When I hear one of our CEOs say “everything is awesome at our company right now; the entire team is in a great mood” – my first thought is “uh-ho”.
Because at great companies things are happening so fast, things are being questioned all the time, things are so at / over capacity – things can’t possibly all be awesome. There is friction, there are disagreements. Great companies live at the edge and it sure as hell does not feel “awesome” – even as an outsider it can be painful to witness.
So when I hear everything is awesome, I know it isn’t.
A few weeks ago I moderated a panel at Tech Open Air. The topic was the shifting venture landscape and how entrepreneurs can navigate it. There are a bunch of new VC firms – some offer services some don’t; there are a bunch of old VC firms now offering a lot of services, some are sticking to their models, etc – what really matters to entrepreneurs?
My favourite part was when Yann from Atomico and Amit from Bessemer talked about – and thankfully disagreed – about something called a “donut board meeting.” You’ll have to watch the video to find out what that is because I’m a little too lazy today to write it up.
And let’s all welcome Felix Petersen to the dark side.
This morning when I checked Instagram I had notifications that an account called eatingberlin had liked two of my pictures I had taken at Berlin restaurants. It reminded me that I had seen others like berlinfoodguide or berlinfoodstories – so I followed all 3 of them to make sure I’m in the loop on new food hotspots in Berlin.
In any case I remember somewhere I had seen one of the accounts reference a new coffee shop called Casita. This is it:
I had always wanted to check out their coffee and space but had never found the time recently. And then I had another notification that an account called masterwolfcoldbrew had followed me. I am not sure why but I may have developed a slight reputation as an extreme coffee nerd and I’m lucky to be on some kind of list of emerging coffee brewers and sometimes samples etc will just show up at the office. I am not going to complain about being on that list. In any case this is their cold brew; it is very good (not my hands in case you are wondering, but taken from their Instagram account):
So I checked out masterwolfcoldbrew‘s Instragram profile and the first picture I saw was this:
So basically a place I had discovered through Instagram had the coffee in stock that had discovered me (?) on Instagram. Cleary this was a sign I had to take action on.
So this morning I went to Casita and got a Master Wolf cold brew. It’s one the best things I have done in a while – the place is magical and so is the coffee. If you are in Berlin I recommend you do the same soon as long as the summer is still around.
This is not really news to many – but I walked away thinking local discovery on Instagram is something I am be going to be doing more off.
P.S. for the folks in Berlin: A few minutes later I walked in to the new St.Oberholz at Zehdenicker Straße. The barista spotted my cold brew and then gave me a free sample of his own cold brew he does at home asking for feedback. So a shout out to Brewhund. Man I love the coffee in this city right now.
“We’re early stage” doesn’t really mean much because it can be stretched to mean a whole range of phases as a company grows up. And that’s OK – VC firms come in all shapes and sizes and folks are successful with all kinds of models. We could have a long debate about what “early stage” is and we’d have to agree to disagree because there is no right and wrong. But what we can agree on is that saying you are “early stage” is great because it implies you are an early risk taker.
But if you are a founder raising a Seed or Series A round – and you’re looking for an investor laser focused on that (you may not be and that is fine); this is a way to find out how “early stage” a VC firm really is – ask them the following questions:
- What is their average and median first cheque size in to a company
- In what % of their investments were they the first institutional money / VC to invest in the company
- In what % of cases did they lead (the first / early) rounds
That’ll tell you a lot about the character and focus of the firm, no matter what the claim is.
There’s a lot more you can be asking a VC of course.
There’s a startup in Berlin called Jobspotting – if you’re looking for a new job you must check them out.
They run a series of interviews, and a while back I had the pleasure of having a chat with Carrie King about how I became a VC and a bunch of other things.
We had that conversation many months ago, so when it came out today it was fun to see if I’d still stick to what I said back then. And I think I do.
Here’s the interview.
Every now and then VC folks should remind themselves of where the capital they raise is coming from. The capital we get fees and carried interest on. The capital we get the opportunity to build wealth on.
And I mean the ultimate source of capital: behind every pension plan that invests in a VC fund are (current and future) pensioners, behind a fund of funds there may be a workers saving plan, behind a life insurance fund there are actual individual life insurance savings.
The point is that the folks that are often the ultimate source of capital for VC funds most likely never have and never will earn anything remotely like VCs do.
So it’s important to remind ourselves what a privilege it is to be trusted with other people’s money. A privilege that comes with a huge responsibility to generate returns for all these folks.
That’s the responsibility of venture capital. It’s not a game.
In a day and age of valuations as score card there are in some cases extraordinary efforts being made to forcefully make certain milestone valuations happen (100m, 500m, 1bn etc).
The right way to make a high(er) valuation happen is of course to have someone just pay that price with fair and appropriate growth / later stage financing terms. Lots of companies can pull that off – even to the point where new later stage investors are just getting common stock.
But that is not what is going on in many cases. This is what’s going on:
New later stage investor: “Hey so I don’t think your company is worth $500m; maybe $200m – BUT if we can agree that I can get a 2x liquidation preference on my $50m and a full ratchet I would be ok with it. You should be fine with it because you told me next round will be $1bn+ – so we both win. You get your $500m valuation now, you don’t get a lot of dilution and I know I’ll make a safe 2-3x.”
Basically this means the new later stage investor will still make a 2x return if the company is sold as low as for $100m (!). And later stage investors typically are aiming for just a 2-3x. So the headline valuation nearly doesn’t matter – they’re happy to meet your milestone if they can generate their required returns through other terms (liquidation preferences and full ratchets) + some extra upside if the the company moves beyond the milestone valuation.
Now the bet that is not being made any more here is this: “I think the company is worth X today and I am going to price it exactly as that. I think it can be worth 3X in Y years – that’s the upside / risk profile I’m taking”. Basically the scenario above is close to pure financial engineering (although you do have to believe the company could be sold for $100m). It’ hedge fund style, not venture funding. It’s very different; I’m not saying it is necessarily a bad thing always.
This approach is working well for some companies. Maybe it’s OK – we’re all adults. Everyone’s knows what they are getting in to. However, in more than enough cases I am sure it will turn out to be a horrific house of cards on the way down.
I suppose this about short term greedy vs long term greedy.
It is short term greedy to put onerous terms on to an early stage company just because you can. This is not about finding (or adjusting to) the right price – this is about unreasonable participating liquidation preferences (multiples thereof), too high a dilution from the get go (30%+ seed rounds etc) instead of adjusting the round size, taking key rights away from the entrepreneur or angel investors, etc. There’s a large torture tool kit folks can use if they want to.
It is long term greedy not to do that because of the compounding returns on reputation for being a fair and good to work with investor (get in to the better deals long run) + the added bonus of not screwing up the company as an investor.
But there’s another, slightly more selfish, reason you may want to ease off the torture tools as an early investor: it’s because they may be used against you come next round.
So say you negotiated a 2x participating liquidation preference (not pari passu) for the Series A – the folks leading the Series B may want that too. And if you invested $2m and they’re investing $15m you’ll have a participating $30m ahead of your $4m in the liquidation preference stack. That’s all fine if the company is a blow out success; most are not – it will hurt you, maybe badly.
Say you negotiated that you as the lead investor in Seed / Series A get to say amen to literally any kind of important decision at the company with little or no important rights left with the entrepreneurs or angels (no ‘balance’). Well guess what – great precedent. The new lead investor is going to want that too – i.e. all the power, no balance. Also to your detriment if need be.
Now, good investors that join later may not ask for any of the nasty early terms but would rather ‘fix’ all of that by correcting the terms also for the A / seed and restoring a more healthy governance. But even if they do – the reputation damage for the early investor is still significant; the entrepreneur will of course be focused on the folks that came in to save the day.
I could go on, you get the picture. You have to be careful when setting precedents as an early investor.
The ultimate act of giving as an investor is of course when you wire money. Hopefully you give a lot more over time by helping the entrepreneur a long the way.
But as an investor you also do a lot of taking. It starts with shares. But it goes on with reporting requirements, board meetings (although they should be giving opportunities), info requests, LP conference attendance for CEOs, the (hopefully only) occasional wrong opinion / advice, etc. It can be a long list.
Nearly everything in life and business is about giving and taking. But every now and then as an investor you need to step back and check whether you are giving or taking more. And if you ain’t doing a lot of giving, you may want to slow down on the taking part too.
I think net-giving is the best long-term strategy for investors.
A few weeks ago the folks at the factory put together a great pop-up (as you do these days) tech conference called Startup Europe Conference. Lots of people came from all over Europe – an ecosystem of increasingly connected dots.
What stuck with me though was something Christophe Maire said in passing. He probably didn’t think much of it; I’ve been thinking about it a lot since then. He said, “you know, entrepreneurship is now the new normal in Europe.”
Christophe is right; something has changed over the last 1-2 years and we didn’t notice it. Thinking about it, the attitude has developed like this over the years:
- Wow we’re a [Berlin / Stockholm / London / etc] startup
- Wow we’re a startup
- Wow we’re solving this really big problem
And politicians, media, non-tech folks have started admiring their local scenes and celebrating them. It’s not a freak show any longer.
Don’t get me wrong – there is so much left to do; but I like this new normal.
The panel at the conference was a few weeks back and I’m not even sure what we were talking about. But I do know it was called “50 Shades of Green” and was fun: