Investor Connect - 741 - Adam Spector of AbstractOps

This is the Investor Connect podcast program. I'm Hal T. Martin. I'm the host of this show in which we interview angel investors, venture capital, family offices, private equity, and many other investors for early-stage and growth companies. I hope you enjoy this episode. Investor Connect is a 501 nonprofit dedicated to the education of investors and startups for fundraising. Please consider donating $100 to the program to help others in their investor and entrepreneur You can find the donate button on the investorconnect.org website. Well, hello, this is Paul Martin with Investor Connect. Today we're here with Adam Spector, co-founder and COO at AbstractOps. AbstractOps automates all the key aspects of running a startup. This includes covering the human resources function, documents and contracts, financial such as payments, taxes, and accounting, and compliance and regulatory. Adam, thank you for joining us.

Hey, Hal, thank you so much for having me. Really excited to be here.

Great. So where are you calling from today?

San Francisco. I'm one of those crazy people, I guess, who actually decided to— I've been in the Bay Area for coming up on 12 years now, actually. But during COVID unlike lots of other people who split town and went somewhere that was lower cost and maybe more open, I stuck here. So I haven't basically left my home office in 2+ years.

Well, that's great. Well, let's kick right into it. What was your background before co-founding Abstract Guards? Can you give us the details?

Yeah, absolutely. So, uh, I was most recently, right before this, I was working in product at Twitter. Um, but before that, I've been Chief Revenue Officer of a company, been COO of another company, and I've also previously co-founded 2, 2 of my other own companies. So this is Abstract Ops, is actually my 3rd company that I founded. So, um, really been in the tech space for a pretty long time at this point.

Great. Well, so what excites you right now?

I mean, I think now is an amazing time to build a company, um, and create something that has a long-term chance of success. So that's actually the, the silver lining of the fact that the world from a startup investing in tech perspective is kind of falling apart. The silver lining to that is it's a great opportunity for founders who are truly passionate about what they're doing to build a company that has a great chance of success, because they're forced to do so by not just having money thrown at you, which has been kind of the situation for the past 5+ years. To build a great company today that has long-lasting viable outcomes, you need to be really scrappy and thoughtful and really focus on what matters, not just on fundraising metrics. So what excites me is this is the best chance to ever go build a great company that maybe existed, not existed, but certainly in the past few years existed.

Great. And so you see a lot of startups out there and a lot of investors. What's your advice for people investing in startups? What do you tell them to do before they write that check?

Yeah, so I mean, I've done 40+ direct investments of my own. About a quarter of those, well, prior to this crash, were unicorns. Hard to know what things are like right now, but I think even then, a bunch of them are still unicorns, even if they've lost 50%, 60% of their value. They were doing great and have been long-term investments that I put in at the super angel, early pre-seed stages. And my advice would be for all these companies, for all the investors that are out there, focus on the companies that you're passionate about, that have a real business model that you think makes sense. Not like an Excel business model, like, oh, does your financial model make sense? I hate it when Kind of less sophisticated tech investors want to see the whole business model for an early-stage startup. To me, that is crazy. It's a waste of time. No tech startup has any idea what their business is going to be doing in 3 to 5 years from now and what the numbers are going to look like. So that you shouldn't care about, but what you should care about is thinking through, is the business something that people need? That, number one. And then number two, when you go meet founders, are they incredibly passionate about solving this problem? Do they know more than anyone else? If you ask them any question, will they tell you the answer, or maybe why you're a completely stupid question, and explain that in depth? And if they have those 2 things, plus like a model, a business model that's really real, like there is a real big opportunity in front of them that you just know is a pain that needs to be solved, those are, those are always been historically my best, my best investments.

Well, that's great. And then on the other side of that table, what's your advice for startup founders? What do you tell them to do before they go out to raise funding?

Make sure you care deeply about what you're going after. I mean, if you're— the truth is, like, being a founder is really, really, really tough. It is one of the hardest things you're going to do. It's one of the most rewarding as well, to be clear, but it's also one of the hardest things you're going to do. So you should only do it if it is something that you are so passionate about that you absolutely believe to your core needs to exist in the world, and you've tried— because you're so passionate, you've tried every other solution that's out there in the market, and you know none of them solve the problem, then you should go do it. This is even more the case nowadays because it's not sexy and fun when the market's as bad as it is. It's not sexy or fun to go be a startup founder. I think for the past 5 years, you had all these— I will be a little bit rude, Um, but you have all these sort of like New York bankers, right, or consultants who used to do work in consulting and banking and then, oh, this is a cool thing, I can go start a crypto company. I have no experience in it. Um, it's going to be worth a billion dollars in like 6 months after founding because, you know, I went to, uh, Ivy League college and worked at McKinsey. Um, yeah, like that's not the way it really works. Like that's not how real businesses are built. You have to be incredibly passionate about what you're doing and be willing to without pay, without, you know, basically eating kind of the ramen diet for a long period of time to lead to real major success. Um, so that, that's what you need. That's what founders need to be doing is make sure you're in this for the right reason, which is to build something amazing. If you are, then you'll achieve the outcomes that you expect, which is presumably potentially a lot of money, but also hopefully changing the world in a really positive way. Those 2 things go hand in hand. If you change the world in a really positive way, you will make the money you want, you'll get the accolades that you want, or whatever other reasons you're going to build your business, those will occur if you are incredibly passionate about building that in the first place. So if you're not, don't go do it. Go work at a normal company, make a good salary, nothing wrong with that.

Great. Well, let's talk about the state of startup investing. You mentioned it before, we're in a changing market right now, but how do you see it evolving from here?

Yeah, right now valuations are down massively. Frankly, they're kind of where they probably should be all the time. I mean, the fact that once again, companies that were a year old in the crypto space were getting a billion-dollar-plus valuation for nothing, where they didn't really have a real business. And in fact, it turns out a lot of them were almost like a house of cards in many cases, is insane. So what I would say to every founder when you're thinking about valuations and to investors, well, to investors, Now's a great time to invest. You can put stuff in at a right valuation because you're still taking a bet. I mean, it's still a crazy idea that you go meet a founder who's just starting out and their pre-seed round might be a $5 million valuation. I mean, there's literally like, just on paper, the idea that any founder, no matter how good, has a $5 million valuation on a company that they've just incorporated and it's just an idea, even that's insane, right? Forget the billion-dollar valuations that we were seeing. $5 million is insane. But over time, $5 million is a really good deal to invest in if you think that the investment hits the key thesis that I mentioned, which is super passionate founder in a real market with a real problem that needs to be solved. A $5 million valuation, when the company is going to be worth a few billion over time, it's maybe not going to be worth $100 billion, but a few billion over time is a great way to invest, and the right valuation in many cases for these really early-stage companies.

Well, great. And then going forward, what do you think is the biggest change we're going to see in the next 3 to 5 years in startup funding? Any major changes or shifts there?

Man, that's a tough question, Hal. I'm not totally sure because who knows if we get back into the crazy exuberance of the past few years or what the next hot, sexy thing is going to be after crypto, and crypto probably will come back. Web3, I don't think it's going anywhere. I think there are some really cool underlying technological changes that are involved in Web3, but where that goes, who knows? And I think over time, investment valuations will probably go back up again. They'll creep back up. But my guess is we're going to see a world of a decent amount of discipline from investors and right-sized expectations from founders over the next few years. And you know what? For the whole ecosystem overall, that's not a bad thing. Fair valuations are good for everybody, even founders to some extent, because it means you don't get over your skis in what you're trying to build.

Great. Well, let's talk about your investment thesis for your fund. Can you tell us about the fund and what exactly is the investment thesis there for it?

Yeah. So I have a few different funds. For about 10 years, I've been doing my own small fund with some LPs that I've known for a long time. And the thesis of that has always been kind of what I just discussed, like finding interesting investments for the longest time. And even today, it's still very hard to get access to the best deals. And because I've been in Silicon Valley for almost 12 years at this point, I was lucky enough to network with the right people, start to get to know people in the ecosystem and have those investments. And then once again, ask the questions that I was just mentioning. Is the founder passionate about what they're doing? Do they know more than anyone else? Is this a really big opportunity? And that's always been the core thesis. for those earlier funds. The current fund that I'm investing out of is called the Operator Fund, and it's with my founding partner from Abstract Ops, Hari Raghavan. And our whole focus is on saying, look, there are smart founders out there, and smart founders, in our opinion, should be doing everything that they can to remove any headache off their plate, except for the core work that they care about doing, which is building a great product and going after getting customers for that product. Those are the only 2 things that matter for a founder. Um, one of the key things that takes up a ton of founder time is doing back office work, essentially running your business, like the operations. Um, up until the launch of my company Abstract Ops, there wasn't anything else. There was no way to take that off your plate other than hiring an expensive person. We've now built software to automate a lot of that. So our investing thesis as a fund is to invest in our customers, potential customers, and our partners who all say, you know what, like this abstract ops is something that makes so much sense because I don't want to be spending time on operations. I want to get back to doing what I care about and why I built this company in the first place. It's not so I can figure out state taxes or how to— the right HR system or how to even do payroll. Like, that doesn't matter. I mean, you need to do it to run your business, But it's not gonna— it's not what's gonna get you a billion-dollar valuation and let you go public someday. Um, so our core thesis is around the people who are in our ecosystem who we think we will help accelerate into being more successful, sort of the same way even, let's say, uh, Y Combinator accelerates companies. AbstractOps is sort of the same. By using AbstractOps, you accelerate your ability. You save 500+ hours a year. 500 more hours a year compared to your competitors is a lifetime for a startup, and that means you have a greater chance of being long-term successful. So we want to invest in those sorts of companies.

Great. Can you talk about one or two startups that fit that thesis?

Yeah, sure. So, uh, a great, uh, investment of ours, um, is a company called, um, Inversion Space. They're awesome. They're building like rocket— they're doing, uh, rockets that come down from— or not rockets, sorry, return vehicles from space. Super, really cool. Imagine SpaceX has made it relatively low cost to get things into space. People haven't really figured out the right way to get stuff back from space. So they're a super cool company, client of ours, doing great stuff there. Another example is— trying to think of ones we're allowed to talk about. But another partner of ours is a company called Puzzle. They're doing some really, really cool stuff in the financial space, and they're a partner of ours. They totally understand our thesis, we understand theirs, we both want to work with each other. And having an opportunity to invest in the ecosystem with them as a partner is a win for hopefully everybody involved. It just means certainly we're more closely connected, but it also means that we can help them achieve a greater upside, and that's a win for our fund, it's a win for Abstract Ops, it's a win for our customers. So it's really a win all around.

Great. Well, there are a lot of challenges in the startup space. What do you find is the main challenge the startup faces in today's market?

Well, look, the— one of the biggest challenges is making sure your costs don't exceed your long-term runway that you think you have, right? Uh, in the end, if you run out of money, You run out of money, you can't keep building your business. And there are certain costs you might have, like you probably have some level of living costs, even if you're kind of doing the ramen diet living costs where you're being as cheap as you possibly can. The challenge though is you need to make sure you get enough money, you grow your business fast enough and prove out your underlying business thesis in a way that will get investors excited. The challenge in this environment specifically today is to get investors excited, you have to be a really freaking good business. You have to be really good. You have to have fast growth, great margins, and yeah, I mean, really just those 2 things, fast growth and great margins are what you really need to have. And hopefully you're not spending too much money to get there, which of course implies some of the margin stuff. If you can do those things, then you're in great shape, but It's really hard. It's hard to build a good business, which is the challenge with doing startup stuff. It's hard.

Great. And then what's the challenge the investor faces in today's market?

I mean, the challenge the investor faces is deciding which are the right companies to put your money into, because there is a self-fulfilling prophecy that can happen with startups in the sense that, like, if they are unable to get the next round of funding because maybe they're going a little bit slower than they expected, which happens all the time, Even for the best businesses, it might take 12, 24, 36 months before they really start to take off. But they might need more cash. They might need some more cash infusions before they get there. Because every founder, you almost have to be overly optimistic, maybe insanely optimistic to be a founder. And that means you might be overly optimistic about your metrics. And so you might think, well, we're going to launch our product to market and people are going to scoop it up and we're going to grow really fast. That's a nice belief, but it might not happen that way. In fact, it probably won't happen that way. What that means though, as an investor, is if you put money into a company that is not going to be able to raise the next round of funding, even if they're amazing, you've now lost your money. So you have to pick out the companies who not only can achieve these great metrics and have, obviously, once again, a big market and can build a great product, But also have a decent ability to fundraise, because they might have to fundraise when they're not as sexy. They might come back hat in hand and say, look, we did our seed round, we need to do a seed extension instead of our A. And that happens because the business has taken longer to grow. And if they're good fundraisers, they will find a way to get that money to stay alive until they can keep growing. If they're bad ones, they might not get that money and there goes your cash. So it's sort of another nuance of who you should invest in, like what you should be looking for when you make that investment.

Great. Well, you see a lot of startups and a lot of sectors and a lot of applications out there. If you could start a business tomorrow, what business would that be?

I'm certainly always biased. I tend to be a little bit more of an investor and builder of SaaS products. So that is certainly an area that I find pretty fascinating and exciting. It's a little bit less risky in the sense that everyone needs— they don't always have quite the same exit multiples that, let's say, the next Snapchat or consumer product might have, but they also— the chance of failure is a little bit lower. Because if you get a few consumer companies, you need to hit it out of the park or else you might fail, especially let's say if it's a social network thing or something. So With that said, the areas that still really excite me outside of SaaS would be, I think climate is just one of the most obvious investment theses you could possibly have. There is zero doubt that the environment, first of all, is in trouble. Second of all, we're going to need technology solutions to help solve for it and fix the problems that humanity has made. And there's going to be, at some point, it might take longer than we expect, which is always the investment question, there's going to be massive government investment behind fixing some of these problems. That government investment will then start to influence the private markets, and then these startups will have a real shot at making a huge amount of money by making dramatically real and valuable impacts overall. So the environment would be an area I'd be very focused on investing in. If the right opportunity comes along, and this is sort of— it's been hard to make money in the environment so far, but that will change at some point.

Great. Well, you mentioned we're in a down market right now. What are the advantages of raising in a down market? What's the upside to the down market, so to speak?

Yeah, the upside to the down market is you only raise what you need. You don't overraise. And what that means, and when you don't overraise, means you're going to stay a little bit more hungry. So, so many companies, and this just happens all the time, so many companies and so many founders get enamored by their own fundraising prowess and their ability to tell a story to investors. They lose track and lose sight of the fact that they have to build a real product and build a real company. And they actually can't just hire people to go do all this work. They need to figure out a way to do it in a scrappy, manner. And that's what the real best companies are built out of, is how do I do things scrappily? So maybe the canonical example is Amazon. Jeff Bezos, he was turned down by like 50 or 60 VC firms when he first was raising money for Amazon. He had all the right credentials, although he wasn't really a tech guy, so I guess he didn't have that one, but he had all the other right credentials. He was turned down by almost everybody. And they, they would build their desks out of used doors, right? They would get like 4x4s and old used doors from like literally a door and like bolt them together, and that was your desk. I think Amazon might even still do something similar to that for almost fun at this point, but that was how scrappy they were. They, they would build their own desk to save money. That is, that is what every company should be thinking about, is how do I do the 2022 version Uh, building my own desk to save money. How do I, how do I cut in every way? So the only thing that has money going out the door is for the best people that we can bring onto our team to build the best product, to make customers as delighted as possible. That is all that should matter. Um, and that is the upside to this downside right now in downturn is it forces you to, to be scrappy and focus on only the things that matter, not the distractions.

Great. Well, what about those people that raised money in an up market last year? What can they do at this point now that the market is very much down?

Put on, put on that, that, that hat that I just talked about. Think about being scrappy. Pretend— cut all the cash in your mind, cut the cash that you have in your bank by 50 or 60%, and then live on that 50%, that other sort of 40 or 50%, and the rest, pretend it's not even there. So live in that world. And if you do that, you will then force yourself to start being in that scrappy mindset and thinking that way. And that will then help you get to the place you need to get to, to build your business the right way. So I would pretend you don't have all that extra cash in hand. Assume that you will never get more money unless you once again build a business that can reach that metric. And the money you probably will get, unless you are incredibly scrappy and thoughtful, is going to be at a lower valuation than what you raised at 12 months ago. And if you can get your head around that, then either you extend your runway massively so you can catch up to your valuation that was overinflated over the past 12, 24 months, or you run out of cash or raise at a much lower valuation, which is a massive haircut for everybody involved. One of those will be true. So I would push really hard to give yourself the time to work once again, work into that valuation, or just give yourself the time even to get profitable, a crazy idea, get profitable for those companies.

Great. Well, in the last few minutes that we have here, what else should we cover that we haven't?

Yeah. I mean, look, the main things are, once again, I mean, for founders out there, this is a great time to do it. If you want to build a company and you're passionate, now's it. You You're truly passionate if you're going out there to do it today, which is a beautiful thing. For investors, go find those passionate founders, go talk to them. And then obviously for those founders who are doing it in a scrappy way, certainly apologies for the quick plug, but come use AbstractOps. We are literally here to automate your entire back office, save you 500+ hours a year so you can get out there and do your job. And then we'd love to invest in you because it means you are that scrappy thoughtful founder on top of it. And same thing, by the way, for investors. If they want to talk to us either about their portfolio companies or about how Abstract Ops can either help them or just about their portfolio companies in general and what we're seeing in the market, since we see— we'll probably see 1,000+ companies this year, feel free to drop me a note as well.

Well, great. Well, so how best for listeners to get back in touch with you?

Yeah, the best way is always for me or to drop me a note on Twitter usually. So in that case, my Twitter handle is @aceback00. Funny thing, that's my old AOL Instant Messenger name, which maybe shows my age a little bit, but that's my old Instant Messenger name. And so that's one great area. You can always tweet at us @abstractopsco as well, or drop me a note on LinkedIn. Those are usually the main areas to get in touch with me that I have the highest chance of a decently fast response.

Great. We'll put that in the show notes. I want to thank you for joining us today, and we hope to have you back for a follow-up soon.

Paul, really appreciate it. Have a great weekend, and thank you so much for having me on.

InvestorConnect helps investors interested in startup funding. In this podcast series, experienced investors share their experience and advice. You can learn more at investorconnect.org. Hall T. Martin is the director of Investor Connect, which is a 501 nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.