Posts from entrepreneurship

Investing in founder-led businesses is comforting to me. They have the ability to see the forest through the trees and do what is necessary to evolve the business.

Two great examples of this are Microsoft in the mid 90s and Facebook a decade ago.

Microsoft had spent more than a decade competing and winning the desktop software market and then Netscape came along and presented an entirely new market opportunity that had both major upside and major downside for Microsoft. Microsoft reacted by moving aggressively to compete with Netscape by launching Internet Explorer and using its desktop software dominance to establish IE as the dominant browser by the end of the decade.

Facebook had spent about a decade competing and winning the social networking market and then Apple launched the iPhone and new mobile social networks like Instagram emerged that both threatened Facebook’s existing dominance and also presented new large opportunities in social networking. Facebook went on a year-long effort to become a “mobile-first” company and also acquired Instagram that year. This all happened in Facebook’s first year as a public company.

I was thinking about that because as many are wringing their hands about the collapse of crypto prices and stock prices and cutting back costs and playing defense, Coinbase announced yesterday that they are investing heavily in the next wave of web3:

The application era of crypto is upon us and products/companies like Metamask and OpenSea are showing how important and lucrative that market is. Coinbase has reacted by making huge new bets on Coinbase Wallet and Coinbase NFT and is committed to winning in those markets like it did in the investment era of web3.

It is very hard to do this sort of thing when your stock price is under pressure and when the markets are in free fall. And yet that is what leaders must do when new use cases emerge and present themselves as both an opportunity and a threat.

Disclosure: I am a Director of and our family is a large shareholder of Coinbase.

So I saw this tweet by Semil Shah yesterday:

A friend who works in an industry far from tech startups & VC asked what would be the single article I’d share to read on each topic. Here’s what I sent him:

1/ Startup = Growth by PG: https://t.co/LNkCsoyYxs

2/ Competing To Win Deals by Fred Wilson: https://t.co/oBpqy4Nhwg pic.twitter.com/q7GG2k7UAX

— Semil (@semil) March 27, 2022

So I clicked on the link to my Competing To Win Deals post, which I wrote in 2010, and read it. I often read things I wrote a decade or more ago and cringe at how out of date they have become. Not this one. It is as relevant today as when I wrote it almost twelve years ago. So I am reposting it below:

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The venture capital business is highly competitive. There is more money out there chasing good deals than most people imagine. It is also true that there are good deals and good entrepreneurs that can’t find anyone to invest in them. That is a failure of the system. But this post is not about that. It is about how a VC can compete and win a deal that many others want.

Here are my rules:

1) Do your very best to connect with the entrepreneur. If you don’t have a great personal connection, you won’t win the deal. Don’t even bother to try to win a deal where you don’t have good personal chemistry with the founder/CEO.

2) Bring your full partnership into the deal process early and consistently. Entrepreneurs are smart and they know they are doing a deal with a firm as well as an individual. Let them see the full picture early. Make it easy on the entrepreneur to meet the full partnership. Don’t make the entrepreneur do all the work.

3) Encourage the entrepreneur to get feedback on you and your firm. Instead of references, I like to give a list of every entrepreneur I’ve ever worked with and an email address. I tell them “throw a dart at that list and talk to four or five of them randomly. you’ll hear the same thing from everyone.”

4) Don’t pressure the entrepreneur to make a decision. Don’t issue exploding term sheets. Don’t put no shops into your term sheets. Those kinds of things are signs of insecurity. I prefer to tell people that we’ll have an exclusive relationship when the deal closes and not before then. If someone wants to leave me at the altar, better it happens then than after we are married.

5) Make your offer in person and don’t do it via a term sheet. Tell the entrepreneur you want to be their business partner. Tell them how much you will invest and how much ownership you want. Leave it at that. Tell them that if they are interested, you will send them a term sheet. Leading with a term sheet focuses the discussion on the wrong things. The process should be all about personal fit and very high level deal terms. Once the decision is made to try to work together, you can get into the specifics of the deal.

6) Add value during the process. Talk about the strategy issues facing the company. Talk about the hiring challenges the company faces. Try to help with these issues even before you are an investor. Show what you can do right away.

7) Use the product or service. Ideally you should be using it well before you start chasing the deal. But use the product/service actively and smartly. The entreprener will be watching. I assure you of that.

8) Don’t feel the need to pay the highest price. Offering a crazy price to win the deal scares off most smart entrepreneurs. They will be wondering why you are so aggressive. Offering a fair price that is in the range is what you need to do. And communicate that if the entrepreneur chooses to work with you, you will be flexible on your offer. That way you put yourself in the position to win and you can work the specifics to close the deal when the opportunity presents itself.

9) Don’t team up with another firm. We’ve made this mistake a few times recently. Entrepreneurs want to choose their syndicate partners. By pairing up with another firm, you signal to the entrepreneur that you want to choose the syndicate and that is a mistake in a highly competitive deal.

10) Be prepared to lose the deal and if you do, lose gracefully. There are plenty of good deals out there. You don’t have to win them all. Lose gracefully and maintain your good relationship with the entrepreneur at all costs. They might come back to you on the next round.

Many of these rules are counter intuitive. But they work well for my partners and me. You might say they will only work for you if you are a top tier investor. That may well be true, but you have to act like a top tier investor to become one. So you might as well play the game that way from the start.

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.

On Friday, the US jobs report produced a confusing result. From Bloomberg:

The jobs report is composed of two surveys — one of employers and the other of households. The employer survey, which determines the payroll and wage figures, showed hiring slowed across industries, including declines at automakers and retail outlets. The household survey, which determines the jobless and participation rates, showed employment surged by 1.14 million people and many came off the sidelines.

So employers are reporting sluggish job growth (and an inability to hire in some sectors) and households are reporting a huge surge in newly employed.

What is going on?

I don’t know but I have a theory.

I believe more people are going to work for themselves and/or going into small businesses that are not part of the employer survey.

Here is US Census data on new business formation:

What was an upward trend for the last decade has become an explosion during the pandemic.

Maybe what we are witnessing is not the Great Resignation but the Great Formation.

I remember about fifteen years ago, a well-known VC said to me “you need to sell a company within a few years of the founder leaving. Companies can’t sustain their innovation after a founder leaves.” I told that VC that my experience has been different on that measure and that I did not agree.

I have seen leadership teams take over great businesses from founders and get them to the next level. Etsy, where I am Chair of the Board and a large shareholder, is a great example of that. There are many others in my career as well.

However, there is a special something that founders provide companies. I’ve heard it called “moral leadership.” I’ve heard it called “the soul of the business.” I’ve heard it called “long-term thinking.”

This podcast with Brian Armstrong, founder and CEO of Coinbase, another public company where I am on the Board and a large shareholder, is a good example of that.

If you are into crypto or a Coinbase shareholder, you might want to watch the entire one hour and forty minutes of this video.

But if you want to see what I am talking about with founder-led businesses, there are a few conversations in this podcast I would direct you to. They are:

• 25:48 The Drive and Vision
• 29:36 The Future of Coinbase
• 47:30 Public Goods & Decentralization
• 51:39 Eating All the Banks
• 1:32:12 Maturing and Growing

When you look at the recent Q3 numbers on seed and early-stage VC fundraising, you might think we are in the late stages of a VC bubble:

The words I would use to describe the current environment in early-stage VC are “fast and furious.”

And yet the thing that makes me think this could be the new normal and not the late stages of a bubble is the dramatic increase in the number of people who are choosing to work in or form new startups. It has never been easier to start a company, build a team, and build a product. And many people are choosing to do just that.

It could be that we are in an environment where too much money is chasing too many good deals.

A few weeks ago, I wrote about NYC’s Tech Resurgence. I observed that NYC continues to develop as one of the world’s leading centers of tech innovation.

And then yesterday, I saw this tweet:

NYC startups are getting funded at 2/3 the rate of Silicon Valley startups. That’s a huge change from where NYC was even two or three years ago.

It wasn’t that long ago that a NYC-based startup had to agree to move to Silicon Valley to get money from the VCs out there. I think that was still a thing into the latter part of the 2000s. Now a decade and a half later, we see NYC startups raising capital almost as much as Silicon Valley startups.

Wow.

Early in the pandemic, we were all deluged with stories of tech workers, companies, and founders leaving Silicon Valley for Miami and Austin. And that was true. But from my personal experience, they also left for many other places too, including Los Angeles and New York City.

I met with a founder last week who has left the bay area for good and now splits his time between homes in LA and NYC. It is hard to know what cities have been the biggest beneficiaries of the great relocation but I am certain that NYC is one of them.

Here are some tweets I’ve seen in recent weeks talking about this:

Feels like every fourth bay area tech person I talk to is moving to New York.

— Sam Altman (@sama) September 26, 2021

2 mtngs yesterday w/ w coast crypto folks where they proclaimed NY the epicenter of crypto. I guess I've been feeling the activity, but didn't realize it was so conclusively here. if true & if crypto eats internet, there's a path to NY dethroning s valley as epicenter of tech.

— Jordan Cooper (@jordancooper) September 23, 2021

I am not proclaiming the death of Silicon Valley. It is alive and well and will continue to be the epicenter of tech in the US for as far as I can see. What it has lost is the power to hold onto people who don’t really want to be there. One of the most important things the covid pandemic has done to work in the US, particularly tech work, is to make it so that people can work for great companies wherever they want to live. That’s a huge shift and I believe it is permanent.

But that’s not the only thing that’s driving NYC’s tech resurgence. As yesterday’s IPO of Warby Parker reminds us, NYC is now home to a growing number of large entrepreneurial companies that are now public and will remain independent and growing in NYC. They may employ people all around the world, but they are HQ’d in NYC and will continue to be.

And Jordan is correct in the tweet above that NYC is particularly strong in Web3 because of its roots in trading, speculating, DeFi, etc and because of large Web3 software players like Consensys that have been operating here for many years now. And as Web3 is now exploding into the creative class via things like NFTs, DAOs, gaming and more, we will only see NYC’s strengths come to the front and center in the most important new sector in tech.

It’s a great time to be working in tech in NYC. You get all of the benefits of living in this amazing city without the hassles of the commute every day.

I’ll end with a plug for a startup competition that Google, Tech:NYC, and Cornell Tech are putting on called the “NYC Recovery Challenge”.

The challenge will bring together startup entrepreneurs from across the five boroughs to pitch tech solutions for New York’s recovery to a panel of business, economic, and policy experts with the chance of winning cash prizes, technical mentorship, and more.

The top three founders and their teams will be recognized as “NYC RecoveryFellows” and will receive cash awards from a prize fund totaling $150,000. The first-place founder and their team will receive a non-dilutive cash award of $100,000, and two runners-up will each receive non-dilutive cash awards of $25,000. Seven other entrants will be recognized as “Founders to Watch” and will participate, along with the three cash award recipients, in a month-long, equity-free mentorship program — dubbed the “NYC Accelerator” — led by Cornell Tech, Google for Startups, and Tech:NYC advisers. 

If you and your startup want to apply, you can do so here.

I recall when my partner Brad and I were raising our first USV fund, back in 2003, and potential investors wondered about my blogging habit. They asked if I was making a mistake telegraphing our investment thesis for everyone to see, including our “competitors.”

We strongly defended the practice and explained that the benefits of telling the world what we were looking to invest in, and why, strongly outweighed any costs. We explained that telegraphing would bring entrepreneurs to us.

And that turned out to be the case. So many of our top-performing investments over the years came to us because of our telegraphing strategy. It is hard to know who is working on a problem you are interested in. But if you put the word out far and wide, they will find you.

I was reminded of those conversations almost twenty years ago now when I read this post on USV.com by Hanel outlining our interest in measuring carbon. She explains that we have made one investment in that area already and are looking to make more. And she explains why.

I am sure that Hanel has already heard from a bunch of founders working on measuring carbon and will hear from more in the coming weeks and months. That’s excellent and how it should work in our view.