What's Really Going On in Venture Capital Right Now

Hey everybody. I wanted to do a quick discussion on what's really happening in venture funding and venture financing right now because there's so much noise all over Twitter. We're open for business. The sky is falling. Notions worth 2 billion. So many great deals on TechCrunch that maybe actually were signed and closed before COVID What's really going on? And we've already done some great sessions at Sasser and I'm going to link to them below this video right after things happened. Byron Dieter, who I've worked with closely for well over a decade, one of the best cloud and SaaS investors. He did a deep dive for over an hour with great Q and A about how portfolio management works, what he's seen, how they're doing deals over zoom. It's great, you should watch it. And then at the Saster Summit, bridging the Gap, we had a couple great sessions, but in particular Mark Suster from Upfront Ventures, one was amazing, where he really dug into what's really happening in venture and why, maybe to be cautious. Why next year, in his strong opinion, next year will be worse for VC than this year. And he made some very compelling arguments. And in any event, it was one of the more compelling presentations I write. I wrote a summary up at Sastra and I'll link to it below. And so those are all great perspectives, but everyone has a bias and even I have a bias. But maybe I'm less biased than most. And I wanted to take just a few minutes to synthesize everything I've seen since March 15th in venture funding into Five Points. So you can understand if you're thinking about raising more or thinking about money this year or later without all the drama, what's really going on. So first, understand that folks, most VC firms are still doing triage today. And both Byron and Mark talked a lot about triage. And what I mean is in venture you think you have a lot of time to meet new startups and do zooms, but the tougher things get, the more your calendar just gets overwhelmed with dealing with the companies that are struggling. And yes, Byron made a point that they've already bridged or put more money into a bunch of their companies. But the truth is so many companies now are in high drama mode. We just saw, I think Uber offered to put money into lime at a third the price the last round. That's not just a term sheet. The amount of drama, the amount of board level conversations happening at lime. Think about all the board level drama we work today when the investors and the xco are suing SoftBank. I mean, that just sucks up all of your time. And yes, some of that got done quickly after March 15, but in many cases, portfolio triage is going to consume massive amounts of VCs time for the rest of this year. It's a frustrating part of venture investing that the struggling companies often take up much more of your time than the ones that are either doing well or, or the ones that just aren't burning any money. So triage is still ongoing and expect it to be super distracting even when there's some companies that are doing well. So that's just an issue and it's going to make fundraising and attention getting much harder. I was speaking today with an incredible entrepreneur that has gotten a bit of a Covid boost. Not a crazy one like some companies, not like Zoom or Slack, but actually gotten a real boost from this situation. And, and he quickly was able to raise millions and more in capital from folks that knew him. But he was exhausted from zooms with investors that didn't know him. They were overwhelmed with portfolio tradition. He had good numbers and has a great CEO. So just that is an overhang that will mean your emails get answered more slowly, that responses are more slow, that folks that maybe take a couple weeks to get back to you in a way they didn't used to. You can't read too much into it because portfolio triage is going to be a venture overhang for all of this year. Second, bear in mind, even if you're a VC and your portfolio is doing better, even if you have a few Covid beneficiaries, everyone's nervous and it's confusing because if you look at cloud stocks, look at the Bessemer NASDAQ cloud index, it's close to all time highs. Yes, we had a big dip after March 15, but it's almost all back. Shopify grew 51% of its market cap last month. So yes, I mean stock like oh my God, unemployment is, I mean it's heartbreaking the effects on tourism, on air travel, on cruise ships, on events, it's devastating the effects on restaurants. But the stock market's still way up here in cloud. And so everyone's nervous, they don't know what to do. And VCs want certainty. So nervousness is not going to come out of the market this year no matter how. Even though the market, it's not like 08 or 09, what is way down the market is good, but we're nervous. Third point, which I know you know this but it's harder to meet. And what does that mean? Yes, we're going to be in this weird phase of between shelter and going back to work, but not really being in person for a long time. And so everyone's getting used to meetings on Zoom and pitches on Zoom and funding on Zoom. But the bigger the check, the harder it is. And if you listen to Mark Suster's presentation, he's like, yeah, we've done two or three deals since March 15, but they were smaller deals, they were seed deals, they were earlier deals and smaller deals. And seed deals have advantages today. First of all, the check sizes are smaller, so that does mitigate some risk for VCs. Not all of it, but it helps a bit when the check size is smaller. But also, there's different expectations for seed deals. Seed deals, you might say, you know what? It's going to take two years for this startup to take off. So even if two years, 2020 and even 2021 aren't perfect, we're betting on 2022. But if you're even past a couple million in ARR, people are investing in the present as much as the future. So that makes it hard. And not meeting just makes everything harder. So just assume the further along you are, the harder it's going to be to get funded this year, unless you're truly a rocket ship. And fourth, and this is a bit. It's close to counterintuitive. Hot deals are still getting done today, even over Zoom, the Notions and others are getting done as fast or faster than ever. But what is hot has changed. To be a hot startup today, and this may not make sense to all of you, but to be a hot startup today, you have to be doing better than March 15th. You have to be a Covid beneficiary. And why should that be? Can't VCs take risks? Can't they see the future? Can't they see that Airbnb will be back and Trip Actions will be back and all these iconic leaders that are just impacted for now, we'll be back. I mean, yeah, they can see it. Airbnb raised a lot, but it was at something like 15% interest and a big haircut to the last round because, you know, VCs have to invest in explosive growth. And when it's not there, even for an interim period, even when we intellectually know why, it's scary, it's hard. And so no matter what anybody says, people are either looking for very promising teams that they'd invest in at any time, or folks with a Covid boost. And here's the thing, you may be thinking it's all zoom, but it's not just zoom. The COVID boosts are in weird places right now. And I'll give you a couple examples from investments I've done where it wasn't entirely expected. I'll give you three quick examples to think about. One, which we had on our podcast and on YouTube recently, was a company called Gorgias. And Gorgias is the leading next generation contact center, chat center, help center for e commerce, and on Shopify in particular. And they have 3,000 customers. And it was not clear after March 15th how gorgeous would be impacted. And Roman actually shared all the data on YouTube and it's ASTER. But right after March 15, they have SMB customers. They have folks selling small e commerce stores to jewelry and luxury and fancy shoes and scarves. And boy, the churn was devastating there. And it didn't look like Gorgeous would shrink in March, but it certainly looked immediately like all their SMB customers would take such a hit that growth was going to slow for a while. And that was March and then April. Whoa, April. The same type of customers, the same SMBs mostly. They grew almost 20% by revenue and 70% in April by usage. So who knew? Who knew? So there's good and bad in e commerce. The good in e commerce is we're all sitting at home ordering from Amazon. We know that, but how does that benefit different segments of e commerce? It wasn't clear how it would work out, and at first it was bad and then it was good for Gorgeous. Another example, these are earlier stage companies, but all doing, you know, millions of revenue to help you think. Another one's called Revenuecat.com, which is an API for managing subscription billing. And it wasn't clear what would happen after March 15, but going into April, who knew why there's a boom in building mobile apps? I don't know why. Jacob, who's been on our podcast, doesn't know why, but the growth since the beginning of the year is up 250% and it's way accelerated in April. Why are developers at home finally dusting off that mobile subscription project they want to work on for years? I mean, we don't know, but it is getting a Covid boost. And then I'll give you a third one that's not obvious. This one grew 40% in April after an unclear March. A company called treasury prime, that's a bank API. Well, there's a bunch of reasons Fintech could go either way. Like if 40% of the company is either unemployed or underemployed now, why do we need more bank accounts? Why do we need more help? Why even is Robinhood doing well, let alone a banking API company? It may not be clear why PPP gave them a benefit, but then boom. April was huge. So my point of these stories is these are not zooms or slacks or notions. These are three examples of tools that you could see benefits from the coronavirus, but also you can see negatives. Like it could cut both ways. We don't know. But if you're an investor, you're gonna In a time when there's uncertainty, where people are nervous, where they're working so much on their existing portfolios we talked about, and when it's harder to meet, you're just going to wait for the ones getting a Covid boost. Is it fair? Does it even make sense if you're going long? No. But the truth is deals that are getting funded are getting a Covid boost. So if you're not getting a Covid boost, and I'm guessing at best 15% of us are, assume funding is just going to be harder because they're out there. There's more startups than you might think in places you might not expect getting a Covid boost. And the last point, which we already touched on, the zoom point. But just remember, the bigger the check is, the bigger the burn, the tougher the things are. Now, VCs are wired to take bets and risk, but the types of bets and risks folks want to take at different times or earlier. So a smaller risk with a lower burn and a smaller check size is just going to be easier to get funded. And folks that are pushing the envelope with burn and deal size, it's harder. So maybe raise less, maybe keep the burn modest, take stress out of investing and realize that there are exceptions. Again, I hate to use notion for like the 11th time here. There will be many, but the bigger the check, the tougher it is today. Like there's a lot. There's been so much excitement for late stage investing. Every VC fund raised a growth fund or an extra opportunity or select fund because it felt like the easiest money in the world was investing at zoom at a billion like Sequoia did and watching your money go 20x in the IPO in 18 months and 50x today or Kleiner doing slack at a billion. Those seemed like the easiest money for a few years and they were the easiest money were investing in a unicorn before it became a decacorn that really was the winning playbook the last four or five years. Put the most money in at a billion for an IPO at 5 or 10 million and don't wait years to get there. And it really was the arbitrage of our lifetimes in investing. But not today, not right now. Now folks are nervous and it's hard to meet in person for those $100 million checks or $10 million or $20 million checks. So keep it simple. The bigger the check, the bigger the burn. The harder it is. Now the smaller the check, the smaller the burn and the more you're getting a Covid bounce, the easier it's going to be. And that's the world we live in. People are open for business but they're under stress, they're confused. They have a lot of triage and they're looking for something that's not fair. They're looking for a Covid boost. So that's where I see the world today.