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Rich

Series A Super Crunch

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Originally posted on the SpringTime Ventures blog.

A few weeks ago, I was on the phone with a SpringTime portfolio company and shared my thoughts about the fundraising environment in the coming year. This is far from a well-researched, evidenced-based analysis and more of “breadcrumbs in the forest.” I have an opinion on where the breadcrumbs lead, so I’ll share that perspective and let you decide.

Seed Funds Are Making New Investments

The growth of new Seed funds has been extraordinary. SpringTime is proud to be part of a new wave of first-time fund managers (the experience of our partner Rick and CFO John notwithstanding). I would expect nearly all the funds that raised capital in the last two to three years still have enough left to deploy in the coming months. Many small funds (outside of the Bay Area) deploy capital over four to five years, and even if that’s shortened to three years, the growth of funds in the last two years plus the number of investments still being made says to me that there is money available in the Seed market.

This could lead to more new companies getting funded or the current portfolio companies receiving follow-on funding. Either way, there may be fewer failures than we’re all anticipating, which means more companies competing for late-stage Seed funding.

The media’s consensus seems to be that venture funds are done making new investments to allocate capital to their existing portfolio, ensuring their current companies make it through the tough times ahead. Since it’s on the internet, it must be true, right? The media also rarely distinguishes between Seed and “Seriesed” (A, B, etc) and that is key difference. How a $100MM fund operates is very different from the so-called Micro VC’s of $50MM and definitely not for sub-$25MM funds.

A very informal poll of the Colorado venture funds (including many micro-funds) via a group Slack channel showed that those with capital are still making new investments. What I’m seeing is a lot of Seed money on the sidelines, waiting to get in the game. This is the only good news I have to share—a least from a fundraising perspective.

Series A Raised the Bar

We recently saw multiple investment opportunities where Series A investors left a company at the altar—term sheets either rescinded or never delivered. We’re hearing this is happening broadly. In these cases, the funds in question had done an evaluation and decided to raise the bar for where they would invest, specifically related to revenue.

If this holds steady for the next two years, that means your Series A round is that much farther away. And once again, more companies competing for late-stage Seed funding.

Fewer Early Exits

An interesting trend in recent years has been an early exit to a private equity (PE) firm. We saw this happen with fitness-related startups in Colorado in particular. PE firms have been playing the roll-up game for decades, and in recent years smaller firms started dipping down into the startup market. These roll-up plays were scooping up startups for valuations well under $100MM, often under $50MM. For all intents and purposes, these exits replaced Series A rounds, sometimes coming quickly on the heels of late-stage Seed rounds. Expect these exits to dry up as PE firms shore up their current investments, looking to turn profits on their portfolios at any cost.

This means another post-Seed opportunity is farther away.

Series A Super-Crunch

I feel like every other year we hear about the “Series A Crunch” meaning there’s not enough Series A capital to fill the appetites of all the startups looking for it. I would argue this is normal, to be expected, and even healthy. If there is too much capital in the market then it gets spent wildly and deployed poorly.

With more Seed funds than ever before in the last three years, and Seed funding still available, there are more Seed-stage startups than ever before. Series A investors have raised the bar for what they will invest in, and sub-$50MM exits to PE roll-ups are  all but off the table. With the goalposts farther away, the available seed money will dry up in the next two years. What’s worse, it may be harder to raise new venture funds, meaning less funding in the Seed phase in 2022 and beyond (but that’s our problem to worry about, not yours).

As much as I think the phrase is overused, I think we’re coming into a Series A crunch like has never been seen before. Post-Seed financing is going to be extremely competitive, harder to achieve, and leave many companies dead or stagnating. This is the Series A Super-Crunch.

Ready For Your Seed 4 Round?

What do you do to survive the next two years?

Get ready to raise Seed 2, Seed 3, Seed 4, whatever it takes to keep the lights on and the business growing. To do this, you must keep your investors close. If you’re not sending quarterly updates (monthly or bi-monthly if you can manage it) to all investors, start this right now. You’ll need those investors in the next two years.

Follow up with your current investors to know and understand their follow-on strategy and allocation. Some questions to consider: Do they have a portion of the fund reserved for current portfolio companies? Did they raise or lower that percentage? How much is left in their reserves? What are their criteria for investing in follow-ons?

Seed Is a Community

The thing that I love about Seed phase investing (note: “phase” not “stage” is intentional) is that it’s a community activity, as opposed to Seriesed stage investing which can be competitive between firms. At the Seed phase, no one firm has enough capital to take a whole round, so we all put our chips in together. The downside is that this can lead to group-think or herd mentality (if you’ve never heard my psychology of fundraising talk, get on my calendar and I’ll share with you). The upside is that we, Seed funds, are accustomed to working together. As you’re talking with your current investors, ask for referrals to funds that are not on your cap table.

The (arguably misunderstood) maxim, “a startup should always be fundraising,” is especially true in this environment. I think people take that too literally as though the CEO should always have a term sheet in hand. A better way to think of that is is to keep investor networking as part of your regular activities. It’s not an all-out-effort, but just a regular soft-circling via updates and check-ins. Just a little bit of time spent building new relationships now will pay dividends later.

Alternative Capital

This last item may not be a fit for everyone. Because we invested in your business we want to live in a world where your solution exists, serves its customers, and employs good people, I’m sharing some information about alternative capital. The rise of revenue-based financing in recent years is incredible. I believe this capital structure has great potential for businesses that are not a fit for venture capital. It has also historically been a bridge between venture rounds. It may be worth considering if this is a fit for your business in the coming months. Here is a list from TechCrunch with some of these firms. And I recently heard a podcast featuring Clearbanc that made some compelling points for their model. And Lighter Capital is also worth checking out as their model is specifically built to work between venture rounds.

The Things You’re Already Sort Of Doing

You’ve made some cuts. You’ve adjusted projections. You’ve froze hiring or prepared to balance it against matching growth. You’re doing the things. It may not be enough. I heard a great podcast the other day from a founder who had startups in both previous downturns and is a CEO of a fund-turned-startup right now. Dave Balter, CEO of Flipside Crypto is interviewed here. The big lesson I took away: when it comes time to cut, prepare to cut deep.

Breathe Through Your Ears

I’ll leave you with this one last bit of wisdom I heard somewhere along the way. A young distance runner asked her coach, “should we breathe through our mouth or our nose?” The coach responded, “breathe through your mouth, through your nose, breathe through your ears for all I care, just get oxygen into your system.”

Cash is the oxygen of business. Breathe through your ears for all we care, just get it into your system,

Happy 100th Birthday Grandma

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Ann Bea Maloy at her 90th birthday party. I love this picture because she was so pleased with having a tiara for the day. Seeing her joy and energy at 90 makes me smile & laugh every time I see this photo.

Today, 4/17/2020 my Grandma (my dad’s mother) would have turned 100. I grew up half a mile from her and my grandfather in the house that they bought in 1948, and owned until she passed away. She was a big part of my life growing up. During high school I spent nearly every Sunday afternoon over there talking with her and Granddad. We had chipped ham sandwiches (it’s a Pittsburgh thing) and “Grandma’s Iced Tea.”

Her iced tea was famous—it is the sweetest sweet tea you’ve ever had. I’ll make you some when you come to Colorado. She had to make gallons of it for every family gathering because we all loved it so much. 

She was an amazing woman that showed love, kindness and understanding to all of her children and grandchildren. Some highlights about Ann Bea Maloy include: 

  • Earned her bachelor’s degree from Pitt when few women went to college
  • Her best friend was Jewish (this was unheard of, on both sides, for her generation) 
  • A savvy investor who understood the time value of money
  • A lead foot driver who used her white hair as a tactic to merge at the very front of the traffic
  • Doted on her grandchildren through her whole life 
  • Loved big gaudy jewelry
  • Always said, “we Irish need to stick together”
  • An independent woman, growing old was hard for her because everyone always wanted to do things for her!
  • And she was truly the matriarch of the Maloy family 

To celebrate her life, we got together today for a family Zoom call and did an iced tea toast. My uncle put picture of her at 20 years old in the frame of his computer. 

Iced Tea Toast 4/17/2020

Happy birthday Grandma. Thank you for all you did for us, for all you gave to us, and for always being there for us. I love you.

Letting the Air out of the Bull Run Bus

By Universe

Coronavirus is everywhere. Well, if you listened to the news you’d think that it was everywhere: in every home, on every corner, in every convention center, and on every flight. In truth, it’s still spreading, slowly, but spreading indeed. At the time of writing this, it is not an epidemic in the country. But you think it was based on the reaction of the general populous. The reaction to COVID-19 is spreading like… like a virus, only worse: a virus that can transmit from one person to one million in a single tweet.

Conference Cancellations

The first chip to fall in what could be the economic downturn of 2020 was Mobile World Congress. Driven by fears of contagion, a couple of big organizations pulled out. And then the rest of the world pulled out. So the organizers canceled it.

Next up, the corporate conferences started cancelling. Facebook. Adobe. Google. Microsoft. IBM. More. And then Expo West Natural Foods had major players pull out, followed by the entire conference cancelling. Then HIMSS.

Corporations are restricting travel. Mayors are declaring pre-emptive emergencies. (Does that defeat the purpose of declaring a state of emergency?)

And the 400,000 people that go to SXSW are holding their breath as they watch the mayor of Austin, the Austin City Council and SXSW organizers dance around the word “cancel” like it was forbidden fire. No one wants to be the one to cancel the event that brings $350+MM into the city each year.

Update 3/6 – they stopped dancing and the city cancelled SXSW.

All of this has me thinking about the economic impact to the country and the world.

Corporate Actions

First let’s unpack the corporate actions. Restricting travel and cancelling your own conference (that is purely a cost center) is a very rational thing for a company to do—not because of the health and safety concerns but because of the fiscal responsibility. The coronavirus provides the perfect scapegoat for saving a significant sum of money. Cutting your developer / marketer / influencer conference and saving $1-10MM in hard event costs “out of an abundance of caution” is a perfect excuse. Same with cutting down all but essential travel. This is a once-a-decade opportunity for big businesses to scale back costs without hurting employee morale, and you damn well better believe they’re going to take it.

With or without a SXSW, F8, MWC, Dreamforce or whatever your conference of choice is, corporations scaling back travel wil have ripple effects throughout the country. Those ripples alone are probably not enough to let the air out of the tires on the Bull Run Bus. Couple that cutback with media-fueled fears of large groups of people, and add in a solid dose of big businesses getting more restrictive with spending—done out of caution in case of an economic downturn—and we’ve got the making for an economic downturn.

The industries that are most exposed right now are anything reliant on travel, groups, or personal interaction. And then closely followed by consumer products, and its sister industry: advertising. But more important is the understanding that all industries are subject to belt tightening, and thus the most at-risk startups are those not mindful of their cash.

Drilling Down

My friend Eric Marcouliier on his website, ObviousStartupAdvice.com says that the CEO has only 3 jobs: 1) sell the vision, 2) hire the best people, and 3) never run out of money. Right now, #3 is all that matters.

As the cases of the coronavirus spread and grow, the fear factor will only get worse. As I write this, my mom is going through chemo and has a compromised immune system. I worry about her, though I know she and my dad are taking precautions. I live 2000 miles away (CO to Pgh) but if I lived closer, I would be very careful about going over to see her. And I sure as heck wouldn’t go see her after coming home from SXSW (and yes I’m still going to SXSW) . And if I lived with her, I wouldn’t go to SXSW at all. I’m not worried about me getting coronavirus—if I get it, I’ll fight it off and recover because our bodies are built to fight viruses. She might not. How many people are having the same thoughts?

Let’s play this out on a larger scale. Corporations cut travel. Conferences are cancelled. General public cuts exposure to large groups of people. The country turns inward, online, and closes its doors. For every 1 person that gets sick, another 10,000 are paralyzed by fear. Schools are shutting down—preemptively or reactively. With children at home instead of at school many parents will be unable to go to work, which puts financial burdens on the lower and middle classes. Many of those people do not have the financial resources to withstand missing work. Household spending begins to dry up. The economic ripples begin turning into waves.

Travel industries and tourist locales are going to get hit hard this year. Retail is going to take it on the chin, again. Events–whether sports, concerts or conferences–will suffer. As these ripples out into the economy more people will become unemployed. Families will spend less, resulting in lower consumer spending, and that is a massive driver of our economy right now. When consumer spending falls, so falls the economy.

It doesn’t help that supply chains are getting disrupted right now—and I mean “disrupted” in the classic “breaking” sense not the startup “innovation” sense. With less stuff to buy and fewer bucks to buy it with, the secondary effects kick in: less advertising. Lower marketing budgets. Less dollars to go around in that industry. (Poor AdTech, can’t win in a bull market, going to get slaughtered in a bear market.)

Side bar: I can imagine an alternative scenario for adtech where everyone stays home and digital ads and digital video ads take off. This is with the added disclosure that I’m an investor in an awesome video ad tech startup, Brandzooka.

I digress.

Bull Run Bus

My belief is that the underlying business fundamentals of most businesses are strong. That is, the Bull Run Bus has been based on solid fundamentals and not the “eyeballs” of the late 90s. And as far as I know, there’s no financial manipulation happening by Wall Street as with the 2008 crash. Even better, the public market is not buying the “cult of the CEO” shit (WeWork, Uber) any more. My hope is that there is truly no funny business being done by bankers (whether of the fed or goldman variety) that has created unnecessary risk exposure beneath the surface.

The reason we’ve experienced an unprecedented bull run is because we continue to unlock human potential by replacing humans. When Edwin Hubble proved that other galaxies existed and the universe was unimaginably massive, he did so by sending the data of his observations to humans (mostly women) who computed the results using pencil, paper and slide rule. Human computers. (h/t to Answers with Joe) We now have all that computing power in our pockets, and more. That is unlocking human potential by replacing humans. That cycle is accelerating. For this reason, I’m a long term bull.

But even with solid fundamentals, as consumer spending dips, as consumer sentiment is driven by fear, and all these little ripples sync up turning into waves. Add in businesses curbing spending—starting with travel budgets being cut—and the economy will take a hit.

Advice for Startups

Startups, now is the time to take a hard look at your cash flows. The venture capital model is predicated on a company continually raising more capital at higher valuations in every subsequent round. The underlying message is: growth at all costs. That is certainly one strategy. Another strategy, and more fitting in down cycles, is to keep the lights on at all costs.

What will it take to stretch your runway between rounds from 12 months to 18 months? From 18 to 24? What do you do if your revenue is cut in half? What happens if you can’t raise at the next higher valuation? Who is prepared to take salary cuts? What projects need to be cut? How will you handle all of this as a leader? Now is the time to buckle down, figure this out, draft a plan, and be prepared to move quickly, nimbly.

It’s been fun, bull run. I’m a long-term bull, but I’m ready to ride the bear this year.

Turkey Hat

As Nassim Taleb said, “you can’t make a prediction without being a turkey somewhere.” We’ll see where I end up being a turkey…

Losers
Consumer goods
Physical retail
Travel
Events
Marketing and advertising

Winners
Remote work enablement
Ecommerce
Esports
Streaming services

Could go either way
Supply chain
Logistics
On-demand economy
Digital advertising

Originally written Tuesday March 3, 2020. Updated Friday March 6, 2020.

The Night Before S8E6

By Universe

Here’s my prediction. I thought I’d share with you my awesome theory. Don’t read this if you haven’t seen up to S8E5. And don’t read if you don’t want this theory rolling around in your head in advance of the show tomorrow (or today as it’s already late here). First, it’s worth saying that I’m really enjoying Season 8. Despite the hate on the internet—and granted, it’s the internet and so there’s always going to be hate—I think the writers, producers and directors have done a phenomenal job with this season.

Read More

This One Thing in The Last Jedi Really Ruined It For Me

By Universe

I just saw Solo. I want a sequel.  But what I really want is rant about The Last Jedi right now.

There’s a saying I heard somewhere about that the only thing Star Wars fans hate more than Star Wars’ critics is Star Wars itself. Might be true for me as I reflect on The Last Jedi.

The more distance I get from The Last Jedi the more I am pissed off about the resolution of the Finn/Rose/Poe conspiracy. To be fair to the movie, I really enjoyed the Rey/Kylo/Luke story arc. But the more distance I get from The Last Jedi, the more this one thing really grinds my gears.

Let’s summarize:

  • Poe asks for information from his commanding officer
  • She deems it unwise to share with him, given his reckless behavior
  • Pissed off by the slight, he proves his recklessness by defying orders in two huge ways:
  1. He sends two people, a mechanic and an ex-Stormtrooper, on a crazy one-in-a-million-shot mission
  2. He mutinies and captures his commanding officers

Let’s pause here

The one-in-a-million mission was a failure. That’s fine. It’s actually pretty good and it’s nice to have some realism (for lack of a better word) play out, as opposed to a non-stop barrage of one-in-a-million things panning out all in the same movie.

I don’t have a problem with the mission itself. Even the entire casino planet being a pointless diversion except to maybe play out a freedom-from-oppression allegory and introduce us to the new character, DJ. That’s fine. Whatever.

And the plans fail. That’s great. Better yet, they get betrayed by the morally-absent new character, DJ. That was fantastic. In your heart of hearts, you were secretly excited for a “new Han.”  A scruffy, stuttering, hacking genius was there to tease us and to make us think we had a new Solo who was going to join up and save the rebels, flying out of the sun to blast the baddie at the last minute. Admit it, you thought it, you hoped it. I did.  But no, the tables turned on him and he turned on his new friends. That was a great twist.

Not only does DJ turn on the two misfits he brought on the ship, but he turns on the entire rebellion by helping The First Order track the loadlifter ships that were fleeing in secret. The First Order otherwise would have never noticed. That’s Crait salt in the blaster wound right there.

Fast forward a bit

  • Leia wakes up from her near-death and blaster-stuns Poe
  • The rebels begin their evacuation on the loadlifter ships
  • Holdo stays behind
  • First Order starts shooting down the evacuation ships
  • Holdo sacrifices herself to shred the mega-class Star Destroyer (fucking amazing BTW)
  • Finn, Rose & BB8 escape to join the rest of the rebels on Crait

It’s at this point that I’m starting to become the True Star Wars Fan. My transformation is nearly complete.

Poe, along with Finn & Rose are put right back into the rebel troops. And Poe still holds his position as an officer.

In what universe would a mutiny leader be left in a commanding role? Shouldn’t he have been spaced? (I’m crossing universes with that jargon, but you know what I mean.)

Not only did Poe lead a mutiny, but his actions along with those of Finn, Rose and BB8 led directly to the deaths of hundreds of the (already severely diminished) rebel fleet. The escape to Crait would have gone of perfectly smoothly, without the First Order ever noticing if Poe had just followed orders of a commander who was wiser and less self-absorbed. There would have never been a Battle of Crait, and there would be hundreds more alive, ready to continue the rebellion another day.

I’m not saying this because I think there shouldn’t have been a Battle of Crait. Quite the opposite.  The battle was awesome. Nor am I saying the plot line was bad. It wasn’t; it was fantastic. Everything coming together in the rebel’s last stand.

Missed opportunity

I’m saying this because there was an opportunity to enrich the plot by holding Poe, Finn, Rose, and even BB8 accountable for mutiny, treason, and the deaths of a hundred or more fellow rebels. Instead, they’re back in the ranks like nothing ever happened.

The character arc of “Poe learns his lesson” and decides at the last minute to call off the frontal assault against the battering cannon is pathetic. He mutinied! He was responsible for hundreds of deaths! That doesn’t phase him or anyone else, at all. Anywhere.

There’s a great chance to add some distention to the ranks, for the rebel alliance to have internal divisions to overcome. There’s an opportunity to turn from black/white characters and add some layers of complexity. Is BB8 a fun party droid, or a mutiny conspirator partially responsible for hundreds of deaths. Is Finn a reformed Stormtrooper, or mutiny conspirator partially responsible for hundreds of deaths. They are both. And that would make them better characters.

Instead, it’s brushed under the rug, and we all escape in the Falcon singing kumbaya without acknowledging that major mistakes were made, that a mutiny—no matter how well-intentioned—led directly to the deaths of hundreds of fellow rebels.
None of that got addressed. At least for now. Maybe it will get addressed in the next film. Maybe.

Until then, my transformation to True Star Wars Fan is complete.