Startup Valuations & Fundraising (ft.Carta)

Hello, good evening, good morning, ladies and gentlemen. So on today's podcast episode, we have Peter Walker. He's the Director of Insights at Kartha. Kartha is an end-to-end platform that ties together different players in private equity and venture, so mainly helping businesses manage their cap tables, valuations, taxes, equity programs. And I think, Peter, you will walk us through what Karta exactly does. Today, I particularly wanted to have you on the podcast because I personally think the insights that you share are so cool. I've been following you for a while now, and I think there's one thing to read through the articles and try to understand the trends, but I think it can make it a lot of fun if you have somebody that can weave a story around those different data insights and you can connect the dots. So, Peter, big fan of yours, and I think you have a huge following. So many people are actually gaining a lot from your insights. You're doing great. Welcome to the show.

Thanks so much for having me. Yeah, it's— I'm so glad that the data has been resonating or useful to you. That's wonderful to hear.

Exactly. Actually, for this podcast, I thought of touching base upon 2 main themes. So we have how early-stage valuations are evolving. that founders should know, so specifically early-stage founders, and how fundraising timelines have been shifting and what is the implication for startup runway. I think these are really concerning topics for early-stage entrepreneurs. So how about we start with what Carta does and then we can move on to the insights?

Absolutely. So Carta at its heart is 2 businesses in one. And the first is an equity management platform. So we help startups manage their cap tables. And effectively what that means is we help them issue equity to their employees, to their investors, to their advisors, anyone who's getting ownership in the business, you manage that process through Carta. So that's digitizing the cap table, putting it in the cloud, and then allowing people to issue and transact and exercise and all sort of the rigmarole, the compliance that takes place with issuing equity as a part of compensation. So, we do that for about 45,000 startups, mostly in the US, but certainly across the globe as well. We have a strong presence in Europe and Singapore and a lot of different places. So, we're the world leader, I would say, in equity management.

Okay, interesting. And personally, like, when did you decide to share these insights when you started at Carta? What made you? take that move?

So, I actually came into CARTA 3.5 years ago or so with the express job description of putting out these kinds of insights. So, I had been doing something sort of similar for a couple smaller startups. And then when COVID hit, I was involved in some public health efforts that were around data and data literacy and analysis. And it just kind of seemed to me to be more obvious that a lot of B2B companies, Carte is a great example, but there are many others, have these wonderful data assets that you can tell stories from. And people really underrate the value of stories. You know, even when you have the data, if you're not presenting it in the right way, if you're not talking about it in the right way, it can kind of just gloss over people's eyes and you just kind of look at it and throw it to one side. But the storytelling, really bringing people in, and seeing what's changing in a market, what should they know that they don't know, how can they arm themselves with information so the next time they go in to talk to that venture capitalist, they feel really confident.

Right.

That was a missing part of the market, and I think our data is as good as any to fill it. So, when I came into Carta, this was, this was exactly what I wanted to build. It's been cool to watch it grow.

Yeah, I think very few companies actually are capitalizing on this kind of practice.

Yeah.

I think it, it can make a huge difference if one does that. So, kudos. On that, um, how about we share the screen and we can go through different themes? I think it would make a ton of sense for the audience to have a look, um, on what we are talking about.

Let's do it.

Let's do it. Hang on. Okay, do you see my screen well?

I do.

Okay, so this one's pertaining to early-stage valuations. and what founders should know. So, and, and yeah, feel free to, to let me know if I've not grasped it properly. So this data shows here that it's becoming harder and harder for seed stage startups to raise Series A funding, um, and very few companies are actually graduating with the expected timeline. So according to you, what do you think is driving this trend? And based on your information, like, how many— how How do you think early-stage valuations are being impacted by these kind of changes?

Yeah, I think this is a really interesting chart because it takes into account a couple different factors. So when we're talking through most of this data, by the way, we're talking about venture-backed founders.

Right.

So there's a whole group of founders who don't take venture capital. They bootstrap their businesses, they grow on customer revenue alone, and they grow at very different rates. So not talking about those businesses, even though those are wonderful. Wonderful founders and wonderful companies. When we're talking about venture capital, the, I think one of the underrated things that founders don't really realize until they start taking venture capital is that it comes with some really significant expectations.

Right.

The expectations are twofold. One, that you're gonna grow to be really big, so you're gonna grow quite a lot. And 2, that you're going to do that very quickly.

Mm-hmm.

So it isn't actually that useful for a venture capital business if it takes you 30 years to get to the right size. They want you to do it fast.

Right.

So this, you know, getting through the venture rounds from seed to A, from A to B, et cetera, the speed at which you do that really matters both for the founder because it indicates a growing business, obviously, but also for the investors because they want to show their investors, their limited partners, that, hey, we picked a really great company. Look how fast it's moving, et cetera, et cetera.

Right.

So you can see in this chart that You know, in a quote unquote normal time, something like 20 to 25% of companies will go from seed to Series A in 2 years or less. So that's pretty quick.

Right.

Um, there are definitely companies that go to seed to Series A in longer than that, right? Some, sometimes it takes 3 years. I'm not saying it doesn't happen. It's just, right, we just pick that 2-year mark as a benchmark. But if you look, 2 things happened. One, you can see in 2020 that when things were a little bit easier to fundraise, companies were making it to Series A very quickly. More and more companies, almost 40%.

Wow.

Now it's more like 15% in 2 years.

Mm-hmm.

So that's what founders are dealing with. There's a lot of companies that are kind of getting stuck at the seed stage, and it's really difficult for them to prove, hey, I'm worthy of a Series A investment. Um, both because there's a lot more companies trying to get Series A and because the metrics that you need, the actual, you know, financial metrics, traction, whatever you're judging them on, those have gotten a lot harder as well as they've kind of grown up. So it's, it's a very difficult time for entrepreneurs kind of to know what exactly they should be doing.

So according to you, there has been a significant drop in the race from seed to Series A, primarily because of increasing competition as well as the metrics, the way the metrics come into the picture.

That's exactly right. Yep.

Wow, that's literally a 50% drop from what it was.

Yeah.

And so when this happens, you know, many startups are turning to bridge rounds for short-term funding because they struggle, as we just mentioned. So What risks do these bridge rounds pose in terms of, you know, letting investors know? You've mentioned even bridge rounds, I believe, kind of signal to the investors that they couldn't, right? That's why they resorted to bridge rounds in the first place. So how can founders have— make a balance between immediate capital as well as positioning themselves strongly in front of the investors?

It's a tricky question. You're right to say that, you know, if you didn't need to raise a bridge round, you probably wouldn't. It's not just something that you do on a whim, right?

Mm-hmm.

So the people that are raising bridge rounds are doing so for one of two reasons. Either they're such a hot company that their current investors are so excited about them that they want to get even more, uh, they wanna give that, that founder even more capital before they raise the, raise the next round, cuz they know It's just gonna be great. Or the opposite, which is, hey, this company thought that they could get from seed to A in 2 years, but they didn't quite hit the metrics that they were expecting. So they're gonna need a little bit more capital in order to get more time to make those metrics better.

Mm-hmm.

And then that second case, the bridge round, you know, we would call it an extension. It, there is some signaling risk here in, in venture capital. So venture is a weird part of the finance world. It's very sort of relationship-based and there's a lot of signal based on who's investing and how much they're investing. So for instance, if you're a company and you raised a seed round, right? If you need a bridge round, the most likely person to give you that bridge round are your original seed stage investors, the people that are already on your cap table. And if they're not willing to do that, it's kind of a signal to the rest of the world because they have more information on you than everybody else. that, hey, maybe this isn't the right company. And so because this world is so opaque and it's very difficult to know, it's not like public companies where you can just go and read their financials. A lot of people rely on signals from other investors to make sense of whether or not this is a good or bad bet.

Mm-hmm.

Not saying it should work that way, but it kind of does a lot of the time. So bridge rounds are something that founders should definitely try to avoid unless they absolutely have to. But—

Right.

Of course, the number one job of a founder is to have enough cash to stay alive. So if you need it, you should probably take it. Hmm.

So one of the things to consider that is if you are looking into bridge rounds and if you're seeking other venture capitalists for, for, for, for this, it might signal to others in the same pool that why isn't the same VC helping you in the first place?

Yeah, it's actually a problem that we've seen. So this concept of signaling risk kind of comes into play as well when you take money from you know, a really, really big venture firm. So, Right. imagine you're a seed stage company and you get a term sheet from Andreessen Horowitz or Sequoia, one of these really big, well-known firms. Everyone's very excited and that's a great thing, but it comes a little bit with a double-edged sword. There is a downside to it, which is now that firm, because they're a16z or Sequoia, everyone knows they have the capital to just keep investing in you if they really like you. They could do your Series A, they could do your Series B. They have more than enough money. So if they don't, if there's, if they invest in your seed round and then are not willing to do your Series A, again, that might look like, hey, why is Andreessen not doing that for this company that they're already invested into? Whereas if you had taken a check from a smaller firm, there would be no expectation that that firm could continue to lead the, the later stage rounds cuz they just don't have the money. So everyone would be like, okay, that's fine. There's a little bit of that signaling risk going on. And so early-stage founders have to be— I wouldn't say don't take money from big funds. I think that's totally fine. Just know that it does introduce different kind of considerations down the road.

Absolutely. That's, that's a nice insight. Okay, so based on your experience, um, have companies faced an issue when they've raised funds from these big VC firms and eventually not had help, um, further?

Wow. They definitely have. They definitely have. And it's, it's not a, I don't really think it's a reflection of the VC firms, a problem with the big VC funds. You know, it's venture capital. So you go in with the expectation that basically 9 outta 10 of these companies are not gonna work out because they're very risky. They're trying something completely new most of the time. And the, the most likely outcome is that they're gonna shut down at some point. So If you invest in a seed stage and it's just not going well, well, that was gonna happen for a lot of your investments. So it's actually not that surprising to these investors, hey, I took a bet on this company, it didn't work out. That's sort of what venture capital is for, like try, try to take risky bets.

Right.

But it may feel if you're the founder of that company that you're not getting the support that you wanted.

Mm-hmm.

So it's really, again, it comes down to this choosing the right investor for you. I know some founders are probably listening to this and saying, well, I have to take this check. This is the only check that I have offered to me. And that's totally fair. If you have one term sheet and you need the money, well, that, that's your investor then. But if there's any way to get other investors interested, you know, picking from amongst investors and finding the one that really fits you, that really seems as though they're invested in you for the long term is really crucial.

I absolutely agree with you. Um, absolutely agree. So, Okay, I think the next graph is connected to the first one, so let's move on.

Yep.

In this post you had mentioned, and that caught my attention, you mentioned that recently you see that seed stage valuations do not really seem to reflect— seem to reflect investor sentiment. They seem to reflect their sentiment because you can't really grasp the patterns. There's no pattern per se. So you evidently jump to the conclusion that they are based on sentiments, so, and appeal. So, with fewer startups making the leap from seed to Series A, what are your thoughts about it? Why are investors becoming more selective?

Yeah, it's really interesting. I think this chart shows a couple things that are maybe counterintuitive for a lot of founders.

Mm-hmm.

The first one is that seed stage valuations, the actual, you know, the number that everyone comes to and they say this company is worth $15 million, they don't really mean that much. You know, is that company— so for instance, if your company was really worth $15 million and that's what the investors thought it would be worth, then they wouldn't invest. That's not what they want, right? They want it to be a billion-dollar company. So at every point, what they're saying is the valuation reflects a price at which I'm willing to take a bet that your company's gonna grow way, way past that.

Right.

And so seed stage valuations, they can bounce around. Sometimes you read, you know, headlines about companies getting $100 million valuations at seed stage, these big AI companies.

Right.

And some companies are dealing with $5 million valuations at seed stage. I'm just, I think it's useful for founders to separate that from some sort of emotional attachment. Like these numbers are simply reflections of a price.

Mm-hmm.

At which the investors feel confident you will immediately surpass that price. That's what they want. They want you to grow fast.

Mm-hmm.

So it kind, and again, when we, when we talk about the difference between a big fund and a small fund, a big fund might say, look, I don't really care that much what the price is when I invest. I'm expecting to invest in multiple rounds for you. I'll keep my ownership. Like, I don't need to be that price sensitive at the beginning. Whereas a small fund might say, it really matters to me whether or not I'm investing at a $10 million valuation or a $20 million valuation that will have major impacts on my returns later on. And so I'm gonna optimize for price a lot more than the big fund will. So again, some of this dynamic is what kind of investor are you attracting and how do they value your business?

Yeah, yeah, because I was going to ask, like, how do they ensure that they're ready for the increased scrutiny coming from investors at Series A? So I believe it ties back to the same point that you mentioned earlier. You need to look into the kind of investor you're approaching and think from how they would think.

Yeah. And there's, you know, I think founders have unfortunately been a bit surprised oftentimes when they get from seed to Series A. Seed to Series A is a very big jump for a lot of founders because you're moving from this thing that maybe you have a few customers, you're trying to figure out product market fit. And then the A round is where you've shown, in order to raise that A round, you need to show that there's some specific kind of person, some specific customer that truly values what you're doing.

Mm-hmm.

And the jump between experimentation to really like narrowing in on that specific value prop, it's a big jump and not a lot of companies make it. There's a lot of companies that raise seed rounds that don't ever end up raising a Series A. So the scrutiny gets harder, the diligence gets harder, the kinds of investors that you're talking to change. It's one of the bigger jumps in early stage, uh, companies is, is from seed to A for sure.

Yeah. Um, right. Um, let me, let, I'm, I'm wrapping my head around, uh, What you just mentioned, okay, makes a ton of sense. I think proof of concept is something that is missing for most of the companies, which makes it so hard to jump from seed to Series A. Proof of concept, right? Because—

Yeah, it's a proof of concept. And it's also that, you know, a lot of founders, what they'll do is they'll go and talk to their other founder friends and they'll ask things like, well, what was Series— what was raising your Series A like for you? You know, how, what level of revenue did you have to have? How did the conversations with the investors go?

Mm-hmm.

And it's really difficult to know that whatever your founder friends had done maybe 2 or 3 years ago might not apply today. So if you're found, it used to be in the, in the US at least, that we would say if you have about $1 million of ARR, of recurring revenue, then you're probably worth a discussion about a Series A.

Mm-hmm.

These days for B2B businesses, it's probably more like $2 million or maybe even a little higher than that. So like the metrics keep getting harder and it's really difficult for founders to compare against each other when they raise at different times.

Yeah, which you mentioned earlier, metrics.

Yeah.

Catch that.

Okay. It really matters.

Yeah, yeah, yeah. Okay, so let's talk about this one and actually here when I read it, You mentioned that the investment in Series A, total Series A, is down by 8%. So it's from 2023. So it's a 1-year gap. And when you were talking about a 40% drop, that was from when to when?

That was from like late 2021 or early 2022. Okay.

So that was way more. So let's just, if we consider last year, the investment is down by 8%, but we see that valuation still remains strong. And with a median pre-money valuation of $43 million.

Yep.

And post-money valuation of $53 million. How— I would want from you to see how— what the comparison looks like. How does it make sense? And what should founders keep in mind when they're setting realistic valuation? Again, we're talking about valuations, setting realistic valuations and preparing for Tougher conversations with investors.

So in this graphic specifically, I think one of the key takeaways is that in the midst of a downturn, so we all kind of invested a ton of money. Venture capitalists went a little bit crazy in 2021 and early 2022. A lot of companies were funded and many of those companies probably won't make it.

Right.

So we, it was a bubble in funding. And so today we're dealing with a little bit of a hangover from that bubble. There's less funding. than there was in that boom time. But we've had 2 sort of weird trends at the same time. The first is AI. So there is a, there's a really significant hype and interest from a lot of venture capitalists, at least here in the States, around AI companies.

Right.

And so it kind of feels like the rest of the market is in a downturn and AI is in this bubble where everything is kind of like 2021. All the valuations are really high. Everything's moving very quickly. So it's weird to have that happening at the exact same time as a downturn for a lot of other companies.

Hmm.

And then to the metrics that you mentioned, median pre-money of $43 million, and then you add about $10 million or so that's raised in the rounds. So that's how you get to the post-money of $53 million. Those are really pretty robust valuations historically, and that's weird for founders to get their head around. They're like, fundraising is down overall, but the companies that are actually managing to raise are doing so at very healthy valuations.

Exactly.

And I think what's, I think what's happening is there's this, this sort of hollowing out of the middle of the market. And what I mean by that is if you are a company and you have a really interesting technology and a lot of investors are excited about it, it's pretty easy still these days to raise at significant valuations. Mm-hmm. The competitive rounds are still very competitive. What's happened is that the less competitive rounds, a lot of them just aren't happening anymore. Instead of venture capitalists taking a bet on something that they think is, you know, not a great outcome, they're just simply not investing in those companies anymore. Now, whether or not those are the best companies or the worst companies, I think that's some moral or subjective, but it's just true that fewer rounds are happening, but the ones that are happening are pretty competitive even so.

Yeah, actually I watched one of your podcasts, um, and I, I remember there was a conversation about AI startups. And the conclusion was that mostly if these AI startups have some kind of application to other softwares, those kind of AI startups do catch the attention because there's some kind of application going on when you can connect. I'm not sure if I'm explaining it very well, but do you have any context to that conversation?

Yeah, I think. You know, everyone, AI is this cool industry that's obviously been around for a long time, but everyone got very excited about it when ChatGPT came on the scene in late 2022. So it really hasn't been that long where a lot of investors have focused on AI as closely as they do today.

Hmm.

And at the beginning, what that meant was investors were kind of not as discerning. They weren't able to distinguish between a good AI company and a bad AI company, what we call sometimes like infrastructure AI or application layer AI. They just kind of all threw 'em in the same bucket and they said, oh, you're building an AI startup.

Ah.

Here's a big valuation. That is no longer the case. Like investors have gotten a lot more savvy about, are you an AI startup because you call, you know, OpenAI a couple times a quarter, or are you building AI, a business that relies on AI in a very fundamental way and wouldn't be possible without The new advances in the technology.

Mm-hmm.

And those 2 kinds of companies are getting different valuations. Now, I'll say this, I don't know which of those 2 things is gonna actually prove to be the most valuable later on. You know, if you really think about it, there's a ton of companies out there that are working on the same technology, and the reason that they work is because they have a great customer insight, distribution, et cetera. So you can build something that just calls OpenAI and build a wonderful business. I'm sure of it. We just don't know which of these AI companies are really going to shake out as the best ones later on.

Yeah, yeah, yeah, totally good to know that, um, the jargons. I wasn't aware you have infrastructure and application-based, um, when you tend to classify. How are other industries being impacted by these valuations? Um, cybersecurity, I see, is also seeing an increased focus. So how are these industries influencing valuations? And what should founders in other sectors take away from the attention AI is getting? Let's say, what are the takeaways from AI per se, or cybersecurity per se, based on the graph that they could receive in terms of takeaways?

I think it's sometimes it's a little bit frustrating, I'm sure, for founders to look at charts like this and say, well, it doesn't look like investors are that interested in my industry. Right? And then you can kind of feel a tug. You're like, how can I make my company, uh, have an AI story or a different kind of thing? How can I change the viewpoint so that investors are more excited about it? What I would say is really it's just about being heads down and building. If you had asked a bunch of founders who were building hardware companies 3 years ago, does, do the, do the general investor community, do they take an interest in your companies? Many of them would say no, they don't care about hardware at all. And now look, 3 years later, hardware is actually a growing sector in our data and it's getting more exciting by the day. So really, in some ways, it's kind of, it's okay if your industry is a little bit less loved these days. It means that you're actually more likely to find investors. If investors are investing in an industry that's not hot right now, it means they really believe in it. And so those actually might be the best investors for you to find, even though it might be a little bit more difficult to find them.

Hmm, the probability might be high if you have a proof of concept and, and, and yeah, okay.

Yeah.

Um, all right, this makes a ton of sense. So let's move on to the next one. I actually love it. Um, so here you— we see that some startups are taking years to raise additional funding, and we've already spoken about it with, um, median range for Series A. So now we've jumped to Series A. In 2024, it was 2.9 years. So based on your experience working with startups and investors, how should founders manage their runway during longer timelines? I mean, we were speaking about bridge rounds, but other than that, how can they manage their runway during these longer timelines? And how do they avoid the pressure, you know, to scale, to grow faster, as against their Normal trajectory.

Yeah, it's— so that's kind of the, that's kind of the devil's bargain about taking venture capital is that your investors will often want you to grow faster than you feel is possible or than you feel is correct for your business at that time. But I think one of the maybe silver linings from this chart that I really like is that it can seem like Early stage startups in particular, there's all these checkpoints that you have to hit. You know, you gotta raise a pre-seed round and then a year later you raise a seed round and all this stuff. And really all that stuff is just trying to put some order or organization around something that is completely chaotic. Always. You know, if you look at any successful startup, there's a period in their life cycle where like things were going super wrong and they were all kind of trying to, struggling to figure out what was going on. It's, it's just a constant story for most, almost every startup that I know that there's some wandering or missed years or mistakes. There's, it's, it's never as simple as just going from seed to A to B, et cetera. So if you're a founder, it's good to just internalize like other founders are struggling with this as well, and you can feel behind or ahead, but you're really just, you're running your own race and that's the only thing that matters.

Yeah.

When it comes to the Go ahead.

No, no, no, I, I totally agree. I would just, yeah, I agree with what you're saying.

Yeah, it's, and it can feel like, you know, I'm sure founders wake up and they read headlines or they talk to their friends, et cetera, and they're like, oh wow, I'm so behind, or this other business is moving much faster than me, or I'm so worried about something. And it's sometimes good just to take a moment and say, look, I'm running my own race. I'm building a fantastic business, but Sometimes it takes longer than I expected, and that's okay. Um, the other thing on runway, this is something that I think was, is sort of indicative of the shift that we've had over the last couple years. It used to be that founders would kind of expect to fundraise every 18 to 24 months or so.

Hmm.

And that is kind of hard now. So it's definitely the case that founders have tried to make it make themselves a little bit more capital efficient so that they can make the money last a little longer if they need to. That's one of the biggest changes we've seen from the boom times in '21 to today is founders being a lot more careful about their cash burn.

Right. And in that, if we were to talk about it, we see that here in the graph, it's 4% companies raising Series B. So fine, I, I do catch that, you know, they need to work on their own pace. And I know that when you look at this data as a founder, you know, you've had this rush of anxiety. But am I, um, am I lagging behind?

Yeah.

But let's say that they make it through Series A. What about Series B? Only 4% of companies are raising Series B in 2020. This is as of 2023, I believe.

Yeah. So they look, it's probably gonna take you, if we just start from the macro context, which is companies are just staying private a lot longer. So if you look back to when things like Facebook or other companies were founded, it was pretty common. You know, it was fewer companies at that point, but it was pretty common to go public after 7 years or 8 years. So you, you grow up as a private company and then you go public on the New York Stock Exchange. Or the NASDAQ. That just isn't happening these days. Some of the best private companies have been in existence for 10 or 12 or even 14 years. So if you are planning on staying private for a lot longer, then a lot of these timelines shift and you're gonna raise capital at significant chunks along the way. And you can see that with a Series B, you know, 4.5 years is the median amount of time from the start of the company to the Series B. That's a long time, you know, 4.5, almost 5 years. That's a whole, that's like what we used to think would be half of your company journey, and that only takes you to Series B these days. So there's just a lot, it's just taking a lot longer.

And again, it's, it's because of the same 2 reasons that you mentioned earlier, you know, the competition and the metrics, um, as well as again, there is some subjective factors as well, like who you seek for investment, how they perceive it, and then you know, it's like a ripple effect based on your first investor. So I believe then the takeaway is just be fine with this, the momentum. Just focus on the momentum. If it's slow, it's fine, um, as long as you're not burning cash and making enough cash flow to sustain in the long term.

Yeah, exactly. There's, there's kind of always this trade-off between profitable companies and those that are growing super quickly. Um, and I think sometimes people paint this as a very black and white trade-off. You're either profitable or you can grow very quickly. It's not necessarily the case. There's a whole spectrum along the way where you can increase growth by spending a little bit more, or you can decrease growth but increase profitability, or at least good, you know, cash burn. And so founders will find different points. of the company demand different strategies. At the beginning, maybe you need to grow super quickly, but maybe at Series A or B, you slow down for a moment and you get the capital and the business very efficient, and then you grow again. So, there's kind of a roller coaster up and down here that sometimes happens.

Yeah, I agree. I mean, the last, in my last, let me move on here. I think we've spoken about it, and it's again the same story. I mean, it's taking 26 months between different rounds, but I think the same holds true that what we've spoken about, just even if there are longer gaps, you know, you can make it through the flexibility. So other than bridge rounds, based on your experience, are there any strategies that founders can think of, runway strategies that they can think of?

Yeah. Within this chart, there's a couple points that stand out to me as very useful for founders. So first is just resetting the timeline in your head. So when you're going out to raise your Series A, if you were thinking, okay, I'm going to raise a $5 million Series A round, and that $5 million is going to last me for 2 years, and then I'll raise again. You need to plan as though that needs to last you 3 years. So you need to have buffer times in the plan in case something goes wrong because it's early stage startups. A lot of things go wrong all the time. The second is that the biggest thing that founders have done in order to change the spend of their businesses is they've actually just started hiring fewer people. So usually the biggest cost for any startup is their payroll, and they just aren't hiring as many people as they used to, and that's because They want to be capital efficient. Maybe it's because they think, hey, I can actually do some of this work myself, or I can outsource some of this work, or I can, you know, use AI tools to make it easier. Um, there's a whole lot of changes going on with how many people need to be at a startup at a certain scale. And it used to be that, just to put some numbers around it, a Series A startup on Carta, the day they raised their Series A round, They used to have maybe 20 full-time employees.

Okay.

Now it's more like they have 15 full-time employees, maybe less. Mm-hmm. So the number one lever that a lot of founders pull on the runway is just the, the literal number of people that are working for their business.

And what's your personal take on that? I mean, it depends on a company to a company, but does that make sense to you? Um, to think about the headcounts that you have at the company and how you can leverage the ones that you have?

Definitely makes sense to me. It makes me a little sad, I gotta be honest, because, you know, one of the things about early-stage startups is I think they're a wonderful platform for, uh, people, especially early in their careers, to try a bunch of things. So, I mean, I started my career at an early-stage startup as employee number 10 or 11, and it was transformative. I mean, it, it teaches you so much to join a company at that stage. And try to figure out, you know, 8 different jobs and everything's on fire and it's fun and there's a lot of responsibility. So I, I'm kind of sad. I hope that more people still have the chance to join early stage startups because I also think that joining an early stage startup makes you much more likely in the future to be a founder. And we want more and more founders, of course.

100%.

So on that side, I'm a little sad, but I think it totally makes sense from a financial perspective that you watching your headcount and only adding the people you absolutely need to add makes a ton of sense. There definitely was some overhiring in 2021 where people were just saying, hey, let's bring people on. We don't really have necessarily a job for them to do, but we'll figure it out and we'll use them, you know, in different ways. So, I think that's probably healthy overall.

Hmm. Makes a ton of sense. Um, and yeah, as you mentioned, being conscious about the timeline and having enough buffer. So that, um, you don't run out of cash.

So, and it's, and it's really hard for founders. I know we say that we, you founders are probably listening and saying, I've heard that so much. And it's not easy. It's not easy to figure out how much cash you're actually gonna need because it interacts with the real world. Maybe something goes wrong in your product process and you have to start over. Maybe your competitor raises a big round and you need to compete with them on a different level and so you feel behind. Like there's 1,000 things that can happen, but it's good to go in with some assumptions and then add a buffer to those assumptions because stuff happens all the time.

Yeah, absolutely. So other than the graph that we just looked at, which did show, you know, the different sectors, so we see AI, how is medtech performing?

I, I've heard a lot about medical tech Um, yeah, medtech for us, we would kind of break it into 3 different parts of sort of the health landscape. So there's biotech pharma, which is the creation of new drugs.

Right.

Um, that's going pretty well. Um, always about, it's, it's stayed pretty consistent. You know, it's a very specific kind of investor who invests into drug development. So usually those are not the same people that are investing into like B2B SaaS. Those are 2 different kinds of, Investors. So biotech going pretty well. Then there's 2 other portions of it for us. One is medical devices, so actual physical, you know, surgical devices and things like that. And then there's health tech, which is everything else, all the digital health, the mental health therapies, the platforms for new telehealth and medicine, anything and everything where it's kind of a software business, but it's about health that would fall into health tech for us. And I think biotech is holding up the best.

Mm-hmm.

Health tech is doing pretty well, although has kind of lost a little bit of ground over the last couple years. And then medical devices are always pretty low in our, um, data. They, they attract less attention. Um, you know, it's kind of odd maybe because you'd think there's a very clear pathway to the people that they're selling to and they solve a very specific problem. Um, but it's been getting a little bit less excitement than, you it used to. So maybe that's the part of health that has kind of gone down the most.

Interesting. Maybe it's because of some legalities. Not sure.

There's definitely some highly regulated stuff there.

Mm-hmm.

So if you're using a new device in a medical procedure, for instance, you have to jump through a lot of hoops before that advice or that device becomes used. So that's definitely a part of it. Um, and investing for a lot of those things that require clinical trials or a lot of, you know, and the state's FDA approval, et cetera. They definitely attract less investor attention because investors aren't as interested in, you know, jumping through all those regulatory hoops with people.

Yeah, a lot of complications.

Absolutely.

Yep. Okay, this was extremely insightful. Based on like everything that we've covered, is there some underlying conclusion that we can think about tying all the dots together? I think you're the best person to To give a picture here.

Hmm. I think, I think it's very easy for founders to look at all this data and kind of feel depressed by it and say, wow, I kind of missed out on the boom times and now I'm building in this very difficult environment. And I guess the pushback that I would have is what was really weird was the boom times. Right now is normal. Right now is, makes a lot of sense where these early stage companies are very risky and they're very difficult to get off the ground. And when they work, they're unbelievable and they're fantastic. So maybe it's just kind of, uh, an admonition to founders to say, you're actually building in a great time for startups. There is a ton of capital sitting on the sidelines waiting to be invested into companies. You just gotta find the right investors and it can feel annoying. and frustrating and like you missed out on the best times. But I think actually now is a fantastic time to build an early stage business. So I'm super excited about a lot of the companies that we're seeing on Carta. They are building new and interesting things that probably if this was 2021, they would've tried to build, you know, the next, uh, sales tool. And now they're trying to build something completely different. So, uh, I, I think it's actually a great time to build an early stage startup.

I agree, especially with the advent of, you know, the AI stuff going around. I think there's a lot of room for creativity for startups to integrate those tools. Even you were talking about, you know, having less and less people. If you— I mean, it's not the ideal thing if you were to think about the human aspect, but yeah, just financial. If you look at the financial aspect, you know, AI, you can leverage that and also work on that. So—

I think the other point that I'd make for any founders on the call is that Venture capital does a really good job of talking about itself and making it seem like everyone should try to raise VC, and it's just not true. Most businesses should not be venture-backed businesses because they're just not gonna grow as fast as they need to, and that's okay. You can build an unbelievable business that is very, very, uh, wealth-generating for yourself and for your employees.

Right.

Without taking venture capital. So, You know, sometimes it feels like the VCs are the ones that are dominating Twitter or other places. Just know that there are a lot of other ways to build a great business. You do not absolutely have to take VC. It's just one path.

I absolutely agree. You know, in my previous podcast, I was speaking with, um, Alicia Miller. She's, uh, talking a lot about private equity, but specific to franchising.

Yeah.

And she did mention, you know, even in every sector, there's this ideology that you need to have that. I think it's just a, a word around, you know, if you have that name behind your venture, you know, you will boom. But that's not true. You know, you can always seek other ways to raise funds, bootstrap your company. And at the end of the day, it's very subjective. You need to see what suits you most.

Yeah. Are you the kind of founder that isn't gonna be happy unless they're trying to build the next Apple or a trillion-dollar company? Or are you the kind of founder that wants to build a smaller company, but own a lot more of it and like get to tinker and play around and, and grow at your own pace. 2 different kinds of businesses. And the, when it gets tricky is when a founder thinks that they wanna build the really big company, but really they should have built the smaller company and really owned a lot more of it. So having those discussions with yourself and your co-founders early on is very, very helpful.

100%. And then you have also how much share different stakeholders have. And are you, ready to let go, even as far as taking decisions.

That's tough for a lot of founders. Yeah. Letting go.

So, okay. This gives a huge sigh of relief. So Peter, I am extremely happy to have this conversation with you today. Literally, I wanted to speak with you for a long time and finally got a chance to speak with you. You're doing a great job sharing these insights. So continue doing that. And for all of those people that have not yet followed your insights, please go ahead and, and do look at Peter's LinkedIn.

Yeah, thanks so much for having me. You can find me on LinkedIn, as you mentioned, or if you want the full download of all the data that we have at Carta, you just go to carta.com/data, and that's where we keep all of it.

Absolutely. Cheers, Peter.

Cheers. Thanks so much.