This Is What The Apocalypse Looks Like?

Back in Q1, you couldn’t swing a dead cat without hitting someone advising startups that the world, as they knew it, was coming to an end. Venture dollars flowing to startups had decreased from $16B in Q3 ’15 to $12B in Q4 and VCs were telling anyone who would listen that nuclear winter was in sight and funding would be drying up. The media just ate it up. Take a look at just a tiny sample of headlines from early Q1.

apocalypse

Imagine my surprise when I opened PWC’s VC Q2 Money Tree report on Friday (ok, I’ll admit that I wasn’t surprised at all). Take a look at the chart from their report below. Not exactly the apocalypse everyone was predicting, right? To be fair, while dollars have increased again, the number of deals fell by about 5% (suggesting that larger dollars were going into some later stage companies).

Q2 16

I wrote a post about all this in February and my advice to founders remains the same as it always is. Raise more than you think you need. Price your rounds to avoid the pain of stacked notes. Watch your expenses. But whatever you do, don’t pay attention to what anybody’s saying about the macro because they’re all full of shit.

Will the funding environment get worse for startups? Yes, of course it will. Eventually. Bill Gurley’s been telling us we’re in a bubble for years now. He will undoubtedly eventually be right. But there’s also logic supporting the notion that an entire generation of globally important companies will be born and go public by the time he is. We’ve now had ten quarters in a row of over $10B of venture capital flowing into the system. Venture Capital firms raised more money in 2014 than ever before in history and then they raised even more in 2015! All of those firms have a mandate to put that capital to work which means VC dollars will continue to flow liberally to startups at least for the next 3-4 years.

My $.02? I think we’re in the greatest tech innovative cycle in history and capital will continue to be available to fuel it. Technology is solving more problems for more people in more ways around the globe than ever before. I see it when I travel to our 24 Techstars accelerator programs and the hundreds of events we put on for entrepreneurs around the world in over 130 countries. Barring a global economic collapse (which certainly does seem like better than a zero percent chance given the events of 2016 and the potential fallout from our Presidential election this November), I think we’ll continue to see a healthy environment for startups for years to come.

 

 

 

 

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Finding Obsession in Iceland

A few weeks ago, I was fortunate to spend two weeks in Iceland, a country I’ve long wanted to visit. My trip began with Startup Iceland, the annual event run by my friend Bala Kamallakhara. It was a terrific few days, starting with the launch of Ultrahack on Sunday night. On Monday, we were treated to opening remarks by the outgoing President of Iceland, Ólafur Ragnar Grímsson who had been in office since 1996. He delivered an impactful talk about how technology has transformed society since he took office (while Bill Clinton was President). It was a real honor for me to meet a sitting President. Bala assembled some captivating speakers including Hjalmar Gislason, VP of Data at Qlik who shared his experiences scaling a startup to scaling a product for a NASDAQ company. We also heard from Magnus Bjornsson, Sr. Director of Development at Oracle which acquired Endeca, the startup where he headed up engineering. Among many others, I was really stoked to watch Techstars CTO Jud Valeski give a great talk on data and equally excited to have Techstars Managing Director Jenny Fielding join me and Bala for a fireside chat about the impact of the global accelerator movement. We all spent the next day at Reykjavík University working with a bunch of terrific startups.

Bala

Bala  – the entrepreneur leading Iceland’s startup community

I left Reykjavík the next day in a 4WD with Jud to do some exploring in the sparsely populated north highlands. As we bounced around the dirt roads, we spent a lot of time talking about how inspiring it was to see another entrepreneur-led startup community unfolding. Bala has adopted Brad Feld‘s Startup Communities as his blueprint and it’s easy to spot the familiar pieces falling into place that will surely make Reykjavík a city that’s going to produce its share of important startups for years to come.

I finished my time in Iceland by fulfilling a dream to spend a week side-by-side with my friend Chris Burkard, who many believe to be the most inspiring outdoor / adventure photographer in the world. If you’re unfamiliar with Chris, check out his Instagram feed or better yet, take a few minutes and watch his incredible TED Talk and you’ll see why he’s motivated so many millions of people to spend more time outdoors. We spent a week with a small group of passionate photographers exploring the remote Westfjords. The highlight for me was an absolutely epic hike from 6pm to 6am in the Hornstrandir nature preserve on the northern tip of Iceland, where I captured this shot of Chris somewhere around 1am.

Chris

While the week was truly remarkable and I learned so much, the most inspiring moments of my time with him occurred on the drive back to Reykjavík at the end of the trip. Instead of taking the 30 minute flight we had booked or a 6 hour drive on the highway, Chris decided we should drive through the most remote single lane and dirt roads in search of more great frames to shoot. We jumped in a Defender with his assistant Ryan in Ísafjörður and set out on a 24 hour adventure which crystallized for me why Chris has reached the pinnacle of his field.

For context, remember that none of us had slept for more than a few hours each day for the previous week as we were in the arctic circle and the sun never dipped below the horizon while we explored the remote fjords by sailboat. We’d set out on hikes over the fingers of the fjords each “night” and Captain Siggi would pick us the following morning. We’d hike for miles and miles, stopping to take advantage of the golden light created by the sun sitting on the horizon from about 9pm to 3am.

So despite (or perhaps as a result of) some pretty intense sleep deprivation, Chris decided that we had 30 hours left in Iceland and we were going to milk it right up until we stepped on the plane. We filled up with gas and coffee and took off in search of great features to shoot that Chris had been researching. I learned how Chris leaves little to chance. He does a bunch of research about the places he visits and stores the coordinates of everything he wants to photograph in his phone. The weather turned cold and damp and armed with a series of GPS coordinates and a map, we drove for over 24 hours, stopping only for beautiful photography opportunities or to warm our bones in remote hot springs.

My biggest takeaway from that journey with Chris was how completely obsessed he is with his work. Despite the fact that we had just spent a full week shooting and talking about photography incessantly, he was in the zone the entire drive. 24 hours without any sleep! While the weather worsened and it got colder and colder, he never lost his enthusiasm. We’d reach our coordinates, pull over and he’d photograph something from every angle. After a while, I’d find myself heading back to the truck to warm up and Chris would be out there with cold wet fingers trying to capture the perfect shot. After a storied career, 25 trips to Iceland and millions of photographs taken, he’d get back in the rig and with the enthusiasm of a kid at Christmas talk about contrast, and light and what Iceland means to him.

Chris A Frame

Chris during our 24 hour adventure

Gazing out the window on the flight home, I couldn’t stop thinking about how similar Chris is to the most spectacular founders I’ve ever worked with. People like Isaac Saldana of Sendgrid, or Ian and Adam of Sphero or Brad Schell of @Last Software who turned their obsessions into some of the most important companies in their respective categories. I’ve had a front seat in watching how my partner David Cohen has seen his obsession with helping entrepreneurs emerge into the worldwide movement of #givefirst which is redefining how mentors and companies interact with startups.  Whenever I’m asked what the common characteristics of the best entrepreneurs I’ve ever been around are, I always begin with the obsessions which drove them.

It’s trite to try and articulate how challenging it is to rise to the top of any pursuit, whether it’s photography, sports, music or building a startup. Only those who have a healthy obsession make it to the top. That’s why more than anything else, I personally look for entrepreneurs who have a serious obsession about solving a problem. There’s so many obstacles to success that if you’re doing it for any reasons other than a very real obsession, the difficult periods will likely derail you. Passion’s not enough. Discover your passion and do it on weekends. If there’s a big enough problem that you’re truly obsessed with solving (I like to define obsession as the thing that makes you forget to eat and poop), give me a call and let’s talk about the startup you should be working on…

 

 

 

 

 

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A Little Grace In The Middle Of Some Mayhem

I’ve spent the last eight weeks in a heavy-duty sling after surgery to repair an old injury and getting freed from it a few days ago feels like I passed “Go” and received my “get out of jail free card.” The surgery was a little more intense than I had imagined it would be and my two months in the penalty box started out a bit rough. To begin with, I did a really poor job of setting my expectations around how long it would take me to get back to functioning somewhat normally and when I failed miserably at that (for the record, I gave myself five days), my first two weeks found me fighting through some storm clouds. More than anything, the evil pain meds they give you after surgery put me in a foggy mental state and left me in no shape to bring my best to work even though at the time I believed I could. It took me a little while to figure out how off I was (it didn’t help that I was one-armed and using dictation software).

After about a week I started weaning myself off the meds and by the week after that the cloud had lifted. I settled into a routine that didn’t vary much until a few days ago. I sat at my desk in my home office and did as much work as I could handle. Despite what I had hoped for, voice-to-text for more than short messages (while pretty incredible when you think about it) still has a lot of ground to cover to become ubiquitous and no matter how many hours I sat talking to my computer, it felt like I was falling further and further behind. I knew that sleep would also be difficult as I’ve had shoulder surgery before and had experienced how much sleeplessness accompanies it. Knowing it and dealing with it are two different states of mind though, and no matter what, having 2-3 hours being the longest stretch of sleep I could put together for a couple of months took its toll.

Two bright spots during this stretch made the ordeal a little easier to handle. First, being around Pam and the kids for two straight months without being allowed to get on a plane was a real treat. Family card games made a big comeback at the kitchen table (euchre and hearts and they didn’t make me shuffle once) and the kids indulged (and even began enjoying) some of dad’s Spotify playlists (with a strong dose of the 60’s and 70’s). The other source of inspiration for me was our dogs Ruby and Maggie. Ruby’s our 10 month-old puppy (yellow, golden & poodle mix) and Maggie’s our 14 1/2 year-old yellow lab. Being home all the time, I found out just what a busy life my wife leads as some days it was the three of us, but Ruby enjoys bopping around town in Pam’s passenger seat so most days it was just Maggie and I. Anyone that knows me well knows that I enjoy a very special relationship with her. For years she was my companion as we explored the hundreds of miles of trails out our back door together and it’s been a little tough for me seeing her slow down so much over the last year. The best Maggie can muster these days is a walk around our neighborhood for about 15-20 minutes.

I’ve begun to cherish our strolls together more than ever these last few months. Whenever I needed a break, I’d find her (napping at my feet mostly) and she’d build up a head of steam going down the ramp we’d built for her and off we’d go. She can’t hear anymore and only two legs work well, but she lights up and her tail wags like she’s a pup when we get outside. I’ve been walking Maggie around the neighborhood since she had to give up the trails last year, but since my surgery, I’ve noticed myself being more patient than ever with her as I just wasn’t in any particular rush anymore. What a sight we’ve been. The guy in the sling trying to pick up poop with one hand and his nonagenarian dog (I looked it up here – 14 1/2 year-old 70lb dog = 90 human years). My daily strolls with Mags have provided me with a lot of quiet time and for some reason lately I’ve been thinking a lot about the notion of grace. It began as the word kept reverberating around my brain as I watched Maggie during our walks. Her back right leg gives out pretty regularly now and she falls once in a while, but she always lifts herself up and manages to keep going, tail wagging. I’ve been saying to myself that I hope I can accept aging with as much courage and grace as she is.

For some reason though, I can’t seem to get the word out of my head lately. Perhaps it’s the mounting evidence when we watch this election cycle how our country’s losing its grip of the concept these days. Grace once again made an appearance in my head on our walk tonight so when I came inside, I decided to look it up. Turns out there are a handful of definitions, but in Western Christian theology, grace is defined as “the love and mercy given to us by God because God desires us to have it, not because of anything we have done to earn it.” Despite not considering myself religious, this is nevertheless my favorite definition. I think it’s because I understand that’s exactly what Maggie has been giving me all these years; she’s given me love not because I’ve earned it, but because she wants me to have it.

Spring has sprung and our walks are getting a little longer. It’s seems there’s more dogs to greet and lots of new things to smell. With my arm free now I know I’m going to get busier and I’ll have to remind myself to make sure we have time for our long walks.  I don’t know how much longer we have together (we thought we lost her two years ago), but I’m cherishing each of our neighborhood excursions. Maggie’s name is borrowed from the song Sugar Magnolia by the Grateful Dead and she’s reminding me these days (as Jerry used to sing) that “once in a while you get shown the light, in the strangest of places if you look for it right.”

File Mar 20, 10 54 18 PM

Maggie on one of our neighborhood strolls a few months ago

 

 

 

 

 

 

 

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Some Gray Haired Insights For New Investors

There’s been a flurry of posts so far in this new year advising startups how to deal with what certainly appears to be the beginning of an inevitable market correction (based upon your point of view, feel free to substitute your flavor of panicked adjectives for “correction”). It seems that every VC who blogs is warning that winter is coming and cautioning CEOs to store their acorns and cut back on their burn rates. All good advice.

I haven’t read much though about how to prepare for this if I’m a relatively new investor in startups. There’s a whole new breed of investors (both angel and new VCs) who have been actively investing in startups since 2010 (when we emerged from the last major recession) who have never been through a downturn as an investor. I’m writing this specifically for their benefit as I’ve been around long enough now that I’ve experienced multiple full economic cycles as an investor and started my career working on Wall Street during the crash of 1987. I’ve got a few more gray hairs today than I did then and I know some of these insights would have helped me better weather those.

To begin with, what does the trajectory look like? At the outset, term sheet valuations start contracting up and down the venture capital food chain and then they start drying up from the growth investors (except for the most compelling opportunities) as they decide to sit on their hands for a while and figure out how bad things really are. Most of the early-stage investors are still investing at this point as by nature, they’re generally a more optimistic group. I think it’s fair to say that we’re somewhere in the middle of this stage today. If the downward momentum continues, startups begin losing lower tier customers  and missing their numbers. After the early stage investors start seeing this across their portfolio, they too get spooked and begin to and begin to slow their investment pace. The slide continues and soon portfolio companies are losing some of their best customers. This is when even the most optimistic investors start putting their wallets away for new investments and start asking themselves “what do our reserves look like?”

A few more months pass and eventually, large corporations begin laying off thousands of people at a time. Each time investors step on the treadmill at their health clubs, they’re greeted with flat screens showing clips describing another massive layoff. That’s when folks realize that shit’s gotten real and fear sets in. Not only are very few new venture investments getting done, but the partners at VC firms are now spending the bulk of their time working with their portfolio companies figuring out how far back to yank on the expense lever. Eventually things get bad enough that one of the top venture firms decides that we’re on the path to hell and there’s no turning back. That’s what happened on October 10, 2008 when Sequoia published this infamous deck. Pay particular attention starting on slide 41. At this point, vc partner meetings are spent discussing among themselves which of their portfolio companies they should allocate dwindling reserves to (“live”) or not (“die”).

 

Admittedly, nothing I’ve shared yet is particularly enlightening or helpful. Anyone who’s lived through it is probably nodding their head in agreement. Here’s where some valuable insight for new investors can be gleaned. Did we continue on the road to hell after Sequoia pronounced that we were at the gates? No, of course not. In fact, it was only three weeks later on Halloween 2008 that we reached the market bottom in the NASDAQ.

 

ripgood

Anyone reading this who’s remotely familiar with the public markets has learned that it’s impossible to time market tops and bottoms, but you’ll be amazed at how many smart and sophisticated private investors were so spooked by Sequoia’s pronouncement, that they didn’t invest in any new companies for a very long time afterwards. I’ve even heard conspiracy theories that Sequoia intentionally sensationalized the deck to clear out investors so that they had to pick of the litter for a while. Unfortunately, those investors who throttled back missed the best pricing of startups in the last fifteen years. Even more importantly from my perspective, the “wantrepreneurs” had all gone home and none other than the most steadfast, determined entrepreneurs were starting companies at that time. In other words, the founders we as investors all dream of working with were the only ones starting companies! What I’ve learned through experience is that the very best entrepreneurs don’t pay much attention to the gloom and doom everyone else is paralyzed by. They see a pain point, they envision a solution, and they set out to execute against it. Sure, how they go about it changes, but they generally ignore what’s going on at the macro level. Finally, because they’re solving real problems, they let customers finance their early growth.

A great example of this is Isaac Saldana, the founder of SendGrid which he started in November 2008, just weeks after “RIP Good Times” was published, at the very bottom of the trough when things looked their bleakest. Isaac knew deep down that he had figured out a solution to an important enterprise problem and he didn’t wait for the lifeguards to say it was safe to get back in the water to start his company. He left his job and founded SendGrid when everybody else was running for cover. Today, Sendgrid is arguably the most important email infrastructure company in the world.

I remember a series of conversations I had with Brad Feld in 2008 about his perspective on investing through various parts of economic cycles. Brad was (and is) resolute in his belief that creating outsized returns in the venture industry demands ignoring the macro environment as it relates to investment pace. I vividly recall those conversations which helped give me the courage to lead financings in companies like SendGrid, Purch and Cradlepoint in 2009 when most venture investors were sitting on the sidelines. All three of those companies are worth hundreds of millions of dollars today.

Are we entering a minor correction? A downturn? A sustained recession? Truth is, no one really knows. One immutable truth of investing though, is that you can’t time the markets, be they public or private. What’s the biggest lesson to be learned here? Invest the same amount of capital at the same pace, year in, year out. That means don’t get greedy when prices are low, and don’t sit on the sidelines when prices are high. Investing in startups sits on the riskiest edge of the investment scale. By investing the same amount of capital in the same number of companies year in and year out, you prevent yourself from being whipsawed and having too much money invested at market tops and not enough money at the bottom.

One last piece of advice for those who have only been investing in startups since 2010. If this slide continues, it’s not going to be fun. It simply sucks coming to work every day for months or even a couple of years and deal with shitty news. Whatever you do, remember to keep this one thing in mind though. Never forget that you’ve got a portfolio of investments and that despite the degree of carnage, many are going to survive and ultimately thrive again. Now put yourself in a startup CEO’s shoes. They’ve got one egg and no basket. They’re all scared and other than the most experienced, they really don’t know what to do. You may not know either, but having somebody else in the foxhole goes a long way. Practice empathy. Spend more time with the CEOs you’ve backed and do everything you can to make their lives easier. You’ll both survive the winter and emerge with a bond that lasts a lifetime, well beyond the inevitable thaw.

 

 

 

 

Posted in Angel Investing, Startups, Venture Capital | 9 Comments