Posts from February 2022

I love using robotics to teach kids to code. A K12 teacher told me many years ago, “when the robot doesn’t do what you told it to do, you know your code is wrong and you need to fix it.” Robotics brings code to life for kids and that’s a great thing.

So when I saw this Kickstarter project, Codrone, I backed it immediately. So did 120 other people and so this project is going to come to life. If you want to back it too, you can do so here.

I wrote a fair bit last year about the disconnect between how companies were being valued and the fundamentals of those businesses. It seemed to me that many companies, from the founders, to the leadership teams, and the rank and file employees got more focused on raising capital and valuations than the basics of a business (people, product, customers, revenues, profits, etc).

That is starting to shift. I can feel it. With the public markets bringing high flyers back to reality, you can now buy the best companies out there at multiples of earnings and profits that make some sense in a historical context. And we are seeing reports that many mutual funds and hedge funds are leaving the private markets because the values in the public markets are so compelling. All of this is healthy.

Vitalik Buterin, the founder of the Ethereum project, said this at ETH Denver this past week.

The winters are the time when a lot of those applications fall away and you can see which projects are actually long-term sustainable, like both in their models and in their teams and their people

Vitalik was talking about a “crypto winter” but the basic point is more broadly applicable.

Business models need to be sustainable. Teams need to stick together and ship things. The fundamentals need to be in place for a business to succeed. All the money in the world at eye-popping valuations won’t do that for you.

I have no idea if we are in for another crypto winter. I have no idea if the stock market will continue to go down. I have no idea if the slump in the public markets will seep into the private markets. All of those questions are above my pay grade.

What I do know is that the businesses that focus on the fundamentals will succeed in any market, up or down. And I do feel that there is more of that going on in 2022 than we saw in 2020 and 2021 and that’s a very good thing.

A friend sent me this Kickstarter project which is about a public art project highlighting three languages that are at risk of extinction.

I backed it and I think you might want to as well. You can do so here. The project ends this weekend so if you want to back it, do so now.

I wrote about pacing a few years ago. I am a fan of a steady pace, not too fast, not too slow. Sometimes the opportunity set forces you to go faster. As I wrote then:

I don’t think a VC firm should manage to a pacing number. It should manage to the opportunity set that it sees.

In the last two years, the VC business has been operating at a blistering pace, the fastest I’ve witnessed in my 35 years in the business (including the 99/00 era). Whether that is because of the opportunity set or the changing dynamics of fundraising (in-person to zoom, endless capital) we will only know in time.

But it is exhausting. Every day I heard some form of this from an entrepreneur, “we got a pre-emptive term sheet and will be making a decision in the next 24 hours.”

Making sound investment decisions in a week is doable. We have done it. We have done it long before the last two years. We have done it a lot more in the last two years. It helps to have a thesis, to know what you are looking for.

But even so, the VC business has turned into a sprint. And you can’t sprint forever.

My friend Howard tweeted out this blog post yesterday and suggested that every VC read it. So I did.

The author, Abraham Thomas, wrote this:

Across every aspect of venture, timelines keep compressing.

Abraham suggests in that post that this hyperactive market has become riskier even though the numbers don’t show it.

I learned a long time ago not to try to time markets. I don’t know if the VC business is near a top or near a bottom. It doesn’t matter to me. I believe you have to just keep investing, slowly and steadily, in the best opportunities that come your way and the rest will take care of itself.

But we all need to pace ourselves. This is not the public markets. Venture investments take many years to unfold. It is a buy and hold business. It is a invest and help business. It is seeding not harvesting. If you start a marathon with a sprint, you are gonna be puking by mile ten. And that’s my concern right now.

Early in my career, I was taught that any team member was replaceable and that as long as you had sufficient time to find a suitable replacement, you would be fine. I have operated on that basis since then, imparted that wisdom to the founders and teams that I work with, and have always advocated for that approach to management.

But I have learned that on any team there are always a few members who are extremely difficult to replace. While most team members are “fungible”, there are always a few “non-fungible people” and retaining these NFPs can be incredibly important to the long-term success of the business.

The first, and most important, NFP is the founder. The person who originally conceived of the opportunity, recruited the first few team members, scoped (and often built) the first product, brings immense value to the business, mostly around long-term vision, setting the culture and values, and knowing when something is “off.” Retaining the founder’s interest in and involvement with the business is critical. There are times when the founder is bringing more difficulty to the business than value and they should depart. But those situations are to be avoided if possible because of how important a founder is to the business.

NFPs are usually individual contributors, not managers. The management function is much easier to replace than a uniquely skilled individual. A common mistake that I and others have made is to promote an NFP into management when they are much happier not managing people. A classic role for an NFP is the CTO of the business. In this role, the person sets the overall technology direction of the business, makes the hardest technical decisions, builds technology themselves, but does not manage the engineering function. In many companies, the CTO has no direct reports.

You can find NFPs in any part of the company. They are not limited to technical functions. You can have an NFP in customer service, finance, legal, marketing, really anywhere. The key is to identify them and recognize them, reward them, compensate them, and retain them.

More and more companies are moving to compensation models where critical individual contributors can make as much, or more, than their manager or any manager. This has long been common in sales where commission models create such opportunities and where there are often NFPs, but I am seeing more and more companies recognize that simply compensating people on the basis of their management level is incorrect and leads to their best people moving into management, underperforming in that role, and departing.

NFPs are pretty rare. Most people are easily replaceable given sufficient time to do a proper search. But there are always a few people who are not replaceable. Identifying them and retaining them should be a key goal of the management of the business.