucial, input to good innovation but still not enough. Peter, at least be able to do work such as I outlined above — that’s your part with training wheels. Get that done, and we can talk about some of the rest of innovation.Uh, Peter, actually the Kuhn-Tucker conditions are a bit tricky and not so easy to understand. So, do some research like what I outlined above, don’t tell anyone, have that research be the key to powerful, valuable innovation, difficult to duplicate or equal, right, for a pressing problem in a huge market, etc., and, then, that research will be a really good trade secret and technological barrier to entry. Now, getting more interested in research?Peter, get thee back to Stanford and learn about research so that you can maybe learn how to do it and at least learn some more about how to evaluate it. Then help Silicon Valley get its ROI up out of the dirt.Disclosure: Goldman was the Chair of the committee that approved my research in optimization (stochastic optimal control) for my Ph.D., and Goldman was a Tucker student at Princeton.For The reality is we tried and weren’t able to pull it off.Just last week, our largest investor passed. Bryce, venture partners and their limited partners say “No” so often because of three reasons:(1) Nearly all the projects they get to see are poor.(2) When they see good projects, too often they are not able to evaluate them with reasonable accuracy.(3) They have had a lot of projects that failed and lost money.So, now they are like children who don’t know college chemistry, have burned their fingers with matches and/or firecrackers, and now are afraid.There is a long history of people being afraid, of snakes, tigers, falling rocks, injuries, infections, of things that go “bump” in the night, etc. For thousands of years, their responses were nearly always from not effective down to really harmful — e.g., leach bleeding.Their fundamental problem was ignorance — they didn’t understand what the heck was going on. Heck, we didn’t start to understand the microbe theory of disease until, when was it, 1890s or so? Vaccinations? Pasteur, right? Antibiotics? Fleming, right? Even OB/GYNs washing their hands in the maternity ward? Not much before 1900, right?The costs of ignorance were really high for a really long time. E.g., near 1900 a lot of perfectly healthy, pregnant women went to a hospital in Vienna for their delivery, caught child bed fever, and died, all for no good reason. Their chances would have been much better just in the hay loft of the family barn.Bryce, the entrepreneurs, venture partners, and limited partners need to learn what the heck is going on, be able to ride a bicycle without falling off, use a sharp knife to shred cabbage without cutting themselves, be able to handle matches without burning their fingers, be able to work with project conception and planning, research, innovation, products, development, management, marketing, sales, and earnings with high ROI.Unicorns? That’s the venture finance version of leach bleeding, right?

  24. andyswan

    I like Bryce’s style and I like USV style. Everyone can have their own style— VC’s, entrepreneurs, etc.People whining about “the system” should either get involved in a different way or STFU.Do I build toward VC approval? No. I’m very confident that I can build something of lasting value that will give myself and my kids more privilege. If outside capital helps that, I’m going to use it.Other people might not have that goal, or that confidence, or that plan, or that whatever. They might want to be on the cover of Rolling Stone. Doesn’t matter to me. My approach shouldn’t matter to them.Go Bryce Go! Love it.

    1. Amar

      Agreed… I think Bryce is ahead of his time 🙂 The unbundling of the “raising capital” business is happening for sure. You have AngelList and kickstarter and “able lending” .. i am sure everyone here knows of a handful of disruptors.The kicker to me is how to get people to People whining about “the system” should either get involved in a different way or STFU.Bryce needs a large megaphone so he can continue to shout sense into folks who think there is only one way to realize the “american dream”.

    2. LE

      See what is great about you is great about me as well. This is why we typically get along. You have general ideas about how you operate but you aren’t married to them like some catholic regarding abortion. You are willing to bend if it gets the job done. You are pragmatic. Enough now with blowing smoke up our asses. Well maybe a bit more.Neither of us would ever survive as a politician (and it’s one of the last things I would ever want to do same as I don’t want to be famous.). Everyone expects you to hold to your values and rarely if ever change your mind. That’s what I like about us.As a reward I will give you the first “you park like an idiot” that someone gave me a few days ago. For being of the class that just wants to get the job done, doesn’t give a shit what anyone thinks. And wants to keep dings off the car.Remember, don’t ever get over yourself….

    3. Sam

      Right on. And I am guessing from your Avatar, Andy, that you are not a young 20-something CEO.I’m beginning to think that we aren’t headed for a bubble bursting so much as we are headed for the ecosystem getting a giant “cleanse” that may be a bit painful for some, less so for others who prepared their business model and their companies for it.

  25. FlavioGomes

    There are those who view business as a game and others as a purpose..::figure out which one and you’ll get closer to your funding strategy and the right investors.

  26. William Mougayar

    It’s simple. When VCs/Investors can’t offer much more value than money, all they can offer is more money, and that raises the valuation accordingly, because of the % ownership that gets affected.A VC that knows their value won’t overpay, and will go to the next deal.

    1. Matt A. Myers

      You can say the same about a founder – they won’t undervalue themselves, and will go to the next deal – so why not do convertible note/debt?

  27. Matt A. Myers

    Maybe it’s not the entrepreneurs that’s the problem – maybe it’s the VCs in how they attract and build relationship?Maybe it’s the quantity of entrepreneurs they try to go through instead of really putting in an effort and focusing on long-term relationship building with entrepreneurs that you really like or see value in.I’ve found that anything takes time, if you’re doing it skillfully – and you trust your intuition and understand your biases – then the outcome is exponential related to time; you can equate the same idea of liking entrepreneurs to invest in who have been working on a problem for a longer time.Talking about money or valuation doesn’t matter as long as you plan to be fair. The entrepreneurs who *really* know their market and have been working on the problems for a long time, they will have more confidence than a VC in its potential – that’s inherent to the situation.If however VCs are going to play the game of lumping all entrepreneurs into the same group of people to make their risk spreadsheets balance out – where the most promising ones pay for the unsuccessful bets – then that’s not really the most fair model to the entrepreneur is it?If I am aiming for a $1B+ valuation after 5-10 years and I need $2mm+ for a two-year runway to build a solid foundation, to get systems in place and to be scaling with revenue streams – and what if during that time the company also built out a solid roadmap for 2-5 years into the future to leverage its current success – and as network effects clearly build towards $1B+ valuation within 2 years … would I rather someone get 10% of my company after that success or 20%? If I don’t reach that success then I pay 20% or more – and I can swallow that because it is a risk I am taking then, not someone who may be taking advantage of a situation because they know they can.If ideas aren’t valuable (a common disturbing phrase used that ideas don’t matter) and execution is considered where the value is, then money isn’t valuable either without the execution.If a company has the room to perform however they don’t perform as well – whether that is at their own fault running out of runway or if it’s market timing – then the equity payout to the money providers will balance out.If people operated from a position of doing things fairly then that will eliminate the beast of striving for unicorn valuations early on – but that’s only if you’re fair from the beginning – because otherwise if I’m confident in what I’m building then I’m going to just foster the relationships who I value and then get as much money as I can wherever that is – if it’s structured fairly. The issue people run into here though it seems is pressure and being rushed, which then has people compromising when they shouldn’t – allowing the person with the immediately needed resource unfair leverage. And that’s why VCs have been able to not been doing a model that is fair – perhaps a combination that the founders didn’t really value what they were doing because maybe they haven’t sunk a lot of effort into it yet; I can imagine it’d be easy for a small team of people who are just coming together and put together a simple prototype of something and then accept $200-$500k to give them a year+ runway – probably just paying their market wages for the year; maybe it’s fair, maybe it’s not – just not all scenarios are equal even if VCs want to group entrepreneurs together.I was really intrigued and excited by Indie.VC when I first heard about it. I reached out to Bryce and had applied to Indie.VC – however wasn’t one of the lucky 8 slots. Kept finding money though.

    1. Aviah Laor

      But this VC strategy wins again and again. The market wins. Countless success stories. So VCs pursue it. It’s the land grab mentality. Until the 2-5 years you suggest for foundations, another startup fuelled with cache and doing things 50% right, will have the entire market (others will burn their cache). I don’t like it as much as you do, but it wins. If an alternate model can overcome this dynamic, VC’s will gladly invest in it.

  28. Emily Steed

    This is a great point (as usual). Q: If investors focus on valuation, and that leads entrepreneurs to tunnel-focus on valuation at the expense of customers and profit, then whose job is it to focus on ethics, integrity, transparent and honest and reliable financial reports and avoiding regulatory missteps? Is ethics not a business fundamental? Do ethics and business process reliability impact valuation? Feedback on this would be greatly appreciated.

  29. RameshJain

    There is so much hype and mob mentality in startup world that all young entrepreneurs consider preparing only to please investors. Most articles are written to tell what will please an investor at this time. Very refreshing to see talking about real businesses. But for entrepreneurs, following this is a steep uphill walk.

  30. Amar

    This is such a powerful fact (yes it changes over time) .. should be tattooed on every entrepreneur’s foreheadSo last year Eileen Lee, did this amazing study where she dug into data going back to 2003. And what her data shows is actually that the number wasn’t six, it was four. Four companies a year matter. Which represents .07% percent of the companies funded in a given year end up fulfilling the promise of venture capital.

  31. Sandy

    99.93% of funded entrepreneurs shouldn’t be funded by VCs. But they are. That’s because 99.93% of VCs shouldn’t be funded by LPs. But they are.That’s because birds of a feather always flock together.If a VC wants to know why his entrepreneurs are wasteful, selfish, greedy, bro types, focused only on money and valuation, then he should first ask himself why he funded such entrepreneurs. He funded them, because birds of a feather always flock together.The great VCs have an extremely rare personality type that makes them great. Only 0.07% of the population has that personality type. Notice that those rare VCs see how overwhelming this problem is for 99.93% of VCs, so they speak out to try to help. But notice that they don’t personally have this problem themselves.That’s because birds of a feather always flock together. The best way to judge what a VC is like, is to look at what the entrepreneurs in his portfolio are like.

  32. Steve Orell

    Very good but also seems like focussing on only part of the problem to me. Entrepreneurs just start the supply side of the market…and then some VCs come along and pump up the value some more…there’s an IPO and their bankers hype up a book and then boom – everyone’s made squillions. Except IPOs have historically underperformed in the long run and maybe one day investors will realize they always lose out in the long term and demand will fall away and trickle back down in a really drawn out cycle. Maybe there’s room for a martyr of a VC who only takes companies to IPO who have a valuation that can be measured using conventional financial techniques…you know…those rational ones that you can find in old finance text books that aren’t all about revenue…

  33. ZekeV

    The Indie.vc terms look a lot like a revenue loan (used most successfully by Lighter Capital) but without the creditor status. Just a contractual right. Revenue loans work, to the extent that they do in fact work, b/c the borrower’s receivables flow directly through an account controlled by the lender. Assuming good credit assessment, the revenue loans generate acceptable returns for the risk. Not USV-sized returns, but very good returns for a secured loan. With Indie.vc there’s no loan, and definitely no collateral. So there’s no downside protection whatsoever (unless the instrument is swapped for preferred stock with a liquidation preference). I’d be interested to see how this instrument fares in practice. I like the idea of providing financing on terms that are appropriate for small businesses that might not pursue an IPO or sale. But it does seem like any success will ultimately come from portfolio companies that do choose to pursue VC financing and an exit event.

  34. jeffyablon

    Fred, I must get two inquiries per week from startups looking for direction where “exit strategy” is ALL that’s on the table. And hey, you MUST have an exit scenario or two cooked up. But the glut of new entities with clear “get bought” strategies in place to the absolute exclusion of “or run this as a viable business entity” is getting out of hand. I’m sure I’ll be borrowing that line (with attribution, of course) :”“the biggest thing that is wrong with the startup sector right now is entrepreneurs and their teams are too focused on valuation and not enough focused on business fundamentals””. It’s everything in a nutshell.

  35. Matt Zagaja

    “We got 20 passes for every yes.”Amazing how much you have to fail before you can succeed.

    1. LE

      Well given how many meetings Fred takes per year and how many pitches he reviews before making an investment, 20 to 1 is actually pretty good odds.Also like with any sales process (or with college admissions) what is important is how qualified your leads are. What doors you knock on matters a great deal. In cases like this smart people should be at an advantage. Because they in theory should be able to learn from others mistakes and create the best possible situation for their selling efforts.

  36. Tara Tiger Brown

    Hi, my name is Tara, I’m one of two co-founders of KitHub, one of the Indie.vc companies. We just got back from NYC where the cohort met for our quarterly in-person meetup.I always find it helpful to hear from an insider so I hope this gives you a taste of what the program has been like for me.Much like the first time we met with each other in San Francisco for an intensive couple of days, the companies met the night before for an ice breaker and the next day dived right in. The group did a rountable where each provided an overview of what stage they are at and issues they are dealing with. Everyone contributed ideas on how to solve the various issues and in some case offered to help or introduce to a contact that could. We all met with experts that Bryce and Sarah invited in to provide advice and teach us everything from package design to project management to analytics.Unlike the first time we met, we now know each other. During the company updates we got excited about progress that everyone had made over the past 4 months, we felt empathy when things didn’t go as planned, we felt more comfortable sharing details that we may feel embarrassed about. We spent a lot more time with each other during breaks and continuing to just be genuinely helpful to one another. The thing to keep in mind is that the group has a lot of expertise and good networks, so as much as Indie.vc provides support, we support each other too.The cohort is made up up a very diverse group of people – a balance of men and women, black and white. What I really love is that these are people that I would probably have never met because they are in a completely different industry from me and live in Atlanta or Austin or Chicago (I’m in Los Angeles).Bryce did more than have a vision for companies that want to focus on the customer and generate revenue rather than spend other people’s money, he had a vision for supporting diversity and this idea that we can be part of a program that didn’t require leaving our home base or forcing us to use certain models or be on an investor-driven timeline. Bryce is cultivating what I hope is the next generation of entrepreneurs and I really hope that he receives a lot more Yes answers.I feel fortunate to be part of the program and the opportunity to get to know the other founders and contribute to them being successful.

  37. Andreas Klinger

    Personally i love this approachRight now almost all VCs play the same game based on power-law distribution of portfolio success. Playing the same game also means that those VCs align themselves in this power-law distribution (either in the market perception or at least in the perception of the startups who are potential high flyers).The only way to succeed is either segmentation by industry or network (or region as proxy for network).There is a huge need for alternative models – i discussed the core idea of indie.vc with several VCs the last few years – almost all think it’s a crazy idea (this is obviously skewed given my lack in finance background i could justify it well enough)If you can combine indie.vc’s approach with a global attitude (a lot of new startups wont be powerlaw portfolio savers but local niche owners) you have the next generation of startup investments from my pov.All the best to @bryce – alternative models are in dire need :)PS: one thing that always bothered me with the landing page: it’s not optimal copy. I at first assumed it’s an accelerator like model which isnt really the core message.

  38. joahspearman

    Two things I’m feeling as an entrepreneur trying to optimize toward users (and the problem they have) rather than fundraising, but being forced to do the opposite: 1) “you have entrepreneurs building companies, building customer bases, designing interactions with their users in order to make themselves appealing to venture capital”…this is an environment entrepreneurs don’t want, but the entrepreneurs who became VCs helped to create because as VCs they continue to see themselves and their product – VC money – as the solution similar to how entrepreneurs see ourselves and our products (our startups) as the solution to problems. 2) “Rather than make people move, we decided to let people bloom where they are planted”…I had one of the top VC firms in the country tell me they can’t invest in a company outside of SF and another say he’s focused on NYC…what that is is “pattern matching” or whatever it’s called, but what it really feels like is a trap to make people move to the major tech markets where it’s easier to be controlled in terms of how you think about fundraising, growing your business, etc.

  39. sigmaalgebra

    I have two reactions to the XOXO talk:Reaction I — Why’d Anyone Do That?From the XOXO talk, there is an amazing statistic: So last year Eileen Lee, did this amazing study where she dug into data going back to 2003. And what her data shows is actually that the number wasn’t six, it was four. Four companies a year matter. Which represents .07% percent of the companies funded in a given year end up fulfilling the promise of venture capital. Okay. The 0.07% of venture funded startups became “billion dollar businesses”. Fine. If that’s the target, okay. Then let’s consider how the heck to do that.This thread has two posts that suggest how:(1) Inhttp://avc.com/2015/10/a-di…I emphasize doing well with information technology, the leading edge kind, based on exploitations of research, to provide a powerful, valuable, defensible solution for a important problem in a big market. The role of the research is for the most powerful, etc.,a solution that is defensible, etc. Seems to make sense to me.(2) Inhttp://avc.com/2015/10/a-di…JLM emphasized “the planning disciplines”: Vision, Mission, Strategy, Tactics, Objectives, Values, Culture, business engine canvas, business process graphic, dollar weighted org chart, pitch deck, elevator/taxi/boardroom pitches Fine.But in the XOXO talk there is: So, you start by taking a little bit of money from your friends and your family so you can build a product so that you can go raise your seed round so you can show that people want to use this product so you can raise an A round to show that lots of people like to use the product so you can raise your B round so scale the team to build the product. And that’s kind of how venture capital works. Maybe this description is partly an exaggeration partly in jest or maybe it is a straw man to be knocked down; sure, likely there have been startups that did that, just why, I don’t know. Maybe the startup wanted lots of people with lots of high end toys in the high rent district or some such. Maybe they believed that to be a very profitable billion dollar company, spend money like are that company. Maybe still more likely, they’d been smoking funny stuff!Also I don’t get the part So, you start by taking a little bit of money from your friends and your family so you can build a product so that … can raise more money? Gads, they already had built “a product”. So, great! Now, go for the revenue and earnings. What’s with the extra rounds of funding?Why? They have five founders and each has a pregnant wife? The founders didn’t understand birth control?But, what most seriously I can’t get is: Just why the heck did they, or their investors, suspect that they had a good chance of being a billion dollar company? Sounds like a lot of really expensive and silly guessing.Doesn’t look like making money to me.And for those unicorn deals where, say, a venture firm invests $200 million for 20% of a post-money valuation of $1 billion, I’d like to see some of the exit terms of that deal! My guess would be that on any exit, the venture firm get back at least the $200 million and likely plus some up to the selling price. That is, the venture essentially bought the company for $200 million. For the $1 billion, that sounds like imagination unless there suddenly is a really hot IPO market where can milk the IRAs of sucker individual investors — “Never be between a VC and the door at the end of the lockup period.”Reaction II — Get RevenueInstead of just spending and raising money wildly as in the XOXO description I quoted above, the XOXO talk seems to suggest as an alternative having revenue and, likely hopefully, earnings.GOOD!Uh, what else the heck are we in business for? We want something else?Then I’m wondering what startups the venture fund is for? That is, if the startup has revenue and is at all well planned and managed, why sell off part of the company for equity funding?I can think of three examples:(1) Plenty of FishWhy not proceed as the Canadian on-line romantic matchmaking startup Plenty of Fish did: Long one guy, two old Dell servers, ads just from Google, and $10 million a year in revenue, as athttp://www.businessinsider….recently sold for $575 million in cash.(2) The One Engineer StartupAthttp://a16z.com/2014/07/30/…of, of course, Andreessen Horowitz, in part is This is the new normal: fewer engineers and dollars to ship code to more users than ever before. The potential impact of the lone software engineer is soaring. How long before we have a billion-dollar acquisition offer for a one-engineer startup? Sounds like a more general statement of (1) Plenty of Fish.(3) Main StreetThe US is awash in businesses, good enough to support a family, one founder, sole proprietor, in large cities down to just cross roads that never got equity funding — a pizza shop, grass mowing, an Italian red sauce restaurant, auto repair, auto body repair, etc.Now, for such a business, information technology should be an advantage. E.g., the CapEx and OpEx for one heck of a busy Web site is tiny compared with nearly all such main street businesses. E.g., for grass mowing, show up with a $10,000+ mower, $500+ more in equipment, on a $5000 trailer, pulled by a $30,000 truck with 2-3 employees.Or, for (1)-(3), after “friends and family” and developing “a product”, what’s the role for more equity funding?Sure, private equity is different.And, maybe for some cases of Series C, D, etc. venture funding, say, for opening offices around the world, strategic M&A, might want some equity funding if not just private equity.Athttp://techcrunch.com/2013/…there is a suggestion of an answer: Ben Horowitz: “We Like To Invest In College Dropouts With Insane Ideas Going After Tiny Markets With No Way To Monetize” Really? Really want to invest in a business lacking earnings, even revenue, even a way to monetize? Surely you are jesting, Mr. Horowitz!I’m just not thinking like a lot of other people! But, as in the XOXO talk, 99.93% of venture capital are thinking wrong and only 0.07% are thinking right. So, people thinking right, or even close to right, or in any very important way right, don’t have a lot of company! So, being in such a small minority is not a sufficient condition for being right be is nearly a necessary condition!Back to putting data into SQL Server!

  40. howardlindzon

    It has been working for me since 2006…agreed and stop telling people. ‘too small to fail’

  41. Terry J Leach

    I’ve been reading and thinking a lot about a nugget of reoccurring wisdom about what is wrong with western society. We place a tremendous amount of focus on getting a result, rather than focusing on process. It maybe difficult to believe but focusing on process will deliver better results over the long run than focusing on getting a certain result such as valuation.

  42. sigmaalgebra

    In the XOXO talk, the main goal of venture capital is to build $1 billion companies but only 0.07% of venture funded companies achieve this goal and 99.93% do not.Or as the talk points out, the 0.07% constitute only about four companies a year. Bummer. Really big, big tim bummer. Not good. So:World of venture partners, shut up, sit down, and listen up: If you want more $1 billion dollar companies, then, in this game, just for openers, have to at least try. Then have to make a good effort. For that, really, have to know how to make a good effort and to have sufficient qualifications. So far, from KPCB, Sequoia, A16z, NEA, Charles River, Benchmark, …, you don’t even meet the openers. You are not even trying.Here’s an outline, with sufficient conditions although not necessarily necessary conditions:(1) Information Technology.From 100,000 feet up, sure, concentrate on information technology. The only candidate alternative is biomedical, and their work is harder, and generally the biotech venture partners do try, at times quite hard.(2) Data Manipulation.Realize that in information technology, we take in data, manipulate it, and get out the results we want to be valuable enough for the goal of a $1 billion company. Okay — we need to give some thought to data manipulations.(3) Problem-Market.Right, can’t get rich being the biggest business guy in just a tiny town. So, right again, need to pick a big problem in a big market. For that problem, there must be enough highly motivated users/customers that find the first good or a much better solution to the problem to be a must have and not just a nice to have to result in enough revenue and earnings to yield the $1 billion company.So, have to do well in problem selection.(4) Means of Solution.So, for that selected problem, need the solution, that is, the input data and the means of manipulating it.(5) Barriers to Entry.To keep out possible competition, need some barriers to entry. While there are several candidates, really want the solution to be difficult to duplicate or equal. That is, need some much better sources of data and means of data manipulation that are proprietary and can be protected at least as trade secrets.Well, that’s it.Sounds easy, right? Well, it can be but, so far, for only a tiny fraction of the population. So, you will be looking for and pursuing something that is rare that few or no others saw, understood, could do, etc.Want some examples? Well, after you have done good problem selection, you will need to find the sufficiently good solution.For how to get such a solution, going back 70+ years there is a grand list of magnificent examples from, right, US national security. Learn from those examples. You won’t find better. With high irony, such work is what built Silicon Valley before it went brain-dead with former biz dev people funding self-taught C++ programmers. Then, as for US national security, you will have to be able to review with quite good accuracy the core technology of project proposals. Uh, there’s a challenge there.

  43. Douglas Crets

    Good post.

  44. Chris Douvos

    Investing is optimizing discomfort. The minute I met Bryce and Mark in 2005, I knew that they were comfortable being non-consensus and I was thrilled to write them their first institutional check. People fear being wrong and alone because of the career implications, but not those two . . . and if you’re never running the risk of being wrong and alone, you take the “right and alone” quadrant out of play and that’s where fortunes and reputations are made.it’s been a great ride thus far and I’m thrilled to be a big backer of Bryce’s as he explores the continuity and change of venture capital.



    1. Matt A. Myers

      Unless you’re Mattermark.

  46. Steven Nargizian

    VCs (at least NY VCs) are simply not interested in innovative models or well thought out business plans. They’re interested in investing in founders that went to the top universities or previously had successful exits. They’re interested in businesses that other VCs have already invested in, and they’re interested in businesses that produce revenue or have attained some demonstrable traction.That’s it.

  47. Dave Hyndman

    “what if we surrounded our founders with other people who weren’t focused on fundraising and valuation, but focused on revenue and customers?”I love that one. I participate in a number of startup events in Atlantic Canada (home of a surprising number of startups and some big successes (Radian6, GoInstant, etc)). It seems the focus of these events is on developing pitches, getting funding, etc. Sure, this is an important piece (at times) for startups but it seems to have become *the* topic for startups.

  48. george

    Enjoyed reading Bryce’s transcript, he identifies a market fit problem and provides a thoughtful solution(s). All of this leads me to believe, plot lines end well if you have the right dynamics working before you get stuck in with investors (single utility). It goes back to alignment; living up to agreed values, goals and capitalism.I would suggest the embedded fabric of creating ones meaning of success lies in this defining stage. Even FB, Twitter and Uber understood this early on – you have to design much more than just great product and/or service for your future to play out as intended.

  49. Donna Brewington White

    As you might imagine, the Gotham Gal and I said yes when Bryce asked us.Bravo!

  50. Prokofy

    It’s funny, I just read this article about Evernote, called a “Unicorn” of course:http://finance.yahoo.com/ne…And I thought to myself, “These Unicorns are always spoiled by VC cash and the VC investors are motivated to have them go on doing “cool stuff” and get distracted on these fluffy new ventures that are ephemeral (like all the things they describe Evernote as doing and failing at) because they need the next rounds of other VC cash to come in and pay them off.”I thought of that expression often used by Fred and other VCs “We took money off the table,” i.e. they put down money and they were able to return their investment — take their money off the table – and usually this is not because the company has gone public, or because it actually makes money selling its product to actual customers in an old-fashioned business sense, but merely because it attracts new VC cash. In that sense, the whole thing seems like a pyramid scheme. Or worse, the company goes public yet it doesn’t really have a viable business plan to make cash. You know, like Facebook.

  51. awaldstein

    This is so true and Luli is in the same boat.Massive opportunity in a low margin capital intensive business.If your end game is a consumer brand you are in a different set of dynamics.

  52. JimHirshfield

    Rising dough

  53. bryc3

    Similar situation in our current group. Interestingly, once they had even our small investment the banks were much more willing to work with them. They secured a non-dilutive loan for the deposit on some space to move them out of their apartment and into an office. Their revenue is up 6x since starting the program. Stories like theirs suggest to us that there may be more we can do with this experiment.

  54. JamesHRH

    I am not sure that I see how it is different from 500 Startups, from a financial returns perspective.Fred argued that 500 Startups will return to the mean and that returns will not be competitive in the VC market.That looks like it is Bryce’s problem – why would I, as an LP, knowingly put my funds into a high risk proposition that is structured to return less than its competitors?Totally agree that it is cool.

  55. Cam MacRae

    +1 Also: you idiot 😛

  56. bryc3

    If this ends up being what our portfolio looks like, I think our LPs would be ok with it: http://37signals.com/bootst

  57. JamesHRH

    What’s the common description there? size? Amount of capital invested? Very diverse group.

  58. bryc3

    commonality is intent. each had the intent of building their business with no outside funding. most did just that. but a few saw potential for larger scale emerge as they built and decided to raise traditional VC to capture what they couldn’t from their own cash flow. my hunch is that by encouraging and supporting companies to focus on revenue and customers that scale will reveal itself. and several within a portfolio will have a similar breakout opportunity.

  59. Vasudev Ram

    The last word in the URL says it – bootstrapped.

  60. JamesHRH

    Micro-risk capital.

  61. bryc3

    still feels risky to me!