What a VC Wants: Forerunner’s Kirsten Green on Investing in a Downturn

No longer a far off abstraction, quantum computing is becoming top of mind for businesses, and the exploration of how it can be used within industries is expected to increase significantly over the next five years. At the break, join Katie Pizzolato, Vice President, IBM Quantum Platform, to learn how companies are beginning to discover how quantum computing could one day solve their biggest challenges.

This is your tech news briefing for Friday, September 9th. I'm Zoe Thomas for the Wall Street Journal. For startups and their investors, it's a bumpy time right now. Economic uncertainty, rising inflation and slowing demand for some tech products have people worried. But it all comes after a funding boom that saw venture capitalists pouring money into startups and asking them fewer questions as they competed for deals. So will the current shakeup give VCs more leeway to scrutinize potential tech investments? And where will they direct their money as consumers change their habits? On today's show, we'll be joined by Kirsten Greene, the founder and managing partner of Forerunner Ventures, to discuss the new landscape for startup funding. That's after these headlines. We report exclusively that Twitter agreed to pay roughly $7 million to its former head of security to settle a compensation dispute after he was fire. The confidential deal was completed back in June, just days before Peter Zatko filed a whistleblower complaint accusing the company of failing to protect sensitive user data and lying about its security problems. That's all, according to people familiar with the matter. Twitter has said Zatko's complaint is riddled with inconsistencies. Zatko is set to testify about his claims before the Senate Judiciary Committee on Tuesday, sources say. As part of the compensation settlement, Zatko signed a non disclosure agreement that forbids him from disparaging the company to exceptions where he can speak openly, whistleblower complaints and congressional hearings. In more exclusive WSJ reporting, Google is almost a year behind in its planned US Launch of a new news product. People familiar with the situation say that's because of stalled negotiations with some media outlets. Sources say the negotiations over Google News Showcase are delayed due to a number of factors. Some outlets feel Google is not paying enough for content or are upset by contractual terms. Others are waiting on legislation in Congress that would give publishers a stronger negotiating hand with big tech platforms. And a note Last year, Google and the Journal's parent company, News Corp. Announced a multi year deal that included Showcase as well as other elements and a third scoop. Meta has disbanded the team focused on addressing potential downsides to its products like Facebook and Instagram. The responsible innovation team was made up of around two dozen engineers, ethicists and others who worked with internal product teams and outside advisors, including privacy specialists, academics and users. A Meta spokesman said the company remains committed to the team's goals, and most of its former members would continue similar work elsewhere at the company. A new partnership between electric vehicle makers Rivian and Mercedes Benz say they plan to set up a new European factory that would build electric vans for both companies. The operation would be set up at an existing Mercedes site in central or Eastern Europe starting in a few years. Rivian and Mercedes said they hope to design electric vans that can be produced on common assembly lines and that the collaboration will help both companies rapidly scale production while lowering operating costs. Costs and Netflix is cutting back on spending from trimming its real estate footprint to limiting the swag it gives to employees, the streaming giant is seeing slower subscriber growth in the face of intense competition. It lost nearly a million subscribers in the second quarter, and it's laid off over 400 employees this year. Our reporter Sarah Krause spoke with people familiar with the cost cutting moves, which are also affecting the company's cloud budget.

In cloud computing, they're aiming to keep costs from ballooning as they try to grow their subscriber base to as many as 500 million customers in the next three years. And to do that, some of the things they're looking at are can we make fewer copies of data that we're storing in the cloud, you know, to sort of keep those costs under control?

To hear more from Sarah on Netflix's belt tightening efforts, check out this morning's edition of our sister podcast, what's News. All right, coming up, over the last few years, tech startups have had the upper hand when it comes to raising money from investors. Now the tables may be turning. So what opportunities does a VC see in the current climate? We'll find out after the break.

Quantum computers are poised to help businesses drive innovation through more expansive and multidimensional computations, says Katie Pizzolato, vice president, IBM Quantum Platform, which sees a roadmap to these use cases.

By 2029 they unlock a new set of mathematics and algorithms to tackle applications outside the reach of classical computers. The loan it really is a fundamentally different way to process information.

Different but not impenetrable.

It does feel more complex, for sure it is, but it is much more accessible and the barrier to entry is much lower than people anticipate.

So many of the products and services we buy today rely on tech running behind the scenes to deliver them through faster more efficiently or directly to us. Skipping the middleman. Forerunner Ventures is well aware of this. The 10 year old venture capital firm concentrates on consumer focused tech startups. It's invested in companies like fintech firm Chime, HealthTech, Brand Aura and gamer platform Metafy. But now, amid an economic downturn that follows the rush of VC funding that poured into startups over the last few years, how are VCs thinking about what to invest in next and how can they help the startups they've already backed? To discuss this and more, we're joined by Kirsten Green, the founder and managing partner of Forerunner Ventures. Hi Kirsten, thanks for joining us.

Thank you so much, Zoe, for having me on today.

So Forerunner typically invests in consumer focused startups. Given inflation, given the kind of economic uncertainty we have at the moment, what kinds of things are you focused on now?

I think one of the things about investing in venture capital is you really do need to take a long view of the market. Our job is to think about what is going to be incredibly relevant a couple of years out, but has enough relevancy today that there's an early audience for it and to get traction. We think very much less about what's happening in the moment in terms of the economic cycles and, and more about where's the consumer at, what does that maybe imply about the need or the opportunity going forward and investing into that?

You know, we've heard from some other VCs that now is the time to batten down the hatches. There's been some real warning messages coming out from other investors saying, you know, startups need to cut back after years of this big boom, this spending spree, hiring sprees. It sounds like you're not really in that camp though.

We are in that camp, but I don't think that's just blanket advice for everybody to say, you know, the world has changed, stop spending, start cutting. I think coming off of the last two years where we've been in a time period of tremendous growth, which has meant tremendous growth in team sizes, tremendous growth in marketing budgets, tremendous mandates to grow in general, as companies like that sort of requires most everybody to take a hard look at those elements of their business and say, do we really need all of the spend that we've accumulated in the last two years? If we're in a period where it's not just growth, growth, growth, it's more holistic about all elements of your business and with an asterisk around, you've got to figure out how to have some opportunity to control your own destiny. You know, there's been a number of layoffs announced. I know people are looking, you know, closely again at their cost structures. Decisions about people are really hard to make. They're personal and they also, you know, any team that grew quickly or hired a lot of people or any people spent a lot of time doing that. So these are, you know, they feel like challenging decisions to make when you bring the human element into it. But in so many ways it's required right now. As you think about how to again create the flexibility and the nimbleness in.

Your business, are there areas that you've seen startups maybe more willing to negotiate on than they were over the past few months or few years?

It's interesting right now because I think what hasn't been as clear this year is that question around, you know, how much negotiating room either side has on deals. And I think a lot of that has to do with the fact that companies raised a considerable amount of money over the last two years. And so there's been less businesses that I think have been in a situation where they need to raise capital. They've decided this is the right moment to raise capital. And I feel like that combination is really going to extend this question into 2023. I think there's going to be more companies in the market looking for follow on dollars in 23 than there were in 22. And those are really the opportunities that will create the data points to understand how valuations have changed.

So what would you want to get from companies that are looking for funding in 2023? I mean, what kind of things are you looking to see and to get from them in return for your capital?

The focus, at least on our team, I think we've always focused on unit economics, even very early. Different environments require you to have more evidence of that than others. Even if you have an idea of, here's the business model, we understand how this is going to play out. We can take some leaps in assuming on how it's going to play out. I think people are less willing to take those leaps and they want to see more proof points. Part of that is because I think that is not just the uncertainty in the market that maybe tests the belief, but it's just seeing how founders operate. Like, are they aware of the environment around them and balancing the right set of elements? And does that build conviction in their ability to grow a business in a state of uncertainty? Because nobody knows how long this period is going to last or whatever, but the real opportunity for everybody right now is to kind of demonstrate your execution capabilities and the real potential of your business based on fundamentals.

All right, I want to end by talking about a space that I've heard you're a believer in, the metaverse. Can you tell us a bit about that? Maybe some of the investments that you're making, any opportunities that you see here.

Our North Star in investing is the consumer. We really think about what's going on with people. How are their lives changing? How are their needs changing? And then where can business solve those and address those? The metaverse is curious to us and interesting. It's another dimension. It's another way for people to engage and interact. I think we've been impressed or at least inspired by many different potential applications. That said, it doesn't yet seamlessly integrate into consumer experience or people's lives. And I think that we really need to find a bridge to bring it into the broader mainstream.

Can you explain that idea a bit more, that bridge to consumers? What do you mean by that?

For instance, like last year, there was so much conversation and so much enthusiasm over NFTs. You know, it captured entrepreneurs imagination, it captured investors imagination. And with the billions of dollars of transactions that happened on platforms like OpenSea and others, it clearly captured some people in the market's attention. I think, though, that there still remains a big question on, like, okay, what is it? What do I do with this? What's the useful application of this? And I think that the bridge could be in unlocking something like an NFT that is less about an advanced JPEG and more about a tool for access to a loyalty program or to your club membership that you bought, or to a different version of executing a subscription model. Something that is sort of like, we're doing elements of this today in other ways in a business. What blockchain or the technology that these NFTs sit on, for example, offers is a better way to execute those experiences with a twist that unlocks more potential going forward.

All right, Kirsten Green from Forerunner Ventures, thank you so much for joining us.

Zoe, thanks so much for your thoughtful questions.

And that's it for Tech News Briefing this week. Our producer is Julie Chang. Our supervising producer is Chris Sinsley. Our executive producer is Kateri Yocum. And I'm your host, Zoe Thomas. Thanks for listening and have a great weekend.

The time to develop strategies around quantum computing is now, says Katie Pizzolato, vice president, IBM.

Quantum platform, just like AI, was experimental in its early days and is now foundational. Quantum is moving through a very similar arc so building quantum literacy is important. Educate leaders and technical teams on the basics and implications of the technology, and run experiments and identify where you define value.

Quantum, she says, should be seen as a new part of your ecosystem, not a substitute for it.

Think about how this technology is going to integrate with AI and classical systems. Quantum is not going to replace those things. It will augment them. We've got to find the parts of the workflow where quantum is Most valuable.

Visit IBM.com to learn how quantum computing will accelerate business innovation and growth.

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