How Do VCs Choose Their Investors (and should entrepreneurs care?)

captureI recently read a blog post by Beezer Clarkson, Managing Director of Sapphire Ventures about why entrepreneurs should care about from whom their VC funds raise their capital.

I spent a bunch of time thinking about this position — especially since Beezer is an investor in Upfront Ventures. There are a lot of things I think entrepreneurs should care about when raising from a VC:

  • How big or small their fund is?
  • What percentage of their fund will you be?
  • How much money will they reserve from their fund for future investments in your startup?
  • How much pull that investment professional has within his or her fund? (which matters for getting future support)
  • Where the fund is in its investment cycle (year 1 out of 10 or year 7 out of 10)?
  • How much experience they have in your sector?

I could go on for a long time. Maybe I’ll save that for a future post. But should entrepreneurs really care whom the LPs of a fund are? I’m still not sure.

But I do know that VCs should care a great deal about whom their LPs are and I find that some are less thoughtful than they could or should be. We were in the very fortunate position of having more than $425 million in commitments for our last fund, which only raised $280 million. We capped our fund size so that we would stay true to our investment strategy in terms of size, scope and number of partners as we stood in 2014 when we raised the fund.

And we felt terrible not being able to let every LP in but we were forced to make some hard compromises yet we opened up our fund to Sapphire even though they were a first time LP.


1. Truly Focused on VC / Knowledgeable About How Partnerships Work

One of the things I value in an LP is a really passionate and inside knowledge of the venture capital industry. There are many LPs who invest in VC one day, oil & gas the next and timber on Wednesday. I’ve met many smart and capable people like this but it was also clear that many of them didn’t have an intimate knowledge of what is truly unique to venture.

Beezer did. She has formerly worked at a VC fund (DFJ) and worked closely with the partners and the network at DFJ and knew what it was like to build, manage and evolve a VC partnership. So I immediately felt like I had a partner whom I could call for sensitive advice on topics where there aren’t many sources of input or mentorship. It’s the same reason I think many entrepreneurs like working with VCs who had formerly been entrepreneurs.

2. Help with Hard-to-Access People

Of course I also appreciate the fact that with Sapphire came better access to the executive team at SAP, including organizing a small dinner with their CEO so I could learn first hand where they see the future going. We have many LPs who come from industry and this is truly a value-add in a LP/VC relationship

3. Stable Capital

Amongst the hardest things to find when one raises a new fund is ability to have stable capital. Many of the sources of capital for new funds come from investors who can’t necessarily back you in good times and bad.

We lived that first hand. Our first LPs from 1996 were industry players who put us in business: Carrefour (the large European retailer), DLJ (the former investment bank) and a billionaire software exec. As venture fell out of favor all three pulled out of the asset class. Even though our 2000 fund was the single best performing fund in the United States for that vintage, continuing to get investments wasn’t possible so we had to rebuild.

We rebuilt our base and secured what we thought was the perfect anchor only to find out that a strategy change for the firm meant our lead was moving from VC to timber and they pulled out of VC altogether. This was in 2010 — exactly the wrong time to be pulling out of venture.

So you really want LPs who invest in the category in good markets and bad. And as a VC you still need to earn the right to get allocations when you raise new funds but that’s within your control.

Many VCs have turned to Foundations and University Endowments (F&Es) as a source of stable capital and this has certainly been a strong pillar for many a VC fund. We ourselves decided to build > 35% of our fund with F&Es.

What’s interesting about Sapphire is that they have now raised on an “evergreen structure” with $1 billion new fund (across LP investing and direct investing into portfolio). So we see them with the same long-term eye as we would our other sources of capital.


Should entrepreneurs care that we have Sapphire as an LP? Well — only in so much as we have an easier time than others in getting technology entrepreneurs in front of executives at SAP when appropriate.

But to other VCs — when you go to raise money — we’ve been thrilled with our choice to work with Sapphire. They’ve been a great partner, delivered on what they said they would do and working with Beezer has felt like working with any other VC I work with. She knows our business and often acts like an entrepreneur herself.

For that — I’m grateful. Congrats on your new fund, Beezer and Nino. And thank you for having the conviction to back Upfront.

(Cross-posted @ Both Sides of the Table)

​#CXOTALK Reinventing the legal industry with AI, machine learning, and augmented reality

#CXOTALK Reinventing the legal industry with AI, machine learning, and augmented reality

Image from iStockphoto

The legal industry has a reputation for being slow to change and behind the curve on adopting new technologies. A credible survey of law firms in the UK indicated these facts:

  • 17 percent of partners in the top 25 UK law firms are women
  • 80 percent of the law firms surveyed see digital strategy as critical
  • 23 percent have made corresponding operational changes
  • 95 percent are planning major IT projects to improve efficiency

These numbers paint the picture of a backward-facing industry focused on efficiency at the expense of innovation. A study of the legal industry by Georgetown University [PDF download] concludes:

Since 2008, the market has changed in fundamental ways. Not only has demand growth slowed dramatically, but the competitive dynamics of the market have shifted as well. Clients who once deferred to their outside law firms on all key decisions impacting the legal services they purchased no longer do so. Instead, clients increasingly demand that outside counsel offer more efficient services with more transparency into both work processes and costs. Clients are also more prepared than ever before to disaggregate matters, to retain work in-house, and to bring in additional (even non-traditional) service providers.

In other words, law firms must respond to the changing demands of consumers just as companies do in other industries. For this reason, digital transformation is coming to the legal industry.

For episode 188 of the CXOTALK interview series, which invites people shaping our world to discuss their experience with digital transformation, I spoke with Michael Shea, CIO of Morgan Lewis, one of the largest law firms in existence. With over 2000 legal professionals and two billion dollars in revenue, Morgan Lewis is a true multinational organization.

The discussion with Shea centered on how law firms can use technology to drive innovation in addition to improving efficiency. In a comment that echoes the Georgetown report mentioned earlier, Shea explains:

Lots of new technologies that are coming onto the market that will have a significant impact on how law firms operate in the next five to 10 years. Firms that are investing in these new capabilities and adopting change will gain competitive advantage. Those firms that adopt and change and innovate will be the haves and the have-nots in the industry.

Our in-depth, 45-minute conversation explores the role of technology in helping Morgan Lewis remain competitive in this changing field. Of equal importance, creating the right workplace is essential to helping the firm attract and retain senior partners and younger Millennial workers.

In the short clip embedded above, Shea explains why the firm invests in knowledge management, artificial intelligence, machine learning, and augmented reality. The answers go far beyond efficiency alone and get to the core of innovation and remaining competitive as a global player.

CXOTALK brings together business leaders shaping our world for in-depth and personal conversation. Please watch the entire episode and read the complete transcript. Thank you to Avanade for being our sponsor.

(Cross-posted @ ZDNet | Beyond IT Failure Blog)

What to Make of Andreessen Horowitz’s Returns?


Rolfe Winkler wrote a piece in the WSJ about A16Z’s returns in which he says they “lag behind Sequoia, Benchmark and Founders Fund.”

Scott Kupor of A16Z responded with a comprehensive overview of valuation methodology in a post that while accurate feels more targeted at sophisticated Limited Partners (LPs) who invest in funds.

Let me offer you an insider’s take. VCs strangely never seem to weigh in on other VC funds. I have no incentive to do so other than to help those reading the WSJ piece better understand how I believe most insiders think. As an entrepreneur I never really knew what to make of VC return data. Now from Both Sides of the Table I know a thing or two.

When Andreessen Horowitz as a fund first started the industry went from “We love Ben and Marc” to “they raised how much?” to “holy fuck, they paidWHAT for that deal I tried to get into?” to “Jeez — they sure are hiring a ton of staff. Can that really work?” to “How can we hire more staff to keep up with the services they offer?”

In short, the VC industry is very sharp-elbowed amongst some very competitive people who are used to winning and most deals don’t have enough space to share investment rounds so people were naturally pretty quick to judge A16Z.

The word on the street now is that A16Z is truly a force to be reckoned with and has done a lot to change the dynamics in our industry. Having a huge services venture firm isn’t for everybody and it isn’t the only strategy that can succeed. But privately now most VCs I know contend that it has gone much better than they had initially expected.

There is obviously room for different types of firms / approaches that can be successful. Case in point: Benchmark, USV, Foundry Group and a ton of other great firms maintain the really small organization model.

Here’s what I know:

  • Most entrepreneurs I know would love to work with A16Z. They perceive it as a place that is well connected and very helpful given the level of services they provide.
  • Upfront Ventures has partnered with Andreessen Horowitz on several deals. In some they have large sums of money and others they have small checks. But in each case I would work with them again. Why? Simple: it is value-added for both entrepreneur and co-investor. I obviously benefit if a co-investor on a deal I’m involved with helps with introductions, recruiting and so forth. Especially in an industry where so many investors do so little to actually help.

But, Mark, that’s not the point. What about those RETURNS the WSJ article spoke of?

Ok. First, the returns data Rolfe has shown are actually pretty damn good. I know tons of LPs in A16Z and I haven’t heard any complaining. Even when they are off-the-record with nobody else listening.

But more importantly, VC returns are notoriously hard to measure at one point in time. Why? In the article it talks about Sequoia’s $19 billion sale of WhatsApp to Facebook that generated apparently $3 billion for Sequoia and its shareholders. It claims that this is more than Andreessen has returned across all of its funds. But let’s be honest — this is more than much of our industry has returned. This was an industry defining deal on returns in the league of Google, Facebook, Twitter and one imagines Uber.


The day before the deal was struck it’s very possible that Sequoia could have held the total value of the WhatApp deal at $1.5 billion (and their stake worth $237 million not $3 billion) — the reported value at which they invested in the last round. Why? Because VCs tend to “mark to market” for private investments so you would often value a company based on the last financing. If a company has significant revenue you might value it based on some industry multiples but WhatsApp had very limited revenue.

So literally the day before the Facebook acquisition Sequoia’s fund could have been significantly less valuable on paper. Now — I’m not saying it wasn’t already a spectacular fund — I believe Sequoia is the best VC in the industry in terms of consistently amazing returns.

But I’m making the opposite point. A16Z could be sitting on several deals that could be worth 15x what they are today. Or not. We can’t know.

So. What’s an LP to do in deciding which funds to invest in?

LPs decide based on a variety of factors but it boils down to some version of:

  • Ability to source the highest quality deals that will become valuable
  • Ability to win competitively when multiple VCs compete
  • Quality of investment partners and likelihood that they are going to work hard (and play well together) for the next fund
  • A proven track record of delivering results

In essence they’re investing in a firm’s potential. Consider that Accel had been a great fund and then post dot-com crash some were questioning whether they had lost their way. So some LPs pulled out. And then they closed their next fund that invested in Facebook at its A-round and that fund must be one of the best performing in history. Whoops!

See. Great firms can have consistently great returns and then for whatever reason one less good fund and then another spectacular one. And Accel has gone on to attract a deep bench of fantastic investment partners and many LPs would fight to get into their funds.

So LPs are investing in potential. Does A16Z attract more than its fair share of amazingly talented entrepreneurs? Of course. Do they win competitive deals? Absolutely. Not always. But often. Have Marc and Ben attracted great partners? Sure. They now have a really wide group of talented investment partners like Jeff Jordan, Chris Dixon and others whom I respect.

So as far as I can tell, Rolfe’s article is a great summary of a snapshot in time for Andreessen Horowitz in which their returns look great and they likely have happy LPs but they are not yet the same return levels of the last few funds of Sequoia and Benchmark — two of the greatest investment firms in our industry. Most LPs would gladly invest in all three funds. Will those A16Z returns be significantly better in the future than today? We’ll see you in 5–10 years. Nobody knows.

But I do know that nobody I know in the industry (Ok, maybe 1 or 2 people) doubts that A16Z is building a great venture capital firm that will have enviable returns.

Photo credit: jdlasica via / CC BY-NC

(Cross-posted @ Both Sides of the Table)

The Pivot You Need to Read About


GOAT just announced it raised $5 million in venture capital led by our friends at Matrix Partners. On the surface that sounds unremarkable — fundings happen daily. But this isn’t just any funding. GOAT (“Greatest of All Time) is a sneakerhead marketplace that is en fuego, but we led the company’s last financing round in 2012 (yes, four years ago) when they were an application for letting people join group dinners.

That’s why this funding story is different. It’s a Chanukkah story where 18 months of venture capital funding ends up lasting more than 4 years and where against all odds the underdog succeeds.

It’s a testament to two fantastic entrepreneurs Eddy Lu and Daishin Sugano — who have been nothing but a pleasure to work with over the years. They are everything you could hope for in a team: Hard working, committed until the end, product-centric, loyal, frugal and importantly — very warm and sincere people. We talk often about wanting to work with entrepreneurs who are truly committed to their cause and these two personify that belief.

It also is truly a testament to my partner, Greg Bettinelli. He didn’t lead the initial investment in the team at GOAT but when the original concept wasn’t working he graciously agreed to step up and help the duo. Greg is the kind of guy who hates taking any personal credit and will probably castigate me for acknowledging his important role in helping GOAT — but the truth is that Greg really was instrumental even as he downplays his involvement.

Greg never gave up belief in the team. He supported their vision for a sneaker marketplace and his eBay work experience was really additive when they initially made the decision to pivot. He was a tireless internal advocate for Eddy and Daishin inside Upfront Ventures and making sure we gave them the time and space and support they needed despite having enough pivots to call traveling.

Please read Greg’s summary of the GOAT story for a better understanding of entrepreneurial grit, stick-to-it-ness, pursuit of one’s passions and second chances. And here is Jason Del Rey’s announcement of the funding.

I was reluctant to write about GOAT because I don’t want to pretend that I deserve even 0.1% of credit for its success. On the other hand I have been so impressed with Daishin, Eddy and Greg that I felt it deserved more attention.

(Cross-posted @ Both Sides of the Table)

Why Computer Vision Tracking the Flow of People Will be a Huge Market


Density laser trackin

As I’ve written before I believe Computer Vision will become a major factor as a Human-Computer Interface (1) as sensors and cameras help us make sense of our physical world.

There is so much in the media about “The Internet of Things” that it has lost meaning and for many for some strange reason it became a short-hand for wearables. Wearables are clearly an important market but to me a much broader use case is bringing real-world objects into the computing world and there is no better mechanism than Computer Vision.

That’s why today I’m so excited to finally be able to tell you about Density, a company I led a $4 million financing (2) along with Jason Calacanis (We’re teaming up on the board together! It’s been so great to collaborate and work towards this common purpose) and with Jonathan Triest at Ludlow Ventures, Amit Kapur at Dawn Patrol and several others.


 As you can gather from the Giphy image above, Density anonymously tracks the movement of people as they move around work spaces. It’s a small and elegant device that hangs about doorways and provides “anonymous people tracking as a service.”

We’re essentially a data platform and envision others building applications to take advantage of this information. At its most basic level it creates simple records of ingress and egress through doorways (people moving in and out) and each movement becomes a record in a database that can be tracked in realtime.

The basic use-cases of this simple data are obvious.

  • You can track how many people are in a room to make sure there are no safety concerns or the people aren’t violating their insurance policy.
  • You can track meeting rooms in a large campus to find out which rooms get used most often and at which times of the day.
  • You could track the flow of people onto a subway or train line to better predict the frequency and length of trains required by time of day.
  • A mobile marketing company could track campaigns and then measure increases in retail traffic driven into local stores.
  • It could also be used with elderly parents to track whether they’re doing ok and potentially even alert automatically to a fall or to a person with Alzheimers crossing an off-boundary barrier.
  • Businesses could use people tracking to show you wait times so you could decide whether you want to impromptu come update your driver’s license and these same businesses could use people tracking to make peak staffing decisions.
  • and so on.

But as you may gather from the Giphy above, the simple use case is greatly expanded by the elegance of the Density solution. The software and computer vision recognize when it’s a human passing by the laser and can filter out other movements like doors opening or other objects passing by (dogs, for example).

Each human is captured in a polygon shape at a precise moment in time. As she moves around the room each micro-movement becomes a new row in the database with the coordinates and time sequence. So a single human flowing through a room could of course produce thousands of rows in a database and computer applications can make sense out of this data and machine learning algorithms could of course start to make informed decisions about things like “way finding” signage placement, where crowd risks may be building, etc.

That the computer vision has the ability to track the “flow” around a room and not just a static count is a big deal and the fact that we provide this data cheaply and anonymously we believe will lead to the creation of a massive market with applications supporting many use cases. Density is simply the data & analytics platform. Our goal is to massively drive down the costs of capture for people flows and create unlimited potential for organizations to understand this and draw insights that help better plan spaces.

Of course if an organization buys Density sensors that data isn’t available more broadly to the market unless they opt in to sharing with others. The initial usage of Density will be single organization but we think it likely that over time organizations will opt into sharing data across companies in limited and controlled situations.

Why Density?

The investment thesis for me combines my belief in computer vision as a next-gen I/O (3) along with my thesis that The Innovator’s Dilemma or Deflationary Economics drive all of the largest success on the Internet (4).

Today’s people tracking solutions are hugely expensive and mostly used in retail environments. The costs have greatly limited adoption and we think that’s about to change in a massive way.

The team insisted on anonymity because it believes the right low-cost, widely available tracking devices shouldn’t be recording people’s identities, which would both limit adoption and also increase costs dramatically.

At the earliest stages when I invest my decision is 70% team / 30% market (5). I have to believe that I’ve met a team of extremely bright, highly competitive and deeply passionate founders who have an idea for a product that has the potential to transform a market.

I look for somebody who is almost mission-driven to see the product in the market more than to make a quick buck and I look for a founder who is frugal, grounded and has a strong sense of what he or she believes uniquely about what is wrong with a market and how it can be fixed.

I always tell people that it’s important who introduces you. I was talking to my friend Jonathan Triest at Ludlow and told him I had freed up a bit of time and was looking for an early-stage company, technically-minded company to back. We had done a few deals together in the past year so I wanted to know what he had seen recently.

He described Density’s team and product and I asked for an immediate introduction — he told me they had already started fund raising and I hate meeting people late in a process.

From the first meeting I had with the founder & CEO — Andrew Farah — and his team of Syracuse grads, I knew they had the right vision, temperament and motivations for building out this market.

I brought a group of them immediately down to LA to meet the rest of my partners. We of course had a healthy internal debate about whether the device was accurate enough since it originally relied upon infrared and couldn’t track with enough precision.

On the other side we debated whether a higher-end solution with video cameras was the way to go and what the demand would be for anonymity versus solutions that can help with security / identification.

We ultimately concluded that exceptionally talented teams like Density would make the right product design decisions and we shouldn’t second-guess today’s products versus the capabilities of the team to make the right product selection choices as they went from prototype to finished product.

And of course within a few months of having raised the funds the team perfected the product design and moved away from infrared towards laser and improved the efficacy, the data collection and the accuracy all while holding costs constant.

That’s why in early-stage investing you back great teams and don’t get too hung up on today’s exact product specification — you’re more looking for how they’ve made their design choices to date, what other options they considered and how they reached their initial conclusions. You’re also testing their mental flexibility in considering alternate solutions so that you know ultimately they’ll make the highest quality decisions based on the data they gather in their journey.

I can’t emphasize this enough — ultimately investors need to trust founding teams to make these hard decisions because the team lives in the trenches day-in and day-out and investors can fool themselves into thinking they know the right answer through intuition or meeting 10 companies in a space. Nothing beats the team on the ground and if you don’t trust them to make the hard calls — then don’t back them. Our role is sparring partner. Our role is to make sure your team is asking itself the hardest questions. In the end, the vote is yours.

What Next Density?

Today we’re formally announcing the product is available to the first companies and developers who order it (we have limited inventory) and it will become more generally available in Q1 of next year. It’s not a consumer product — it’s for people with technical capabilities. We’ve had it in private Beta for the past 6 months with companies like Uber, with major universities, with a major airline and many other companies.

There’s an excellent 1-minute overview video here and embedded below:

If you’d like to be included or are just interested in learning more please visit the Density Website.


  1. Computer vision as a major investment theme for Upfront Ventures including Nanit, Osmo, Navdy, GumGum and Density.
  2. Density raises $4 million from Upfront Ventures, Ludlow, Dawn Patrol, Jason Calacanis and more.
  3. I did this very short video on (now searchable by category of entrepreneur advice) if you’re interested in hearing some quick views on Computer Vision as I/O for the future of computing (or you can just watch from embed below)

3. Innovators Dilemma and Deflationary Economics and how they drive startups.

4. How I Invest?

(Cross-posted @ Both Sides of the Table)

Why We Can’t Let Luddites Ruin Global Trade




It’s a term most of you know as being somebody who is backward or uninterested in learning new technology.

Actually, the Luddites were worse than this. They were a movement in England during the Industrial Revolution who had the objective of ruining machinery that was used to build products at scale. They thought factories were a threat to custom assembly of products and ultimately to the agrarian way of life (as more people were moving to urban environments).

You can imagine that if you had spent a lifetime gaining a vocational skill and being a member of a protected industry guild that you wouldn’t be happy with technological change. And if your town specialized in an industry that was being replaced the Industrial Revolution no doubt wreaked havoc.

The Luddites would ruin machinery by “throwing a spanner in the works” (or a monkey wrench to the American reader).

It’s easy to see why people of the time would have taken great issue with machinery — it left some people (industrialists) very wealthy and made people previously in control of their economics often devastated. And of course since machinery costs money and lowers the number of people required to produce a product it pitted labor vs. capital.

It’s not too controversial to look at the march of history and know that there was no way to stop the Industrial Revolution and that societies were better off figuring out how to take newfound prosperity and convert it into a just society where all could benefit. If not for altruism than at least out of invisible-hand-like motives of wanting workers who were safe & healthy. It was also quite useful to one producing products to have people gainfully employed to buy said products. It’s also infinitely better in society when people don’t live at the margins and resort to crime.

There was a grave consequence to nations who were slower to industrialize because the scale advantages wiped out entire local economies in foreign lands including Germany and France and in parts of the Middle East and Asia. People who failed to industrialize, however well intentioned one’s goals, were at a competitive disadvantage to those who had.

Nowhere is this better captured than in the most mind-opening book I’ve read recently, The Accidental Superpower by Peter Zeihan.


Zeihan’s book is a fascinating history of how country’s outcomes are determined by topography and demographics — notably the economic advantages afforded by the luck of one’s natural advantages.

He outlines each major wave of competitive advantage of technology brought about by topography such as why the Dutch and the Portuguese and ultimately the British came to rule the world due to deep-water navigation and ports mastered through their proximity to water.

And he talks specifically about how water trade lowered the costs of transportation and thus products and gave such a resounding advantage to those with great water resources that other nations struggled to keep up. American has 17,600 miles of navigable rivers (more than the rest of the world combined) and water has a 12x cost advantage to land transportation.

Industrialization. Mass transportation. Cost advantages.

The movements raised the living standards dramatically of the countries that adopted them and as a result Industrial nations developed more “surplus” wealth that allowed them to invest in new infrastructure and to create specializations in the service economy that didn’t exist en masse elsewhere (medicine, management practices, banking, accounting, higher education, scientific research, etc.).

In order to combat the losses of traditional jobs we invested in education and training and public infrastructure that enabled the growth of the middle class.

If you could look back on history you might nostalgically wish for different outcomes and of course the Industrial Revolution wreaked havoc on the under-developed parts of the world but the reality is that if any nation simply threw a spanner in the works it simply would have been devastated by neighboring nations who did not. And if you look at the standard of living of even the least wealthy amongst us it is still vastly better than pre mass manufacturing.

And this is similar to the world we face today with global trade.

There are winners and losers in NAFTA (the North American Free Trade Agreement) but it is undoubtedly better for each of the societies: The US, Mexico and Canada. The free flow of goods without tariffs leads to more trade and lower costs and thus more consumer surplus. I know not everybody will agree but I can assure you those who don’t never studied Comparative Economics or Ricardo because the theory and math are very sound.

In trade, like industrialization, there are winners and losers. As societies we face the responsibilities (even if self interested) in ameliorated the impact of change through the same means we did following the Industrial Revolution — investments in education and infrastructure and retooling those left behind by change.

Our problem isn’t trade or globalization — it’s tax policies that favor the special interests of the wealthy and a political system unable to allocate resources properly to those who need the resources most to retool themselves. Again, selfishly, if the wealthy class doesn’t realize the need to take care of those less well off you will continue to see the kind of disenfranchised revolutions you’re seeing in those supporting: Trump, Le Pen (in France) or Brexit. We have probably only seen the beginning of the chaos.

Nationalism and nativism and xenophobia are impulses of the disenfranchised far-right wing of the political spectrum and are crassly being exploited by Donald Trump and the opportunists who want to help him seize power.

But the opposite is equally true. The far left wing, whatever their intentions, have unrealistic policies that aim to throw a spanner in the works of global trade that will bring less wealth to our country — including poor people — that will only fuel the far right. I have seen the allure of some of my youngest friends to the populist messages espoused on the far left but these are the siren calls leading to lower prosperity for all.

To try and pretend we can put the genie back in the bottle on globalization is a fantasy. To promise our manufacturing towns that we will bring low-wage manufacturing back to their communities by cutting trade with China is at best a lie and at worse a huge step back for progress — even for those most affected by change.

If we cut off ourselves to world trade we’ll lower our GDP (how much we can produce) and increase the costs of goods and the people who will suffer the most are those at the bottom end of the rung.

I know the left wing of the Democratic party (and Trump also, go figure!) are championing reductions in trade agreements but they’re selling our people an unrealistic bill of goods equivalent to arguing against the Industrial Revolution.

Here’s the thing. Obama has rightly been pursuing an American-Asian trade agreement called the TPP (the Trans Pacific Partnership) aimed at reducing tariffs and increasing trade.


I’ve listened to Elizabeth Warren and Bernie Sanders and many of my super liberal friends rail against TPP because they believe it will undermine lower-income jobs in the US and hurt the interest of US workers.

It’s actually more complicated than that. Of course it impacts jobs and we need to work hard to create a vibrant economy and find ways to funnel income gains to the middle and lower classes. But increased trade also lowers the costs of goods supplied to America in ways the benefit consumers greatly.

Simply ask any startup looking at the differences in manufacturing in China or Mexico versus domestic manufacturing the US. The prices points for a BOM (bill of materials) would make most of these new startup products too expensive to reach a mass market. Intuitively we know that trade is important and that lower-income jobs should go to regions with the lowest cost labor.

And if we would have sensible immigration policies our companies could attract the best-and-brightest from around the world who already study at US universities and let them stay here and innovate and create jobs like Vinod Khosla, Elon Musk, Sergey Brin and countless others have done.

And while the TPP is an imperfect agreement that does hurt real people — the reality is similar to that during the Industrial Revolution. If we don’t lead in commerce and trade by expanding products, investing abroad & at home and lowering the costs of goods — somebody else will. And they will eat our lunch. And that somebody is China. And India. And Korea. And Russia.

As a nations we compete for trade and jobs and resources and we need to be sure that we remain competitive with the world. If we don’t build global trade agreements do you expect that the Chinese will simply focus only on their own domestic economy? Do you think the TPP countries will simply say, “Oh well, the US isn’t playing ball. Let’s all just focus on our home markets like the US”?


Trade has winners and losers. Let’s focus on creating global trade agreements and then use our wealth gains to make sure that our most vulnerable are taken care of and are educated and retooled and remain productive members of society.

Our startups can be “winner take most” but our societies need not be. It’s not in your personal interests for them to be. Distribution of wealth benefits all.

And if you want to read far more comprehensively on the topics of immigration (which actually greatly benefits countries by bringing younger demographics), topographic advantages of nations and how the changes in global resources may change alliances in the next 50 years please consider reading Zeihan’s book.

(Cross-posted @ Both Sides of the Table)

Why Raising Too Much Money Can Harm Your Startup

Amongst the most often asked questions I get from founders is, “How much money should I raise?”



Reflexively founders want to raise as much money as they can because they figure it will give them more resources, better chances of competing and a longer runways before they have to do the often painful job of asking, yet again, for money. Every time you ask for money you’re faced with the possible of feeling literally and figuratively like a failure.

I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5 million and in my second company we raised only $500,000 by choice.

I have this “How much should I raise?” conversation literally every week with startups. While there is no science to it, here is how I think through the issues with founders:

1. You will spend what you raise in the same timeframes whether you raise $1.5 million or $4 million.

It is a truism that with more capital you will hire people more quickly and spend more liberally whether it’s on external contractors, PR firms, attending events, doing legal work (trademarks, patents) or whatever. You will build out features or expend to platforms — often before you have enough market feedback to warrant it.

I was reminded of this yesterday watching my friend Justin Kan on Snapchat with this 10-second reminder, “No matter how much you raise at your company you’ll end up spending it in 12–24 months”

I would probably amend it to say 12–18 months. People do what people do. You have money, you spend it. And there are consequences for spending too much money.

I was always fond of saying about fund raising, “When the hor d’oeuvres tray is passed take two and put one in your pocket for later. Just don’t take the whole tray.” My analogy was that there are markets where it’s relatively easier to raise capital and therefore you should take a little bit more but you should create a budget where you only spend 70% of what you raise on a pace of 18 months.

But people never do. Justin is right.

2. How much you raise determines valuation

I know it sounds crazy but at the earliest stages of a company your valuation often is determined by how much money you raise. There is a general guideline of how much investors want to own in order to invest in your company and the norm is 15–30% with the most common range 20–25% per early stage round.

So the temptation would be to ask for $5 million because that implies a $20 million pre-money valuation if you’re able to only give away 20% or a $15 million pre-money valuation of investors require 25%.

A $15–20 million valuation sounds better than an $8 million valuation, doesn’t it? It seems almost silly to argue that it’s better to have an $8 million valuation. But it’s actually not that silly.

For starters if you raise at an $8 million pre-money valuation you’re much more likely to raise $2–3 million and not $5 million. It’s infinitely easier to raise $2–3m than $5m so you have a higher hit-rate.

3. The larger the round, the higher the price, the harder the next hurdle is to hit

But the bigger point I want to make is what happens when the coffers are depleted and you need more money? That is where over-raising can be corrosive. What felt great when you raised it $5 million on $20 million now feels like a noose around your neck because raising at an up-round of $8–10 million at a $40–50 million pre-money valuation is stratospherically harder than raising at a $20 million valuation.


Because investors need to imagine making a minimum of 10x their invested capital and early-stage investors are shooting for even higher multiples. The data suggests that the investors have a much easier time hitting a $100–200 million outcome than a $400–500 million outcome so it’s easier to commit at lower prices.

And if you raise the “5 on 20” and don’t grow into your next-round valuation you’re stuck because venture investors HATE doing down rounds. They’re corrosive in your relationship with the early VCs, the management teams will take them if they must but they end up feeling demotivated and in a venture world where great new deals are always coming around — why commit to somebody else’s problem child?

4. Constraints can spark creativity

Of course it never feels this way when you’re the founder, but constraints can actually force creativity. Each person is the company has to personally do more vs. lead others doing work. Each person in the company has very short timeframes for making progress because you know proof-points are critical in fund raising.

And importantly — having limited resources forces you to make hard choices about what you’re build and what you won’t. It forces harder decisions about whom you’ll hire and whom you’ll delay. It forces you to negotiate harder on your office lease and take more frugal space. It forces you to keep salaries reasonable in a market where wage inflation has been the norm for years.

I like talking about it as “holding one’s feet to the fire” because it’s an idiomatic way of reminding yourself of the obligation to constantly show progress.

The two biggest measures for me of early-stage company capabilities are:

  1. The ability to hire insanely talented people relatively quickly and without overpaying
  2. The ability to ship product early and often (in enterprise even shipping internal code or beta code matters)

Mo’ money, less fire.

5. Some people can skip first base

My partner Greg Bettinelli has a sports metaphor that I’ve become fond of which is “skipping first base.” Internally at Upfront it’s an entrepreneur who has enough of a proven track record that they can raise a $5–10 million A-round based on their prior experiences.

I like the skip first base metaphor because for some entrepreneurs they really deserve to start on second base.

Maybe they worked much of their career running a startup in a sector and years later they want to go after that market again and they know from day 1 what they want to build, why and why it would work or fail.

Second-base entrepreneurs often know a large number of talented technology professionals and other executives who would gladly come back and work for him or her so team assembly is both quick and impactful.

Second-base entrepreneurs often have the credibility to raise follow-on capital due to their historic track records and/or their venture relationships so clearing the valuation bar on a subsequent round becomes easier.

When we think about second-base entrepreneurs we think in terms of being able to get to market without having to pitch 20 VCs and thus have all of your plans in the public market because we all know that word travels fast and we think in terms of being able to pull in a relatively senior team quickly.

Often second-time entrepreneurs don’t want to leave the option of a safe exit at a smallish valuation on the table. They’ve made a bit of money, they’ve had a bit of success and they really want to go big or die trying.

Out of 30–35 investments per fund we like to fund 5–6 second-base entrepreneurs but mostly we believe in capital constraints as a positive force for both investor and founder.

6. Choose wisely

The obvious consideration for you when you think about how much money to raise is also from whom you will raise the money.

Some funds are geared towards a wide aperture of first checks but aren’t big on following on to deals that don’t attract follow-ons. These funds have a view that “the market will speak” and if they don’t support you then something must be wrong. There are some great funds that operate this way and I see some merits.

Other funds have the view that they can form conviction of whether this still represents a great investment or now irrespective of what the market says. These types of firms may see your follow-on financing as a chance to “buy up ownership.”

Most firms are somewhere in the middle. Knowing the style of the partnership will tell you something about what to expect if your cash starts to deplete and you’re not yet ready for the next round. Importantly, within each firm different partners also have different styles and different levels of street cred in their respective firms to get deals done where the external market isn’t yet ready to validate things.

Knowing the style and reputation of the firm and of the partner may guide you towards the right number. If a firm is known for being supportive of initiatives that take longer, you may be willing to raise a little bit less up front.

The “feet to the fire” mentality still holds even if the partnership is supportive. You’re always better off if you can take the next round to market because it will create price pressure that helps you get a fair valuation internally if that’s the route you take. If you don’t have external interest you may still get an internal round done but probably at a lower price than you otherwise may have. So there’s a healthy balance between investor needs and founder needs if you keep the pressure on yourself as though you don’t have a supportive internal investor.


There’s no right answer, only trade offs. Most people opt for the “more money equals faster progress and less time fund raising” mentality. Often this is a mistake and one that isn’t realized for 18 months until you next need to be in market.

Fund raising isn’t fun. But it’s an important process. It’s truly a marketplace where the validity of your idea is challenged and where your progress since your last time in market is measured. Marketplaces often provide the right incentives for people to perform. Having one’s feet to the fire can be painful, it also can provide inspiration and creativity.

And while having more money makes today easier, having a lower valuation makes tomorrow easier. So just consider the trade-offs as you plot your journey.

(Cross-posted @ Both Sides of the Table)

Why Acceptance of Failure is Critical to Startup Success



I talk about failure a lot because I think it can be tremendously instructive and I think that success without failure often masks underlying lessons.

I even prefer to fund entrepreneurs who have experience some level of set-backs in their careers or startups because I think it brings a humility to decision-making that I find healthy. I have experienced many first-time entrepreneurs with too much hubris if fund-raising came easily and press was fawning and employees joined in droves and customer adoption has been rapid.

When I hear the realism that comes from founders with setback it elicits an understanding of what it takes to be successful at a startup that frankly can’t exist unless you’ve walked in those shoes before. It is these stories that helps me bond more with the team because I’ve personally experienced just about every kind of setback at my first startup:

  • Raising too much capital, too quickly & at too high of valuations
  • Hiring too quickly and too senior
  • Building too much functionality before market validation
  • Charging too much, keeping prices too high
  • Seeking too much press before we were ready for it
  • Being too driven by quarterly revenue targets that led me to make bad strategic decisions about products, customers and staff levels
  • Spending too much time on inorganic growth (M&A)
  • Expanding too rapidly to new geographies (I didn’t want competitors to become entrenched)

I could write my blog alone on the mistakes I made.

But even more important than personal lessons of failure, I believe acceptance of failure at a societal level is one of the key ingredients that allows the technology startup industry in the US to flourish. I say this as somebody who has lived in 6 countries and worked in 9 — having lived abroad for 11 years of my work life.

In my experience the US loves the narrative of the come back. We champion a storyline about an underdog who failed many times but through grit and determination have risen above the odds. One of our greatest presidents — Abraham Lincoln — lived a lifetimes of failure and setbacks before being elected as president (1). One of our greatest technology leaders (Steve Jobs) had humiliating business failure before coming back to build the most successful tech come-back of our times.

Silicon Valley itself was built on the sciences with a foundation of trial-and-error and then improving the model and trying again. I believe this scientific method and trial-and-error approach is one of Silicon Valley’s most valuable strengths.

This came to mind a couple of years ago when I had the chance to sit down with the president of South Korea and she asked a small gathering of 19 tech & business leaders for opinions about how to make the Korean economy more “creative.” The backdrop explained was that it was viewed that Korea has been tremendously successful at copying and perfecting other people’s technologies but in order to compete more effective in the future had to be more creative.

Of course as a non-Korean I can only generalize but when it was my turn I told her my experience of living in Europe and Japan where failure seemed less tolerated than my experience of living in California and working in the tech sector. In London when founders failed they were ostracized in the press and culturally I believe it became harder to raise capital. Perhaps that’s changed in the decade since I left but that was my experience when I lived there.

In France in some ways it was worse because if you failed as a startup founder you shouldered personal liabilities that don’t exist in the US under our bankruptcy laws. You also ran the risk that if you hired employees quickly and then demand wasn’t as strong as expected it was incredibility hard to fire people. So founders took fewer risks and at the societal level with fewer companies taking fewer expansion risks job creation is weaker.

Labor-force inflexibility and personal liabilities are bound dampen the entrepreneurial risk taking and a society that shuns failure is likely to kill the entrepreneurial spirit.

In my discussions with Korean friends they tell me that there is big pressure in Korea to work for large companies like Samsung over startups (this is similar to what I experienced in Japan) and that the more educated and hard working ones family was the more pressure to join a prestigious firm rather than starting a company or joining a startup. Many are no doubt trying to change this culture.

People of Korean descent in Los Angeles are amongst the most entrepreneurial people I know — in technology but also in garments, fashion, food and so forth.

So I wondered out loud with the president if the government wanted to encourage more entrepreneurship — was there a way to help promote more of a culture accepting of failure? After all, if people feel more of a safety net for trying and not succeeding more people are bound to try in the first place and more innovation is almost inevitable.

Could government establish laws the encourage more risk-taking knowing that the consequence of 98 failures but 2 massive successes were enough to transform industries and society and lead to both job and wealth creation?

Could leaders of society try to change the culture in ways that encourage acceptance of failure? Could Korea’s largest companies increase their funding of startups and provide them with initial business development deals as so often happens in Silicon Valley? Could big business accept its own creative destruction?

I’m not sure I know how societies can change to become more tolerant of failure but at a minimum an acknowledgement of a problem has got to be the starting point for making change.

I feel strongly that lowering the bar for risk-taking in all of its forms: liabilities, work-force flexibility and de-stigmatizing of businesses that don’t succeed would inevitably lead to more innovation and more job creation.

I was interviewed recently by Inc Magazine and they have been publishing snippets of this interview online. I was asked about this topic of failure and you can see my views in the short, one-minute interview below. (2)

(Cross-posted @ Both Sides of the Table)

The Corrosive Nature of Over-Introducers



In modern society we’re all over-worked and over-loaded with information and tasks and to-dos and obligations. Nowhere is this more apparent than working in a startup where you are definitionally under-resourced and trying to make big accomplishments in compressed periods of time.

That’s why focus is critical. Saying “no” often to people who want to divert you from your mission becomes obligatory if you want to make progress. Modern-society is also littered with over-networkers and over-introducers and professional conference attendees. These people are like the friend in college who always tempted you by telling you about the latest party when you were at the library studying.

I find the over-introducers especially corrosive around first-time founders who often struggle with the balance of their time between tasks like building product versus tasks like speaking at conferences or meeting with potential business development partners.

Focus is almost always the right answer. Meeting new people is critical to business success yet you must be judicious with your time.

It’s human nature to try and be helpful to others. In many instances this help is genuine, well-meaning and productive. Most of us like to help create connections between people for whom an introduction, we believe, would be mutually beneficial.

For the respectful person we usually try to assess whether the recipient of the introduction would truly find it useful and we try to filter out unnecessary connections because we know that connecting people creates a time obligation. Many of us go one step further and almost always ask the recipient if it’s ok to do an introduction before we do it. It’s often called the “double opt in” as in you make sure both sides are ok with an introduction before creating it.

Draped under the guise of “being helpful” many super-connectors create flurries of meetings for first-time founders. I try to steer entrepreneurs away from over-introducers and I often find myself wanting to be careful about them becoming an investor in companies I back.

It starts seemingly innocent enough. A person at a board meeting starts listing all the people they know at companies a, b and c. Or an angel investor starts emailing the CEO of a company with all the people they want him or her to meet.

Newer founders are often flattered to make the connections, are not experienced enough to know which people are valuable to meet or are simply too polite to say “no.” It’s hard enough building a valuable product or service in competitive global markets without spending time on unproductive tasks.

I find over-introducers are often motivated by their own self currency. Showing founders they know important people makes them feel more self important. They assume that helping senior executives meet interesting startup people will show the introduced party that they are tapped in and relevant.

Over introducers use this currency liberally because in the absence of any real operating knowledge or without actually taking the time to diagnose what the important issues are at a company and how to truly be helpful, over-introducers fall back on the easiest and often least-productive form of help.

I know some will read this as an indictment of all introductions and of course it’s not that. I introduce people constantly and it’s an important part of my job. Each time I carefully consider whether the connection would be helpful to each party and I almost always ask both sides whether it’s ok.

Mostly I just wanted to write this as a reminder to founders to be suspicious of people who constantly introduce you around. And maybe also a reminder that the library, while infinitely less exciting than the party, is where real breakthroughs occur.

(Cross-posted @ Both Sides of the Table)