This is a weekly newsletter about the art and science of building and investing in tech companies. To receive Investing 101 in your inbox each week, subscribe here:
This was a heck of a conversation; I hope you enjoy it as much as I did. This week, I got to sit down with Dan Gray, the Head of Insights at Equidam, a startup valuation platform.
I usually put the show notes at the bottom, but just to show you the breadth of the conversation, here are all the different things we talked about throughout our conversation:
Matt Turck's tweet about how to price venture rounds in 2022
Dan's post about how revenue multiples are silly, and a longer piece on how "revenue multiples will be looked back on as the weak-link in venture."
Bill Gurley's post from 2011 called All Revenue Is Not Created Equal -- a real classic!
The General Theory of Employment, Interest, and Money by John Maynard Keynes; I incorrectly cited Warren Buffett as the source of the idea that markets aren't rational because you're not trying to guess what a stock will do, but rather trying to guess what everyone else is going to guess a stock is going to do.
Aswath Damodaran's AWSOME video entitled "Putting the (Insta)cart before the (Grocery)horse: A COVID Favorite's Reality Check", which I've quoted before in my piece called The Value Chain of Capital.
Quoted some of the parts of my piece on Venture Capital Unbundled and The Unholy Trinity of Venture Capital.
The episode of the All-In Podcast with Bill Gurley called State of Series A's, VC dry powder, IPO window opens"
The eye-opening Venture Predation paper from May 2023.
Talking about Uber as an example of venture predation and the company's cash flow journey over time.
Goldman Sachs' CEO on why "startups should reconsider the idea of going public."
Bucco Capital on Stripe NOT going public.
Brett Adcock's Twitter dunk on me (and my response)
Tyler Tringas' post about shutting down Calm Fund because institutional investors didn't have appetite for investing in calm companies at scale.
My favorite piece I've written -- Playing Different (Stupider) Games
The Profitable Startup by Linear CEO, Karri Saarinen.
The back-and-forth between me and Bill Gurley on companies raising a LOT of money.
A paper on the relationship between fundraising and startup success.
Can you believe it was only an hour long conversation? Wild.
On top of that, at the beginning, one of my questions was about what we each saw as the "7 deadly sins of venture capital." I meant it to be a conversation starter but, after taking notes during our conversation, I realized we ended up coming up with exactly seven!
Here's a quick summary of the 7 deadly sins of venture capital that Dan and I came up with in our conversation:
Allocator vs. Adventurer Mentality
VCs have, increasingly, started focusing on incremental outcomes rather than ultimate outcomes. Rather than the VCs of old, who are getting their hands dirty, today they're often just taking an allocator approach.
It reminded me of one of Steve Jobs' lessons he wanted to pass on right before he died:
"I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be."
A lot of founders might be that way, but nothing could be more true of the majority of venture capitalists.
The Platformization of Venture
Firms started looking for ways to extend themselves. They framed it as "value-add" for the founder, but what it really was is resource extension for the investor.
Capital Agglomeration
That extension gave way to the capital agglomeration that I've written about ad naseum.
Letting The Loudest Models Win
From there, that style of capital agglomeration -- bigger funds from bigger LPs to fund bigger companies chasing bigger ambitions -- became the loudest model. It works for a small subset of hyper ambitious companies, but it doesn't work for the majority of companies.
Pervasive Venture Predation
The size of the capital base being deployed now, as more and more people chase the agglomerator model, has led to pervasive venture predation where every company thinks the playbook is to raise ungodly amounts of capital and outcompete everyone everywhere by having a bigger war chest.
Lost Generation of Potential Companies
In its wake, this model of listening the loudest models and chasing a very specific strategy has led to a lost generation of potentially great companies. The capital model we have now has been in pursuit of massive generationally ambitious companies. But they've been built by sacrificing a generation of startups on the altar of burn rates and high growth. What could those companies have been if they'd been built differently?
North Star Metric of Fundraising
Finally, the culminating sin that all of this yielded was the growing consensus that fundraising is a good north star metric. When, in reality, its a symptom of the broader engine. But that doesn't necessarily lead to more successful outcomes, it simply leads to more capital deployed.
Hope you enjoy the conversation!
Show Notes
Special thanks to Zach Collier and Michael Barrow & The Tourists for the intro music!
Thanks for reading! Subscribe here to receive Investing 101 in your inbox each week:
Share this post