How will technology change venture capital over the next 20 years?

For an industry that is ostensibly predicated on being at the cutting edge of technology, venture capital itself has been relatively slow to adopt new technologies. Sure, VCs themselves are all highly technically literate and drive the newest Teslas and have all the latest fitness trackers, but the profession itself looks largely the way it did 20 years ago. Why is that? Will things really be that different for the industry in the next 20 years?

A Tortoise Industry whose job it is to bet on Hares

So why has venture been slow to adopt new technologies? There are a bunch of reasons for this but I will share some of the few that I find most compelling. First and foremost, venture capital is, and likely always will be, a relationship-driven industry. It’s about people and networks. Not about technological supremacy. And that makes sense. It’s hard for there to be a meaningful ROI on technology as a venture capital investor today. Maybe there are some cost efficiencies that can be realized by adopting middle and back-office platforms, but it’s important to remember where VCs make their money. They don’t do it on driving incremental efficiencies. They do it on having outsized, power-law outcomes on companies they get into early enough to have meaningful ownership at the end of the day. It’s especially interesting to compare venture capital to public market investing where technology adoption has been so prevalent. Why the difference? Because in public market investing the margins really do matter. When you are trying to beat benchmarks in a hyper-competitive market with clean and readily-available information, efficiencies generated by technological adoption really do make a world of difference. Since venture capital operates in much murkier waters, there just hasn’t been the same push to roll out the technology.

Another reason that VCs don’t leverage technology nearly as much as they invest in it, is that it is difficult to do so in the spaces they are playing. So much information is obfuscated in private markets. It is really difficult to build any sort of quantitative models or use technology to evaluate companies or entrepreneurs. As the old saying goes “crap in, crap out”. Without access to high-quality information, your options are to A) invest in a niche space where information is relatively available or B) hire an army of pencil pushers to do data clean up and acquisition. It’s really tough. There are just so many different variables you need to take into account. And even if you get all the data you could ever want on some companies, comparing them is extremely difficult at the early stages of a company’s lifecycle. Any VC that tells you they are data-driven today really just means that they have a convoluted grading system that they shoehorn their companies into to justify their own personal biases.

How Technology Could Change Venture Capital

Is venture capital doomed to always be behind the tech curve? I don’t think so. I wouldn’t say that venture capital will ever get to the point of the technological adoption of private markets, but there is a lot of room for improvement. Here are a few ideas on where we could see technology impact venture capital over the coming decades.

Artificial Intelligence

Remember how difficult I said it was to build predictive models for private businesses? There is a good chance that AI changes that in the next 20 years. Why is it so difficult to use analytics in venture? Massive amounts of unstructured data with tons of variables. What is AI good at finding patterns in? Massive amounts of unstructured data with tons of variables. AI has the potential to completely change how companies are evaluated and talent is identified. The biggest challenge will be feeding artificial intelligence models the right kind of data when that data isn’t easily found. If someone can solve the data question, then watch out. If I were you I would keep my eyes on the companies who are building out proprietary flows of that data. Companies like Carta have access to the inner workings of a variety of private companies. What are the chances they leverage that at some point?

Portfolio Management

Portfolio management is tough. Giving all of your companies the attention they need just doesn’t scale well. Technology will continue to decouple aspects of portfolio and fund management from VCs. Automated data collection, quarterly updates, portfolio rebalancing, reserve allocation planning, capital calls, and more. We are in the early innings of this game but there are already multiple players looking to take this work out of investors’ hands. More mature industries like Private Equity have had providers handling much of this work for decades. I expect that we will see more and more venture shops “outsource” many aspects of fund and portfolio management to technology so they can focus on their highest leverage activities.

Fundraising

Within the last few years, there has been a veritable explosion in technology solutions aimed at startup fundraising. I expect that in the future technology will provide solutions for GP fundraising as well. Fundraising is a highly manual process that has not evolved in decades. There is an opportunity here for technology to streamline the space. Matchmaking between VCs raising funds and investors is a highly manual process mostly driven by word of mouth and pounding-the-pavement networking. Technologies that made this process easier would be valuable for both GPs and LPs. Perhaps the place where technology could make the biggest impact is for first-time funds. Believe it or not, the median first-time fund will generally outperform the median fund managed by a more experienced investor. First-time funds however are notoriously hard to raise, especially for people who don’t have an ivy league or tech royalty pedigree. What would an angel list look like for first-time fund managers?

Deal Execution

Every investor knows the difficulty that comes with getting a deal across the finish line. Last-minute negotiations and ever-growing red-line version lists can make the last 5% of a deal as painstaking as the first 95%. Automation has the potential to bring massive efficiencies to these processes in the future. Collaborative documents instead of back and forth redlined word docs. Optimized automatic negotiations based on each party’s preferences. E-Signatures and E-Notaries. These technologies will have sweeping impacts across much of the legal profession and transactions of any kind and they will make a meaningful difference in the way that venture capital deals are executed.

These are a few of my ideas about how technology will change the world of venture capital. Let me know your ideas in the comments below or on twitter. Until next time!

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The Future of Education

The COVID-19 Pandemic will have long-lasting impacts on our society. One of the sectors where normalcy has been the most disrupted and which will likely undergo the most change is education. Millions of students have had to move from in-person classrooms to remote learning almost overnight. While not all of the long-term effects of this pandemic will be positive, I believe that the evolution education will undergo will be long overdue.

Our education system has been deteriorating for decades. A system predicated on conformity has not been able to keep pace with the tools and methods necessary to best equip learners to flourish in modern society. I believe that the coronavirus’ impact will be less of a seismic shift for education and more of a wake-up call to the massive impacts that technology has been making on the learning environment. The three technology trends that I think will leave the largest impressions on education are the rise of remote teaching, more personalized lessons, and life-long learning.

Remote Teaching

Whether we wanted it or not, remote teaching is here and my guess is that it will be here to stay. As school districts and universities have tried to flip the switch on remote learning, what has become clear is that teaching remotely requires a different skill set and tool kit than teaching in person. This may sound obvious, but as I have spoken with those who are experiencing this first hand, it is striking how different the experience can be depending on whether or not your teacher was prepared. Teachers who were prepared had developed asynchronous lectures, experiential modules, and environments where students could collaborate. Teachers who weren’t, propped up an iPhone on some textbooks in the back of the room and continued trying to teach as if nothing had changed. The reality is that there isn’t an inherently superior type of learning. Both remote and in-person education have their shares of pros and cons. I expect that in the future we will see the rise of more blended styles of learning that combine the collaboration and communication of in-person learning with the convenience and asynchronicity of remote education.

Personalized Lessons

Modern education’s most fundamental flaw is the forced structure of the one-to-many classroom. Teachers are put in the impossible situation of trying to keep 30+ different students with different needs and learning paces in lock-step as they navigate government-imposed standardized curriculums. Inevitably some portion of the class is left behind. Either lessons move too fast and struggling students are left in the dust or they move at a snail’s pace with high achievers becoming bored (and if they are anything like I was growing up, resorting to distracting their fellow students). Technology now allows us to meet students where they are and not where a one-size-fits-none curriculum tells us they should be. Students can learn at their own pace, investing more time to understand concepts they struggle with and speeding through those that are intuitive to them. This technology is already in use and its adoption will only increase as a result of forced experiences with remote learning. Altitude Learning develops software that empowers existing schools to build a more personalized learner-centric curriculum. Lambda School has gate assessments that their students must pass in order to move forward with their education. Once a student has mastered a certain section or skill, they become student teachers to help mentor newer students, developing even further mastery.

Life-Long Learning

As the trend of increasing automation continues to accelerate, workers will be required to continuously upskill throughout their careers. Technologies supporting life-long learning will make it easy and enjoyable for people to take courses in subjects that interest them. I have been keeping myself busy through quarantine by going through Bram Kanstein’s No Code MVP course. I am sure it won’t be the last course like this that I will take. I believe we will continue to see more and more courses built off of an individual’s personal expertise. These are a great way to learn no matter what age you are and a nice cherry on top is that they allow people to monetize their expertise in a powerful way (they are a great example of micropreneurship). With the proliferation of technologies like no-code software, it has never been easier to build and consume educational content over the course of your life.

The cat is out of the bag. Education has been too broken for too long and I believe that the coronavirus pandemic is exactly the spark the sector needs to start reinventing itself. What impact do you think COVID-19 will have on education? Let me know on Twitter or in the comments below!

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So You Want to be a Venture Capitalist? Required reading for any aspiring VC

Books are one of the best ways to learn about a topic.

Art. Science. Finance. History.

A book allows you to absorb in a few hours what it may have taken an author decades to learn.

In the past, I have talked about how I always try to be reading two books at any given time, one fantasy book and one non-fiction book.

In fantasy, I exercise my imagination.

In non-fiction, I exercise just about everything else.

It will come as no surprise to most of you that a significant portion of the non-fiction part of that experience takes the form of books directly, or at least adjacently, related to the world of venture capital. I regularly get asked for resources about the industry. I thought a good place to start would be some of my favorite books on (or around) the topic. I should note that this is in no way an exhaustive list, this is simply the books that have had the biggest impact on me, my career, and the way I think about venture capital.

Without further ado, my list of must-read VC books (Amazon affiliate links included):

The Hard Thing About Hard Things by Ben Horowitz

The book that started it all. During the summer after my junior year of college, I had the opportunity to intern at a venture capital firm. I knew I wanted to be an investor, but that was about as specific as I could get. On the first day of work that summer, my boss handed me a list of books to read (many of which are included below). The first book I read was The Hard Thing About Hard Things by Ben Horowitz. The rest, as they say, was history. This was the book that first kindled my love of all things venture capital, tech, and entrepreneurship. It is a fascinating look into the ups and downs (and downs and more downs and somehow eventually even greater ups?!) of a dot-com era startup. Come for the lessons on leadership and entrepreneurship, stay for the rap lyrics and no holds barred commentary on the startup world. An amazing opportunity to learn from a successful technology entrepreneur who just happened to found one of the world’s most successful venture capital firms as his second act. Casual.

Creative Capital by Spencer E. Ante

If you want to learn about something, what better place to start than its beginnings? Creative capital is the story of one man, Gorges Doriot, and the monumental impact he had on the world by founding what we know of today as the venture capital industry. Doriot was an unassuming Frenchman academic who answered his adopted country’s call-to-arms by serving in World War II. After the war, he went on to found the first venture capital firm. An enjoyable and enlightening book that takes you back to the metaphorical primordial ooze of what turned into the modern venture capital industry.

Venture Deals by Brad Feld and Jason Mendelson

The definitive must-read for anyone interested in learning about the nuts and bolts of how venture capital deals are structured. Brad Feld and Jason Mendelson are legendary venture capitalists in their own right, but their contribution to the industry in the form of Venture Deals is pretty tough to beat. If you are a VC, read it. If you want to be a VC, read it. If you are an entrepreneur trying to raise venture capital, read it twice. Venture Deals walks you through the ins and outs of deal terms and gives you a baseline understanding of what you can expect when hand shakes have been made and the lawyers start putting pen to paper. If you are going to be spending any time in or around this industry, you will be a step behind if you haven’t read Venture Deals.

Zero to One by Peter Thiel and Blake Masters

Zero to One is the ultimate place to start understanding the world view of one of the most successful technologists and investors in history. The book is about how to think differently and build truly innovative products the world needs, instead of simply inventing better and better mousetraps. In some circles, Peter Thiel may be derided at worst and thought cliche at best, but I for one couldn’t have a higher opinion of his technological and ideological contributions. Zero to One is one of those books you are either going to love or you are going to hate. You will either be inspired by Thiel’s unique perspective or you will find yourself diametrically opposed to it. And in some ways, that is precisely the point.

The Lean Startup by Eric Ries

Another seminal book in the world of technology and venture capital. If you have had any exposure to modern technology development or startup building, chances are that you have come across at least some of the ideas contained in this book. Reis’ ideas have become so pervasive in the world of startups that they have become completely core to how companies are built. There are no such things as “lean startups” simply because nearly all high growth technology companies are built using the lean methodology today. The book is not without its share of critics COUGHkeith raboisCOUGH, but it is a pillar of the modern technology ecosystem. At the end of the day, The Lean Startup is about tightening feedback loops, pushing decisions as close to problems as possible, and getting customer input before you start building something they don’t want. Which business couldn’t use some of those strategies?

Powerful by Patty McCord

You want to learn how to build a world-class organization? You start by reading this book. Patty McCord was the architect behind the culture of one of the world’s most effective and impactful modern companies. Patty joined Netflix during its early days after previously working at Reed Hastings's prior startup. She was instrumental in creating a culture that favored candor, transparency, and trust over the normal HR jibber-jabber of engagement, hierarchy, and performance plans. Her key insight: People want to work on something important while being surrounded by really smart people and they want to be treated like adults. Get that wrong and all the hand-holding, all-staff retreats, and ping pong tables in the world won’t save you. An incredible book that guides you through thinking about building a company culture that is fit to excel in the dynamism of the modern world. Be warned though, if you are reading this while finding yourself stuck at a company with its head in the sand, you will find yourself in for a world of frustration.

Creativity, Inc. by Ed Catmull and Amy Wallace

The story of Pixar. Does anything else need to be said? Creativity, Inc. takes you behind the curtain of one of the most exciting and fascinating companies ever. It gives you an inside look at the trials (so. many. trials.) and tribulations of one of the most beloved companies in the world. If you read it for the heartwarming stories about how to capture the imagination, you won’t be disappointed, but this book is so, so much more. Creativity, Inc. isn’t just the history of Pixar, it is a guidebook on how to create a company where innovation always comes first. Where envelopes are pushed and conflict is handled directly out in the open instead of through anonymous feedback inboxes. The placement of Creativity, Inc. next to Powerful is no coincidence. You will see many of the same themes about transparency, treating people like adults, and holding employees to the highest possible standard echoed across both books. It’s almost like they might be on to something…

Elon Musk by Ashlee Vance

Hero or villain. Sympathetic or despicable. Genius or idiot. The modern titan that is Elon Musk refuses to be defined by easily traced lines. You really have a chance to know the man you need to be one of the few he lets into his inner circle. For the rest of us, we read this fantastic biography by Ashlee Vance. Halfway through the book, I wanted nothing more than to be Elon. By the end of the book, I wanted nothing less. Elon Musk’s life is one that defies all attempts at shallow categorization and in some ways this book reads more like an action novel than a biography. If you want to become an expert at building innovative companies, you absolutely must take the time to read about the life of the world’s most innovative company builder.

Loonshots by Safi Bahcall

One of my favorite books that I have read in recent years and one that, if you know me, I have probably recommended to you multiple times. Safi Bahcall excellently examines why it is that some companies are able to innovate and others aren’t. Why some are able to nurture the crazy ideas that change the world and others bury their most promising talent under paperwork and bureaucracy. So many non-fiction books follow the trope of “Here is my idea and here are 27 chapters that include slightly differing examples.” Loonshots is among the minority that truly break the mold and I found myself on the edge of my seat throughout. Throughout the book, Bahcall examines some of the very companies and people discussed on this very list and why their companies were able to succeed where competitors didn’t. I’ll give you a hint: It’s all structure.

Have you read any of these books? Are there any other must-reads for the next generation of venture capitalist? Let me know in the comments or on Twitter.

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Tech's Manifest Destiny

In the 19th century, American pioneers expanded across the reaches of the American continent. The driving force behind this unstoppable conquest was the belief in America’s Manifest Destiny. Today, as we witness a new technological Manifest Destiny, we must be careful not to repeat the sins of the past.

The Call of Destiny

Manifest Destiny was the belief that America’s unique virtue not only allowed, but obligated, its citizens to expand and tame the American continent. It was followed with an almost zealous fervor by pioneers and settlers pushing the bounds of the United States’ frontier ever further. Manifest Destiny, perhaps more than any other cultural belief, has created the country we know today. It brought immeasurable wealth, resources, and power to what eventually would become the world’s preeminent superpower. This treasure trove of riches was not won without sacrifice. The secondary effects of Manifest Destiny were the displacement of native peoples, the extinction or endangerment of many natural species, and the fundamental altering of America’s environmental landscape. It’s hard to argue that the benefits of Manifest Destiny, at least from America’s perspective, outweighed the cost, but we are fooling ourselves if we ignore that there was a cost. I will leave the debate of whether Manifest Destiny on a whole was positive or negative to history’s scholars, but what is undeniable is that the phenomenon was more complex and nuanced in its ramifications than anyone considered at the time. Manifest Destiny’s effects, good and ill, have reverberated through time and are still felt today. The modern-day Manifest Destiny will have an equally far reach, but will it be for our benefit or our detriment?

Technology’s Manifest Destiny

The modern equivalent of America’s Manifest Destiny is the seemingly unassailable march forward of technology and innovation. Innovation grows at an exponential scale as new discoveries and technologies open up the door for additional breakthroughs. It has become a cliche critique, but I do think there is truth in the idea that we spend so much time asking if something can be done, that we rarely take the time to ask whether it should be done. As we reach new technological frontiers in mobility, automation, and artificial intelligence, we need to start grappling with the very real questions of not only what should be done, but how should it be done.

Don’t mistake me. I am not out to get technology or break up big tech or regulate innovation away. If anything I am the opposite. I genuinely believe that technology and innovation is the driving force behind a tide that raises all boats. I believe that we live in the single greatest period of time in human history and that tomorrow will be better than yesterday.

I write this post not because I distrust technology, but because I believe in it so strongly. Just as the pioneers of 200 years ago did, I have at times found myself a zealot blindly preaching the benefits of the forward progress of technology with little heed towards its potential side effects. This entrenched bias and lack of nuanced view scares me when I see it in myself and it scares me when I see it at large in our community. I love disruption as much as the next guy, but we shouldn’t worship at its altar. Disruption hasn’t always had the positive connotations that it enjoys today (just ask my grade school teachers…). We mustn’t give in to the temptation to simply assume that what we do is “good” and what others do is “bad”. We can’t kid ourselves that just because technology has created unprecedented prosperity that, left to its own devices, it is destined to continue to do so.

We are better than that.

Innovation is a force and just like any other, it is indifferent in its application. The fire does not hate the wood it burns.

Responsibility ultimately lies with those who wield it.

Us.

The lack of acknowledging that responsibility is one of the things that scares me most in the world of technology today. There seem to be two camps. On one hand, there are people who believe that tech can do no wrong. That it is not just ultimately a force for good, but unequivocally so. On the other hand, there are those who believe that we are powerless to change the course of innovation for better or worse. That innovation is an unstoppable tide that we must be content to merely keep our heads above water as we are swept away.

I reject both of those arguments.

We should not fall into the same trap that the pioneers of yore did by simply believing that because we can do something that it is good. I will be the first to tell you that I believe that technological progress is on its net, overwhelmingly positive, but to outright ignore its downfalls is a path to disaster.

We are not bystanders who lack sovereignty over our circumstances either. We are creators that can exert our will upon our creation. To argue otherwise is an attempt to dissociate responsibility.

Now look, I don’t have the answers.

But I do know that we need to continue the discourse. We need to have the tough conversations about not just what can be done, but what should be done.

We as a community cannot hide behind platitudes of technology’s greatness. We need to be honest with ourselves about innovation’s heights and depths. About its greatness and its shortcomings. Its light and its darkness.

Because if we don’t.

Who will?

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Board to Death

Photo by Drew Beamer on Unsplash

The world of Venture Capital is very different than it appears from the outside. I have been surprised by many things since becoming an investor, but none more so, than the difficulties surrounding boards. From the outside looking in, boards appear simple. Incentives are aligned. Everyone wants what is best for the company. Experience and expertise are leveraged to make the company the best it can be.

If only it were that simple.

Properly managing boards as an entrepreneur is a dance. Defer to them too much and you will lose the magic that made board members want to support you in the first place. Don’t heed them enough and you will make avoidable mistakes and miss out on opportunities.

The biggest mistake I see entrepreneurs make in respect towards their boards is that they think about their boards with the wrong mindset. The second you grow mistrustful of your board and start thinking of them as antagonists trying to put up hurdles in the way of your company, the chances your company is going to become successful with you at the helm plummets to almost zero.

Alright, Erik chill out. Classic Berg exaggeration.

No I am serious. A toxic board relationship is THAT deadly. It may not happen that day. Or that month. But eventually allowing the relationship between you and the board to fester will come back to bite either you or the company. Or both.

I believe the best metaphor for a well run board is to think of the board as your boss. Because that is exactly what they are. The keys to a healthy relationship with a board are the same as with a healthy relationship with your boss.

Communication

As with most relationships in life, the most important thing when managing a board is communication. Regularly update your board (even, and especially, outside of official board meetings) on your successes, failures, and any ways that they can help. I maintain that investor updates are one of the highest leverage activities any entrepreneur can do. Keep your board in the loop with what is going on with your company and they will be able to leverage their experience to help you make the best possible decisions. Note that I am not saying to do whatever your board tells you to. If they knew what was best for your business in every possible scenario, they would’ve started your company themselves. Rely on your intuition. It got you this far. But your board has many lifetime’s worth of additional experience than you do. Use it. Take it into account and leverage it to make the best possible decisions. To do otherwise is simply foolish.

Coaching

Just like all good bosses, boards have a responsibility to develop the CEO. Most startup entrepreneurs have not built a business before. Those that have, in all likelihood, have done so in a different sector or space. The board has a responsibility to coach and mentor the CEO to be the best that they can be. This means giving your CEO the tools they require to be successful. Equip them with resources and connect them with mentors who have been successful in this space before. A board’s fundamental job is to protect the interests of a company and its employees. The best way to do this is by making sure that the CEO performs at their absolute peak. If you as a board member believe your duty is to provide oversight without nourishment, advice without mentorship, you are neglecting your responsibilities to the company.

Accountability

Communication is a two way street. Yes, the impetus lies squarely at the feet of the entrepreneur, but at the end of the day, they will only feel empowered to bring everything to the attention of the board if the board knows how to give appropriate levels of feedback. Successful boards design structures where they can hold their CEOs accountable in a constructive way. I think Fred Wilson has the best approach for ensuring that feedback loops are tight and honest. Entrepreneurs, don’t get defensive when the board gives you feedback. Every single one of their incentives is aligned with the success of the company. So are yours. Remember that they trying to help you make the company the best that it can possibly be.

From the outside looking in, no one will know how healthy your company is. You can survive with a bad board relationship for a little while. But, if you are consistently neglecting your relationship with your board, eventually it will blow up in your face. The key is to leverage their experience and remember that they are on your side.

How often should you update your investors?

Regular investor updates are one of the highest leverage activities entrepreneurs can do to make their company successful. They provide tangible value to companies and a positive signal to investors. And they don’t have to be hard.

If you follow me on twitter, you will have noticed that investor updates have been a topic on my mind a lot recently. There is some debate in the industry about how vital they are and what form they should take. Hopefully this post can codify my thoughts and be a resource to any entrepreneurs.

Help me, Help you

Should investor updates even be done? The answer is an overwhelming YES. Not to be confused with an emphatic YES or a confident YES. An overwhelming YES. Updating your investors is important for a few reasons.

First, investors cannot help you if they don’t know what you need. Investor updates are an opportunity to ask for help/guidance/connections. It may seem intimidating to open your company’s komono to some of the less than glamorous aspects of the business, but by the time investors find out about issues on their own, it will often be too late for them to help. This of course all operates under the assumption that your investors are able and willing to help you. If they are, great! Update them. If they aren’t, why are they your investors in the first place (a topic for another post perhaps)?

I am going to let you in on a little secret. Investors want to be helpful! There are better ways to make money in finance than being a VC. For the most part, VCs have an itch to help build the next great thing and providing help to portfolio companies allows them to scratch this itch. I know that is the case for me. Anyday I can make a fruitful introduction or help clean up a model for a portfolio company is a good day in my book. I think any other good investor would agree.

Brent Beshore describes entrepreneurship as a “daily knife fight”. It is not easy. Founders are faced with new issues and obstacles every day. Mobilizing your investors can help solve a lot of those problems. Why turn down a resource that is not only willing, but excited to help you succeed?

Timing is Everything

As with many things in life, the key to investor updates is consistency. Developing a regular cadence with your updates will take a lot of the punch out of anything that is less than perfect. An email received after not hearing from a founder for 6 months saying that a company missed one of their revenue milestones and need help hiring a VP of engineering seems like a catastrophe. An explanation of why a milestone target was missed and a request for help hiring a VP of engineering received as part of a regular investor update is a Tuesday.

There is some debate in the industry on how often companies should be updating their investors. Some investors believe quarterly updates are sufficient. This may work for later stage companies, but for early stage companies, I believe that monthly investor updates are always the way to go. Monthly updates allow you to keep your updates brief and to the point. In-depth strategic discussions can be left for quarterly board meetings.

How Much is too Much

Entrepreneurs have enough on their hands, so investor updates absolutely must be designed to keep the burden to a minimum. With a monthly cadence, your update can be brief. I suggest that entrepreneurs don’t spend more than 15-30 minutes putting together their update. Items noted should be whatever is top of mind. You don’t need to write a novel, just give your investors a sense of the momentum of the company and make any asks you need help with. Here is a template:

Hello Investors,

XYZ month was a productive one for ABCify! This month we accomplished A, B, and C. We are excited about Initiative X and are thrilled about new hire Y. We continue to execute on plan Z.

Thank you for your continued support,

Founder

Company

Wins:

• Win 1

• Win 2

• Win 3

Challenges:

• Challenge 1, brief explanation

• Challenge 2, brief explanation

• Challenge 3, brief explanation

KPIs:

• Metric 1

• Metric 2

Asks:

• Ask 1

• Ask 2

That’s it. Seriously. If you fill in the blank with the above template your investors will LOVE you. This is a good thing. Happy investors make for happy fundraises. More than that, consistent updates are a very positive signal for investors. It shows that the entrepreneur is on top of things and is being thoughtful about their company.

And it shows that the founder is smart.

Because spending 15 minutes keeping your investors happy and leveraging their expertise to help you overcome obstacles is one of the most high-leverage activities you can do as an entrepreneur.

2019 Predictions for Venture Capital and Tech

I hope you all had a pleasant holiday season and a happy new year! My wife and I went back to The Commonwealth to spend some wonderful R&R with friends and family. It was quite the “break” with a lot of family time, my first ever successful cooking of traditional Norwegian Juleribbe, my first ever debutante ball, and a New Year’s Eve filled with board games and Super Smash Bros until the wee hours of the morning.

My family is big on traditions, especially around the holidays. We eat the same foods for Christmas and every New Year’s Day growing up we would go to Buffalo Wild Wings (kinda random I know) and make our New Year’s resolutions while watching the bowl games and eating chicken wings. Last year I started a tradition here of making some predictions about the year to come and I thought it would be fun to evaluate how they did before making a few new predictions for 2019.

2018 Predictions

The Rise of New Tech Hubs

Last year, I predicted we would see new tech hubs really solidify themselves as leaders in the space. Of all my predictions I think this one has turned out to be the most true. New hubs for technology have been flourishing for years, but 2018 was really the year that people began to sit up and take notice. The tech scenes in places like Columbus, Nashville, Ann Arbor, and Denver have a new found legitimacy that is demanding coastal investors take notice. This has also come at a time when the largest tech giants are under increasing amounts of scrutiny and the socio-economic situation in the Bay Area has grown more tenuous than ever. I had so much confidence in this trend, that I bet my career on it, and I have had the pleasure of getting to experience the best of what a growing tech ecosystem has to offer first-hand. It has been an absolute thrill to be a part of and I am confident this trend will continue to accelerate into 2019!

The Legitimacy of Zebras

For 2018 I believed that the VC world would wake up a little bit and take notice of more sustainable business models than the boom or bust unicorn hunting that the sector has become known for. Unfortunately it seems to me that, at least in SV, the opposite is true. As record amounts of capital were pumped into the space by ever-growing mega funds, the swing-for-the-fences mentality only seemed to heighten. I understand that VC is a power-law sector where the majority of returns are made only by the top firms/companies, but I worry that in the pursuit of growth at all costs the sector has let valuations get away from them and overlooked wide swaths of new businesses that can be built on more sustainable, cash-flow focused models.

Structures that add value

In 2017, we were starting to see what I thought was the beginning of a trend of innovation within venture capital fund structures. I thought this trend would continue into 2018 and we would see some true innovation in value-add fund structures. This turned out to not really be the case. The same crop of firms that were doing new and interesting things, like indie.vc and Kindred, continue to test their models, while structures for the rest of the industry have remained largely intact. Credit where credit is due, Indie.vc did roll out a new v3 model which is very interesting and seems to have had some initial success, but that announcement happened on January 1, 2019 so I don’t think I can really count that in my favor in good conscience! I think the lesson here for me is that any innovation in fund structure will have a LONG lead time towards wider adoption. Fund feedback loops are simply too long and the outcomes too opaque for other firms to take the career-risk involved with adopting an innovative model.

2019 Predictions

Mega Funds take a Mega Hit

The dominant story in VC over the past year has been the rise of mega-fundraises for both companies and firms. SoftBank’s $100 billion Vision Fund was the spark that started off this explosion, but other big players in the space were quick to follow suit by raising ever larger funds of their own. This trend was also fueled by the combination of a very strong bull market (except for Q4) and an environment of still relatively low-interest rates where major LPs were starved for returns and turned towards alternative assets. I think the writing is on the wall that both of those exogenous factors will be disrupted in 2019 with rising interest rates and growing global economic uncertainty. Within tech, I think we will see a good portion of companies that have raised “mega-rounds” really struggle. There are some companies, like Uber, that have a strong, but costly, business model that can bear to raise hundreds of millions of dollars. However, I do not believe the majority of companies raising these mega rounds fall into that category. They will face the same struggles that all overcapitalized startups face, a lack of fiscal discipline and an inability to meet unrealistic expectations. I predict that the combination of both this financial environment change and the underperformance of many of these companies will lead to a significant pull back in terms of firm fundraises as well as smaller company funding rounds from the all-time peaks of 2018.

Crypto starts showing signs of life

The second biggest story of 2018 was that Crypto got absolutely clobbered. Like I am talking demolished. Basically crypto took the hit that got Jadeveon Clowney drafted first overall (and which still causes him to be incredibly overrated despite being a mediocre pro-football player). The price of Bitcoin (a pretty good barometer of the space in general) started at $13,850 on January 1, 2018. On January 1, 2019 it had fallen to $3,747. A rough year to say the least… I think the majority of us in tech saw a correction coming in 2018 after the irrational exuberance of 2017, but few that I know of predicted it would be quite so dire. Overall, I think this will be a very good thing for the ecosystem. The story of 2017 and 2018 was easy come, easy go. I predict that the story of 2019 be that the cream rises to the top. It was too easy to raise money in 2017/2018 and greedy/lazy/bad actors flowed into the space until the bubble popped. Now that some of the sheen has worn off, I think the smart, passionate true believers will be able to hunker down and get to work without the distraction of the mania. I predict that 2019 will still have its ups and downs, but that we will see the overall health of the ecosystem steadily start to re-accelerate. As an indicator of this, I believe that Bitcoin will end 2019 above $8,000 (complete thumb in the air prediction here).

Tech liquidity gets weird

Liquidity has always been an issue in tech, but the trend of mega funds/rounds has only exacerbated this as companies have chosen to stay private for longer. There is an absolutely stacked lineup of potential IPOs this year including the likes of Uber, Lyft, Palantir, and Slack, just to name a few. This liquidity will be great for investors and founders and will pump capital back into the ecosystem as early employees start angel investing into nascent startups. Unfortunately, I predict that due to global economic headwinds and rising negative sentiment towards tech companies the majority of these newly public companies will underperform in the public markets for the year. The silver lining to all of this is that I believe efforts will continue to find new and interesting paths to liquidity for investors and entrepreneurs including smart secondaries and things like the Long Term Stock Exchange.

Startup I am most excited about: Lambda School

I thought it would also be fun to highlight the startup (excluding any that I have any sort of business relationship with) that I am most excited to watch in 2019. That company is definitely Lambda School! Lambda School was founded by Austen Allred and is a 30-week coding bootcamp that is absolutely free to start. Lambda makes its money with Revenue Sharing Agreements as students graduate and get new jobs. I have written about structures like this before and I absolutely love the incentive alignment that they provide! The more you get paid as a graduate, the more that Lambda makes in revenue for teaching you. I have been on the lookout for new innovative companies like Lambda in the edtech space and I think they fulfill a very interesting niche by equipping people for the future of work in a low upfront cost, incentive aligned manner.

The Globalization of Venture Capital: Is United States Innovation Falling Behind?

Photo by NASA on Unsplash

There was a story doing the rounds this week about a new Center for American Entrepreneurship study about the globalization of Venture Capital. CAE’s study showed that the United States’ share of global venture capital investment had fallen 20% in the last five years and 50% in the last 25 years. These statistics were framed with alarming rhetoric from both the tech media and the Center for American Entrepreneurship.

VentureBeat stated that this report should give Americans “cause for concern.”

Richard Florida, one of the leaders of the study, stated that “[he] thinks for the first time, the U.S. is truly in trouble.”

Much of the discussion around this report has represented similarly disheartening views of the outlook for innovation in the United States. Media sites and commentators have worried over America’s loss of “edge,” and forewarned of dark days ahead.

My response:

Are we really so insecure that our place in the global order is threatened by the United States only receiving HALF of the globe’s capital invested into innovation?

The United States represents approximately 4% of the world’s population. By any objective viewpoint we are significantly punching above our weight to receive over 12x our share of the world’s risk capital.

But Erik, what about the relative decrease in our portion of venture capital investments? Shouldn’t we be worried about investment into our country decreasing by 20% in 5 years?

Short answer: No.

Long Answer: This is why Intro to Statistics is required coursework. Venture capital investing into the United States has not decreased by 20%, the share of global venture capital received by US-based companies has decreased by 20%. The difference is incredibly important.

Via NVCA. As of June 30, 2018.

2018 is, in fact, poised to be the largest year for venture capital investment into US startups since the Dotcom crash. At the halfway point of 2018, about 3/4 of 2017’s total investment value has been deployed. This means that we are on pace for a potentially record breaking year (for discussion of whether this should even be something to be celebrated or not, check out last week’s post.) Yes, our piece of the overall venture capital pie is shrinking, but the overall size of the pie is magnitudes greater than it used to be. That is what matters most. Innovation is not a zero sum game, our ability to innovate is not hampered by China’s or India’s. In fact, it is the reverse. Increasing levels of global innovation create network effects which the United States can take advantage of to propel us even further.

It is short sighted and, frankly, close-minded to believe that the United States has some sort of divine right to be the innovation capital of the world. Innovation, by its very nature, is meritocratic. The United States’ shrinking share of venture capital dollars should be met with fanfare, not rumors of our impending demise. The rest of the world is catching up, and that can only be a good thing. More innovation means more impactful technologies that can improve people’s lives for the better. Where that innovation occurs is far less important than the fact that it is occurring, and if we are being honest with ourselves, there are many parts of the world that need ground-breaking innovation a lot more than the United States needs a new social media app.

We are not facing an innovation crisis in the United States. We are the pioneer of modern technological innovation and the rest of the world is starting to build up their own capabilities on the back of 80 years of the United States writing the playbook.

This is a good thing.

For everyone.

To suggest otherwise is both alarmist and misguided.

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