My Least Favorite Part of Venture Capital

I'm a lead investor.

That means I'm usually the first person to put down a price on what your company is worth--a dollar value on months, if not years, worth of your work, blood, sweat, tears, stress, etc.  

"Here's a piece of paper that says how much I think your dreams are worth."

The reality is, any price that I put down at the stage that I invest isn't going to feel like enough--and if it doesn't feel like enough, I'm probably grossly overpaying.  But, you don't feel like that as the founder.  

Your company is special, which, I 100% agree with.

That's why, out of the 2,000 opportunities I saw this year, you and your company are one of the 8-10 I gave a term sheet to.  So, congrats!  All the reasons why you think you should get a much higher price for this round are the very reasons you made it past the 1,992 other companies.  

But, at this stage, starting from a Powerpoint, prototype, or even a demo product, you probably have just as much chance of going under as any other company.  It's sooo early in the life of the company that it's nearly impossible to determine if, in 7 or 8 years, whether or not you have a better chance at success than anyone.  

If picking out the winners were so easy at this stage, VCs would be a lot better at it.  

Really, the biggest determinant of price is supply and demand--and so, more so than a qualitative judgement on your worth as a human being, consider this bid a data point.  This is where I think the market is for this company right now.

That other company, I can't speak to what happened there and why they got a $10mm pre-money.  I passed on that deal.  Maybe those investors were smarter than me.  

What they aren't, however, is harder working--and I have to say, it really bugs me when I invest in someone super early and then the next round comes in and the price isn't that much higher than what I paid for it.  It's like, "Why did I take all this risk at this stage if the next round is going to be a $3mm round on a price of $12mm?"  

Makes my $7mm pre seem not really worth the risk in the grand scheme of things.

But back to us.

Look, we're just not aligned here.  I'm just trying to get the best price possible for my investors, and you're just trying to take the least dilution.  

I hope we can meet somewhere in the middle, but yeah, this part is kind of going to suck.  The only thing I can really do is tell you how I came to this price, what other deals I closed with similar pricing, and show a willingness to be flexible if it turns out we underpriced it and the round is oversubscribed.  

Besides, the only thing that matters is how big it gets in the end, and how self-sufficient we can make this company over time.  A million dollars on the pre-money now pales in comparison to the dilution of having to take a few more rounds down the line.

Not Just Any Given Sunday #takeaknee

Posted this in what used to be my tech newsletter, and what has lately been about more...

Yesterday wasn't just any given Sunday, was it?

I would imagine most of the NYC-based readers of this newsletter don't take the position that "these athletes should just stick to sports" nor do they feel that way about Jimmy Kimmel and his recent conversations around healthcare.  So, telling you that I support their willingness to share their views and why seems a bit like preaching to the choir.

What I will say is that there's no way either side of this conversation is going to "win" unless both sides start asking each other why they feel that way, and actually listening.  No, I don't mean listening to Trump and asking him why he feels the need to call private citizens SOBs.  Honestly, he's got the least important opinion in this whole equation--it's just the wasted noise of an old racist without any character or class.  

No, I mean that athletes need to understand and listen to people about what the flag and the anthem means to them--and why they feel offended by the protest, as is their right.

And anyone who says anything about these athletes needs to open their ears and listen to their stories.  They need to listen to firsthand accounts of what it means to be black in America.  Go read a book like The New Jim Crow.  Then, feel free to say you disagree with the protest.  

But never tell someone they don't have a right to *peacefully* protest--because then you simply don't understand the basis on which this country was even founded.  

The Lovett or Leave It podcast recently had Normal Lear on--the creator of All in the Family.  He was saying how "in love" his generation (he's 95 now) was with America.  We had not only won a World War on two fronts, but we were successful in helping to rebuild wartorn Europe and Japan.  We had a lot to be proud of.

What strikes me about these protests is what kids and young people likely think about this country today and whose side they're likely to be more sympathetic to.  They see the widening gap between the rich and the poor.  They see our inability to deal with drug addiction and gun violence or our problematic education system--all things other countries seem to have a better handle on.  They see us mired in a war in Afghanistan that, in two years, will start recruiting kids who weren't even born on 9/11.  I have a feeling that the idea that the flag and the anthem is unquestionable in any way isn't something that's going to hit home.

One thing Trump got right in the election is that there are a lot of people who feel like America isn't so great anymore--but what I hope he's wrong about is that the people fixing that aren't turning back the clock for answers.  We're not going to regain greatness by waging war or nation building.  We've got to do it by coming together to solve tough problems like inequality of all kinds.  We've got to get healthier and smarter--and that's going to take creativity and courage to change systems full of friction.  

People wanted change last November.  They didn't get it.  When a politician doesn't listen, that's not change.  That's more of the same.  

When every single NFL game has players protesting in solidarity--that's different.  That's change.  That's going to make an impression that people will notice.  

If they ask why and actually listen, Trumpism is done.

Work Like You Mean It: Why I backed Wethos to change the future of work.

If economists tried to measure the cost of the malaise that the election of 2016 left, we'd undoubtedly see billions, if not more, lost in worker productivity. 

At the same time, I don't think I've ever seen more political engagement in my lifetime--and not just political engagement, but all sorts of action around causes they care about.

These two realities are linked.  If you're not doing something to positively affect the world around you, you've likely been overcome by a lack of motivation.  You're realizing that passing your work hours for pay alone, without meaning and impact, just isn't cutting it anymore.  

We've seen the move towards more flexible work, but I think it will pale in comparison to the shift towards meaningful work.  The best and brightest are going to need a much better reason to work for your company than the perks and benefits--the work itself is going to have to be meaningful. 

That meaning isn't going to be something you search for on a traditional job board branded around impact--it's going to be an inherent part of the way you search.  What you care about is going to be a filter as important as geography.

That's where Wethos comes in.  I met Rachel Renock a few months ago at a SheWorx pitch event.  I got what she was doing right away.  Starting with freelancers, she was creating a place where impact was the guiding principle by which talented people sought ways to share their professional talent.  

It reminded me of when I first heard the pitch for Kickstarter and then witnessed what it would become.  While it may have been the way some bands would start funding their next album, it would go on to affect and inspire a whole generation of not only creative projects, but business plans as well.  Pre-sales would enable companies to exist off the financing of the fans most passionate about their vision for products.  

I was reminded of that when I interviewed Rachel's co-founder Kristen about how she hired their first two developers on the Startup Recruiting Podcast.  What struck me was how they were bought into the passion of the team so early on--almost in a way that made it seem all too easy to hire them.  That's going to be the case in the future.  If you're not convincing someone of the impact they can make doing their primary job, you're going to have to overpay to make up for the lack of meaning you're providing.  While they're focused on just freelancers today, still a huge market, I'm convinced they'll not only expand to all meaningful work in the future, but they'll help turn more work meaningful by changing the way companies design roles for their talent.  Eventually, they'll impact how companies design their own goals--because otherwise they'll die from lack of talent.  

I look forward to working with the Rachel, Kristen, and Claire, as well as some fantastic co-investors, like Flybridge and Corgin.  Jesse Middleton at Flybridge led their investment--and Jesse knows a fair amount about seeing the future of how people work from his days as the founder of WeWork Labs.  Also joining our round is Fabio Rosati, who was CEO of Upwork/Elance.  Together, we'll help impactful organizations find the talent they need to make a difference--and help talent find work that makes a difference in their lives.

Introducing Petal, Providing Access to Credit to Thin File Consumers

One of the biggest fears about the future of data is that everyone will turn into a number--that algorithms will turn everyone's personal experience into a single score that will decide whether or not you get what you want, a job, a house, a car, financing for a new business etc. or whether you get shut out.

Actually, you don't have to wait for that to happen.  Consumers have been living this reality since 1956.  That's when a company called Fair Issac, or what we now today as FICO, started selling consumer credit data to lenders.  A four billion dollar publicly traded company basically decides who gets credit and who doesn't--and if you don't already have credit and you're invisible to FICO, you're going to get financially left behind.  As they say, it costs money to make money, and without access to credit at key moments in your life, you're going to wind up on the wrong side of the growing gap between the rich and the poor.

Just because you're invisible to FICO doesn't mean you haven't been doing anything financially.  You've been paying your bills on time, socking some money away for savings--you just never had a credit card or took out a loan.  Maybe you immigrated from another country.  Either way, this shouldn't stop you from being able to get credit when you need it.

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That's what I believe and that's what Petal believes as wellBrooklyn Bridge Ventures led their seed round last winter.  

Petal is a simple, no fee credit card that looks at the money you make and the bills you already pay to help you qualify instantly. That means you can get a great credit card and start building your credit history, even if Petal is your first credit card.  You can sign up to be one of their first customers here.  

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It's not only about building up a score--it's about learning how and where to use credit appropriately.  Petal provides transparency to consumers through their technology to help them make smart credit decisions.  What card do you know tells you how much you'll pay in interest *next month* based on what you pay now?

I first got introduced to them by my friend Kevin Marshall back in March of 2016 when they were Creditbridge (Petal is to Creditbridge what Frogger is to Highway Crossing Frog, I suppose).  He sent me a pitch and I didn't quite understand the issue, so I passed.  Undeterred, they kept plugging away, working on the brand and the message.  They got mentioned to me again by Nan Li at Obvious as an interesting team he had just met.  When you start to hear of a team multiple times from multiple people (which is the same thing that happened to me with Canary and The Wing), you take notice.  I don't mind cold intros, but market buzz helps push things over the line to at least take a meeting.  

In our first meeting, which was theoretically scheduled for 45 minutes, I sat down with co-founders Jason and David for more than two hours.  What sold me was their fluency in this market.  It was obvious that they had spent most of the year becoming the smartest possible founders they could in their space--and talking to every founder who had done anything adjacent.  That's important for a VC.  You don't want to be able to be smarter than your founder about a pitch after an hour of Googling around.  

In the last ten months since I've invested, I've seen them execute in the most organized and professional way possible--it's not easy to stand up a consumer credit card company from scratch.  They've gained the attention of large players in the space and attracted some high quality talent to their team.  

As we saw with the Equifax breach just yesterday, the monolithic world of centralized control over your financial life is being disrupted more and more each day.  New consumer friendly brands are being created and new products are coming to market.  It's a dynamic space and I'm excited to have gotten the opportunity to back Jason, Andrew, David, Jack and Berk and the rest of the team in their mission to bring credit and financial opportunity to underserved "thin file" consumers.  

Not Interested: How to know whether you've actually got an investor on the hook.

I don't think there's ever a time when I feel more like I'm raining on parades as when founders tell me how interested other VC firms are in investing.  I've seen it time and time again where founders, understandably apprehensive about fundraising, read too much into their engagement with investors--especially non-partners at firms.

The founders will say things like the following--and then comes my splash of cold water, which is honest, but also makes me feel like the bad guy, or not enthusiastic about the company.  In reality, I just don't want the founder spinning their wheels and wasting their valuable time.

"They're interested, but it's too early."

There are tons of examples of later stage venture firms not only placing seed bets, but also skipping right to Series A with huge "seed" rounds right out of the gate.  If Mark Zuckerberg was going to start a new company tomorrow, do you think he'd be too early for anyone?  No.  There are also lots of examples of companies who get funded by later stage firms that don't have the metrics that we've been told you need--$150k in MRR, a million users, whatever. 

"Too early" is a pass.  

You might take enough risk off the table for them in the future and they might come in at a later right, sure... but if they're not writing a check now, they're passing.  When you get a pass, move on, don't keep your hopes up, and go back to work.

"They're very interested if you can get a lead."

There are some firms that, as a policy, don't lead.  That's fine, but saying you're interested pending a lead is not saying you're committed.  Committing is saying "If you find a lead, we'd like to come in for $200k, assuming standard terms and the price isn't anything more than X."  Even better is when that firm reaches out to firms that do lead and says, "We've committed, but we need a lead."  Those people are basically in, and everyone else is just sitting on the sidelines with their thumbs in their butts wasting your time.  Many of those people are assuming you won't get a lead, and they're just being polite, and if you do get one, it's a good way to cover themselves in case they missed something.  This way, they try to guarantee that if someone else jumps in, they get a second look.  It's a free option, so why ever give a definitive no?

"[Non-partner] is really excited about it and is going to bring it to their partner meeting."

Listen analysts and associates...  I've been in your shoes.  I've been the junior person around the table trying to get partners excited about a deal.  The absolute worst thing you can do is fail to be transparent with a founder as to where your team is on a deal, and to lack the firm awareness to realize whether you have any internal traction.  It wastes founders' time and ruins your credibility.  So, when you know that founders are going to hinge on every little indication of interest, you should be straight with them about your process and who gets to make the decisions.

Unfortunately, even when you are transparent, the words "partner meeting" make founders think they are just a week away from a term sheet when, in reality, they're one of many line items likely to be passed over. 

What you really need is partner interest.  Even when you've got a principal, like I was at First Round, who can do deals, you still need partner interest to get the check approved.  So, realistically, unless you've got partners showing up to meetings with you, staying the whole time, and engaging with you after, taking multiple meetings, you really don't have anything.

Two things to watch out for:  The partner who gets dragged into a meeting.  Who set this meeting up?  Does the partner leave after ten minutes?  Do they engage with you after?  Do they show up in the next meeting?

Two is the partner cc'd on e-mail while the junior person does all of the talking.  This happens a lot with growth stage firms that do a lot of random cold calling.  I'll bet these firms have a special account or filter that allows them to ignore that CC, but it makes you feel like the partner is interested.  

"We want to see you get up to X milestone."

First off, like I said before, there are plenty of examples of firms that invest before conventional milestones if they really like something.

Second, this isn't a progress.  It's "come back to us when you get there".  If a firm really thought you had a 100% chance of getting there, why would they wait, potentially risk losing the deal, and pay up for it later?  The reality is that they're just setting a time for a check in.  It really doesn't mean interest at all--especially if they're not engaging.  Engagement means continued customer introductions, or potential talent introductions.  They start acting like an advisor--maybe even having regular calls with you.  

So how can you tell whether or not a firm is actually interested in investing?

a) They give you a term sheet or actually start discussing not only the terms of a deal, but how much they'd like to put to work.

b) You've met all of the people necessary to put a deal together, and those people take initiative to be engaged with you, multiple times.

c) You actually get invited to an official weekly partner meeting.  That's a thing.  

d) Senior people keep hounding you--like, daily.  

How else would you know?  You ask them.

Founders should be asking filtering questions--the kinds of questions designed to kick investors out of their pipeline.  I know it feels good to have a lot of names in a Google sheet, but a lot of those leads are cold or dead.  Find reasons to knock them out by asking questions like "By when can I get a firm yes or no?"  "Who needs to sign off on this?"  "What are your remaining issues?"  "Who in the firm has said they'd like the firm to invest?"  "Who is against the deal that I need to work on?"

Better to be positively surprised that someone came up with an offer than to feel like you're going to get something done and then have your pipeline fall apart.