Eric did pretty much every job in the company at one time or another, including being the CEO for a three month period in 2016. He gave SoundCloud everything he had for eleven years.
Startups are incredibly chaotic organizations with a lot of change. Very few people can make it through all of that chaos for a decade or more. But founders can and do.
Eric is an example of that and I am incredibly grateful to him, and his co-founder Alex, for the level of care and responsibility they brought to SoundCloud (not to mention the original idea and the original product!)
We meet with founders all the time and a few times a year decide to back them with our firm’s capital. One of the things we look for is that commitment, responsibility, and care, the “founders commitment.” It has to be there or it isn’t going to work. Because building a company is really hard. But also incredibly rewarding.
My colleagues and I are asked all the time for recommendations for coaches, mostly for the founders and CEOs we work with, but often for others on the senior team. I am a huge fan of coaches. I think they can be game changing for leaders and their teams.
I always ask a bunch of questions to find out what kind of coach someone wants before making suggestions.
A key question is whether you want answers or questions from your coach.
I’ve spent a large portion of my career investing in early-stage companies. Part of that job is to advise and counsel, to assist a company in reaching its potential. I try to ask for feedback on how I am doing in that job. A constant thing I hear is to provide more direct answers to problems posed to me. Typically, I am told, I answer their questions with further questions.
Yet, I think it’s important to tolerate ambiguity. Maybe there isn’t a direct answer. Maybe I don’t know the answer. Maybe I want to assist others in coming up with their own answers.
I have to confess that I am more of a “why don’t you try this?” sort of advisor.
Andy is more of a “why do you want to do that?” sort of advisor.
Both can be very valuable but it really depends on what you want/need in an advisor. Getting answers when you want questions can be frustrating. Getting questions when you want answers can be equally frustrating.
So think about what it is you want from a coach before going out and finding one. Getting the fit right is important.
Martin Luther King Jr. was a man of words. He used them to inspire, to rally, and to ultimately bring change. The change he brought is the reason we remember him on this day every year.
Many of his words are broadly applicable, well beyond the worlds he occupied.
This quote strikes a nerve for me as we work with many founders and leaders:
A genuine leader is not a searcher for consensus but a molder of consensus.
Martin Luther King Jr.
Leading is knowing where you want to go and working to get others to want to go there too. That could be your team, your board and investors, your customers, or the entire world.
Molding is the word I like most in that quote. It describes the work of leading correctly. You can’t will people to follow you. You can’t expect people to follow you. You need to work to get them there.
I’ve written about these two related but different topics before but I’ve been doing a lot of board meetings as we kick off 2019 and I am reminded of how important both are.
At the end of every board meeting, the board should meet alone with the CEO in an executive session, followed by a session without the CEO, followed by a session where at least one director, but possibly all of the directors, meet again with the CEO.
This requires a fair bit of time to do right. These three back to back sessions will easily take thirty minutes to do right and could take as much as an hour.
When a board meeting goes three or four hours, it is tempting to wrap when everyone has “hard stops” and punt on these executive sessions.
But that would be a big mistake.
CEOs need to know where the board stands on the meeting, the big issues, the team, the strategy, and most importantly the performance of the CEO. And CEOs need to know that in real time and all the time.
The big problems that I have run into with companies over the years often have to do with misalignment between a management team and the board, and most acutely misalignment between a CEO and the board.
A process by which the CEO gets real time, regular, in person feedback from the board will alleviate many of these issues. These can be hard conversations and they can be difficult for the CEO to understand and process. None of this is easy stuff. But when people know where they stand and can react to it, things go better. It is when people don’t know where they stand and are grasping for straws when things go most badly off the rails.
The executive session/feedback process is also used by audit committees to manage the relationships between the board, CFO, and external auditors. I have found that they are incredibly important in that setting too.
If you aren’t doing executive sessions with your board, start doing them. And if you do them, but you skimp on them frequently due to time issues, shorten your board meetings and protect your executive session time. These sessions need to come last and that makes protecting them challenging but I believe a board meeting without an executive session is a bad board meeting.
Flip is a USV portfolio company. They provide a suite of services to renters that allow them to easily flip out of leases and move when they need to with the cooperation of landlords.
Before Flip was a USV portfolio company, it was angel funded by the Gotham Gal and Flip’s founder Susannah Vila went on the Gotham Gal’s podcast last month to talk about how she got the idea to start Flip and how she has gone about building the company. It is a great listen.
Today, as is my custom on the first day of the new year, I am going to take a stab at what the year ahead will bring. I find it useful to think about what we are in for. It helps me invest and advise the companies we are invested in. Like our investing, I will get some of these right, and some wrong. But having a point of view, a foundation, is very helpful when operating in a world that is full of uncertainty.
I believe and have been telling those around me that I think 2019 will be a “doozy.” I think we will see major dislocations in the leadership of the United States, a bear market in stocks, a weakening economy, a number of issues with the global economy including a messy Brexit and a sluggish China. All of this will lead to a more cautious stance by investors in the startup economy. And crypto will not be a safe haven for any of this although there will be signs of life in crypto land in 2019.
Let’s take each of those in the order that I mentioned them.
I believe that we will have a different President of the United States by the end of 2019. The catalyst for this change will be a devastating report issued by Robert Mueller that outlines a history of illegal activities by our President going back decades, including in his campaign for President.
The House will react to Mueller’s report by voting to impeach the President. Which will set up a trial in the Senate. That trial will go so badly for the President that he will, like Nixon before him, negotiate a resignation that will lead to him and those close to him being pardoned for all actions, and Mike Pence will become the President of the United States sometime in 2019.
I believe this drama will play out through most of 2019. I expect the Mueller report to be issued sometime in the late winter/early spring and I expect an impeachment vote by the House before the summer, leading to a trial in the Senate in the second half of the year.
The drama in Washington will have serious impacts to the economy in the United States starting with our capital markets.
The US equity capital markets enter 2019 on shaky ground. Though the last week of the year brought us a relief rally, the markets are dealing with higher rates, some early indications of a weaker economy in 2019 (possibly due to higher rates), and, of course, the potential for the drama in Washington that we’ve already discussed. Here is a chart of the S&P 500 over the last five years:
I expect the S&P 500 to visit 2,000 sometime in 2019 and then bounce around that bottom for much of the year. This would represent a decrease in the S&P’s trailing PE multiple to around 15x which feels like a bottom to me given the recent history of the equity markets in the US:
Interest rates have been rising gradually in the US for the last three years. The Fed has taken its Fed Funds rate from essentially zero three years ago to almost 2.5% today:
The rates that are available to consumers and businesses have followed and I expect that to continue in 2019. Here is a chart of the interest rates on the three most popular mortgage products in the US:
When it gets more expensive to borrow, marginal projects don’t get funded. And what happens at the margin has a much larger impact on the economy than most people understand. No wonder the President wants to fire the Fed Chairman.
I expect the combination of higher rates, uncertainty in Washington, and storm clouds globally (which we will get to soon) will cause business leaders in the US to become more cautious on hiring and investment. Consumers will make essentially the same calculations. And that will lead to a weaker economy in the US in 2019.
The global picture is not much better. The eurozone is about to go through the most significant change in decades with some sort of departure of the UK from the EU (Brexit). It remains unclear exactly how this will happen, which in and of itself is creating a lot of uncertainty on the Continent. I don’t expect most businesses in Europe to do anything but play defense in 2019.
Probably the biggest unknown for the global economy is the resolution of the ongoing trade tensions between China and the US. It seems inevitable that China will make some concessions to the US to resolve these trade tensions. But, of course, what happens in Washington (first issue) may impact all of that. In the meantime, the uncertainty around trade and exports hangs over the Chinese economy. China’s GDP has been slowing in recent years as it achieved relative parity with the US and the Eurozone:
Any significant trade concessions from China could impact its growth prospects in 2019 and beyond, which will take the most powerful engine of global growth off the table this year.
So all of that is a pessimistic take on the broader macro environment in 2019. How will all of this impact the startup/tech economy?
The startup/tech economy is somewhat immune to macro trends. Many startups and big tech companies were able to grow and expand their businesses during the last financial downturn in 2008 and 2009. Some very important tech companies were even started in those years.
The tech/startup economy is driven first and foremost by technical and creative (ie business model) innovation. And that is not impacted by the macro environment.
So I expect that we will continue to see big tech invest and grow their businesses and do well in 2019. I expect we will see IPOs from big names like Uber/Lyft/Slack, although I also expect those deals will get priced well below the lofty expectations they have in mind right now. Some of that will be because of weak equity markets in the US, but it is also true that most of the IPOs in 2018 also priced below the lofty “going in” expectations of founders, managers, boards, and their bankers. The public markets have been much more sanguine about value than the late stage private markets for a long time now.
However, I do think a difficult macro business and political environment in the US will lead investors to take a more cautious stance in 2019. It would not surprise me to see total venture capital investments in 2019 decline from 2018. And I think we will see financings take longer, diligence on new investments actually occur, and valuations to come under pressure for even the most attractive opportunities.
But all of that is going to happen at the margin. I expect 2019 to be another solid year for the tech/startup sector as we are in a possibly century-long conversion from an industrial economy to an information economy and the tailwinds for tech/startup vs the rest of the economy remain in place and strong.
Any set of predictions for 2019 from me on this blog would not be complete without some thoughts on crypto. So here is where my head is at on that topic.
I think we are in the process of finding the bottom on the large, liquid, and lasting crypto-tokens. But I think that process could take much of 2019 to play out. I expect we will see some bullish runs, followed by selling pressures taking us back to retest the lows. I think this bottoming out process will end sometime in 2019 and we will slowly enter a new bullish phase in crypto.
I think the catalyst for the next bullish phase will come as the result of some of the many promises made in 2017 coming to fruition in 2019. Specifically, I think we will see some big name projects ship, like the Filecoin project from our portfolio company Protocol Labs, and the Algorand project from our portfolio company Algorand. I think we will see a number of “next gen” smart contract platforms ship and challenge Ethereum for leadership in this super important area of the crypto sector. I also expect the Ethereum open source community to ship a number of important improvements to its system in 2019 and defend their leadership in the smart contract space.
Other areas of crypto where I expect to see meaningful progress and consumer adoption happen in 2019 are stablecoins, NFT/cryptoassets/cryptogaming, and earn/spending opportunities, particularly in the developing world.
There will also be pressure on the crypto sector in 2019. The area I am most concerned about are actions brought by misguided regulators who will take aim at high quality projects and harm them. And we will continue to see all sorts of failures, from scams, hacks, failed projects, and losing investments be a drag on the sector. But that is always the case with a new emerging technology that allows anyone to set up shop and get going. Permissionless innovation produces the greatest gains over time but also comes with the inevitable bad actors and actions.
So that’s where my head is at on 2019. Do I sound pessimistic? I suspect I do, but I am not. I am incredibly optimistic, like my partner Albert and can’t wait to get going and make things happen in this new year. It is going to be a doozy.
I had an interesting conversation with a friend who operates a traditional business (not tech, not venture backed, not “growth”) last week. He buys a lot of software from tech companies and he observed that not one of them operates profitably. And that makes him a bit uncomfortable as he has always operated his businesses profitably. He mentioned to me that when he has taken capital from investors he has paid them back in full in less than a year each time, from the profits that the business is generating.
It got me thinking that there is something about tech, particularly venture capital-backed tech, that allows us to operate for what seems like forever without a need to generate self sustaining profits.
This can be a fantastic way to generate value when the opportunity is large enough (Google, Amazon, Facebook, Twitter, etc). But it is not a fantastic way to generate value when the opportunity is constrained, either by a smallish market size (TAM) or by a ton of competitors (little to no barriers to entry) or a number of other factors.
Value is generated when the capital required to get a business to sustainability (usually positive cash flow, but I will include exits here) is meaningfully less than what the business is worth when sustainability is reached.
As the capital requirements go up, because of sustained losses year after year after year, the business needs to become worth ever more money at sustainability.
The mistake I think we make in the startup/tech/VC sector is that we look at things like Google/Amazon/Facebook/Twitter, or more recently Uber/Airbnb/Slack, and we think that every business can execute the same playbook. The sad truth is that not every business can execute that playbook and, as a result, many startups consume way too much capital on the way to sustainability and value is lost, not created.
The never ending question that founders and management teams and boards face is whether to invest for growth (aka lose a ton of money) or work towards profitability (but constrain the growth of the business). It seems like every board I am on and every company in our portfolio is always asking this question.
Where I come out on this issue, and always have, is that the growth has to be responsible (positive unit economics on growth spend) and that the path to profitability needs to be well in sight. I would add to those two constraints that a management team ought to be able to get a business profitable in a pinch without killing the business, if necessary. Clearly these “rules” should not apply to very early stage companies. They become relevant and possible once a business has a growing customer base and revenue stream.
I think very few companies in our portfolio and any VC firm’s portfolio will pass these tests right now. Some do but not many. We have a few companies in our portfolio that are operating profitably. We have a few more that are in operating with profitability well in sight and could get there in a pinch without hurting the business too much. But the vast majority are burning money like its water and there is plenty more where it came from.
Perhaps it is true that there will always be money to fund burn. Or perhaps it isn’t. But even if there is endless capital, many founders and teams will wake up one day and realize that all of that burn they accumulated is now a hurdle they have to overcome. And many won’t overcome it.
The profit motive is what makes capitalism work. Businesses are ultimately valued as a discounted set of future cash flows. Positive cash flows. If you can’t generate profits in the future, your business will not be worth anything. So profits are key. And yet we don’t seem to value them in the tech/VC/startup world very much. Maybe we should.
I believe that negotiating is more of an art than a science. There are certainly strategies and skills that one can develop that make for better outcomes.
But the art comes into play in figuring out what the person or people on the other side are optimizing for and adopting a strategy that reflects that.
I have found that a single style and strategy rarely works well for every situation.
Let’s take the important question of whether you should make a “take it or leave it” offer and then draw a hard line on that offer or whether you should make an offer that has a fair bit of negotiating cushion in it.
Some people like to negotiate and expect to negotiate. If you make a hard line offer and refuse to negotiate with them, they will be frustrated with you and may seek out other offers. Or if they do end up transacting with you, they will feel burned by the negotiating process and you will be starting off the relationship on the wrong foot
If you make an offer that has a lot of room for negotiating, they may actually enjoy the experience and come away feeling like they got a good deal from you.
I like to shake hands at the end of a negotiation with both parties pleased with where they ended up. That is particularly important when you are entering a long term relationship like a venture capital investment.
It is also critical to know what your “must haves” are going into a negotiation and what you can give on.
Another form of negotiating art is how you reveal your must haves and where you are flexible. I have found that it is not helpful to a negotiation to lay all of that out at the start. There is a lot of value in a discovery process. It is a bit like dating. Each side reveals a bit about themselves to the other and that is also very helpful at the start of what might be a long relationship.
All that said, there are times when drawing a hard line is appropriate. If the other side has all of the leverage then it is often best to make your best offer and say take it or leave it. If, for example, the other side has used a process to drive price discovery and possibly discovery around other key terms and has multiple offers, you are not going to win the deal with the low ball offer with negotiating room. You have to give it your best shot and then walk if you can’t win on that basis.
Like most art, it takes some time to learn all of this. You can take a class or a workshop on negotiating tactics and learn the fundamentals. I would strongly recommend that for young folks just getting started in business.
But when it comes to learning how to size up the other party, well that takes time. You have to mess up some negotiations, lose some deals, and possibly win some on terms you later regret.
It is that last bit, living with the terms you negotiate, where the greatest learnings come. I have found that a very powerful argument in a difficult negotiation is when you say “I did that once, I deeply regret it, and I’m never doing it again.”
In the last week, we have learned that Uber, Lyft, and Slack plan 2019 IPOs. I am sure that a few more highly valued private companies are also planning to go public in 2019.
It is something that I have been expecting and predicting for a few years now. Eventually these companies that have raised a ton of capital in the private markets will choose to go public and generate liquidity for the shareholders who plowed all of that capital into them.
And yet storm clouds are on the horizon for the capital markets in 2019. Rates have risen significantly in the last eighteen months, pulling capital out of the equity markets and into the fixed income markets. There are some leading indicators that suggest a business slowdown is on the horizon, which would be the first one in the US in a decade. And, of course, the situation in DC is getting dicey and that will weigh on markets as well.
Good companies can go public in bad markets so I am not saying that the long delayed IPO plans of juggernauts like Uber will be squashed by a bear market in 2019.
But what I am saying is that 2019 is shaping up to be a very interesting year for the capital markets that power the startup economy.
There is a big difference between the private markets and the public markets. They do not move in lockstep. For years now, the late stage private markets have been trading at valuations that are well in excess of their public market comps. That is true for a number of reasons. First, private market investors have longer time horizons and are looking for a three to five year return, not an immediate one. Second, private market investors get a liquidation preference which in theory protects them from losses. Finally, deals in the private markets clear in an auction like environment where the highest bidder wins the deal. All of these factors mean that a hot company can raise capital in the private markets at valuations well in excess of where they can raise capital (and trade) in the public markets.
But the public and private markets are connected to each other. If the Nasdaq falls significantly, and it is down roughly 15% from its highs in the late summer/early fall, then it will eventually weigh on the private markets.
And, if Uber, Lyft, and Slack do go public in 2019, where they price and where they trade will impact startup valuations, both late stage, and ultimately early stage too.
These markets, public, late stage private, and early stage private, feed off each other and the participants in one look to the others for supply of deals and liquidity. So while they may appear to be disconnected, and often are, they do ultimately sync up.
And so I’m wondering if 2019 is the year they start to sync up again, after quite some time being out of sync. And if that comes to pass, what it means for our portfolio companies and their financing and liquidity options.
Fortunately for most of our portfolio companies, and most companies in the startup sector, we have had a number of years of very flush capital markets and many companies have strong balance sheets and a lot of staying power. The same is true of most venture capital firms as the past few years have been a great time to raise capital.
So if things slow down in 2019 and I am not predicting they will, but I think they might, the startup sector is in good shape to weather it. But at some level, the startup capital markets are a game of musical chairs and you don’t want to be the one who can’t find the chair when the music stops.
We’ve known for a long time that one of the most stressful things for entrepreneurs when they pitch us and other VCs is the initial setup of the meeting when they need to be meeting and greeting the folks in the room and, at the same time, figuring out how to connect their laptop to present their deck.
That combo is a real challenge. Some entrepreneurs navigate it with grace and some really struggle with it. But it is a pain for everyone.
We used to have a cable that the entrepreneur could connect their laptop with but that had its own set of problems as not every laptop would work with the cable.
We use Zoom now and we ask the entrepreneur to get on our guest wifi (no password) and then fire up zoom, join our room, and share their screen.
That works better, particularly when we let the entrepreneur know in advance that is the way we do it so they can download zoom onto their laptop before the meeting.
But even with all of that, we still have this awkward few minutes where the meeting is getting set up.
I am curious to hear from all of you about the best meeting setup situations you have run into in your careers. We do not subscribe to the theory that making it hard on the entrepreneur shows us something. We do subscribe to the theory that making it easy on the entrepreneur is in everyone’s interests.