I came across a press release announcing Instacart’s Series A funding round. The 2013 post noted that Paul Buchheit participated in the round and that he was the creator of Gmail. I wasn’t familiar with Buchheit and did some research. He not only created Gmail but also cofounded FriendFeed, which Facebook acquired, and is a Partner at Y Combinator. I also found a chat he gave to Y Combinator founders several years back.

Buchheit gave background info about himself and how he went from midwestern college student to Y Combinator. And he shared what he learned as one of the first twenty or so Google employees and from building a social start-up that competed with Facebook.

One of the insights he shared during his chat has stuck with me. The thing that helps companies become $100 billion giants: sitting on top of an exponential change in the world. A massive shift in society has happened or will happen. These companies recognize this and build a solution that capitalizes on the change. In this portion of his chat, Buchheit went on to give examples of companies and the exponential change they benefited from. 

Buchheit’s insight is spot on. To take it a little further, the companies recognize an exponential change that will create a new market that will expand rapidly. They build a solution for this new market and ride the wave. As the market leaders and hopefully first movers, the companies get pulled along as the market grows because of this exponential change in the world.

A great insight from someone who’s been inside multiple billion-dollar companies as an early employee (Google/Alphabet) and investor/advisor (Instacart, Doordash, Coinbase) and been acquired by one (Facebook/Meta).

This is my one-hundred-eighty-first weekly reflection. Here are my takeaways from this week:

•  Surveying B2C – I had a great chat with a few entrepreneurs who own businesses that sell to consumers (B2C). These conversations provided ground-level information in real time on what’s happening with consumer spending habits. Anecdotal, but still helpful.  
• IPOs and fundraising – Arm Holdings, a semiconductor company, went public this week. Next week or the one after that, Instacart and Klaviyo could go public. A few early-stage founders I know officially kicked off their fundraises this week. The next few weeks of IPOs and fundraising will likely have an impact on public and private market investor sentiment.
• Rational decision-making – I’ve been thinking about a conversation I had with a seasoned entrepreneur. I think I’m going to start asking myself and others, “Is this a rational decision?”

Week one hundred eighty-one was another week of learning. Looking forward to next week!

I had a great conversation with a seasoned entrepreneur this week. Part of our chat revolved around rational decision-making. We’ve both observed exceptional entrepreneurs and investors in our social circles. Many of them have a particular trait that has contributed to their success: they can make rational decisions consistently. This doesn’t mean they lack empathy or emotion. To the contrary. But they don’t let those feelings affect their decision-making. Their decisions are based purely on reason or logic.

In a bit of experience sharing to drive the point home, this entrepreneur described how he’d made an irrational decision that cost him a few million dollars. He went on to say that had he been using sound reasoning, he likely would have made a different decision and pocketed those millions.

At the end of our chat, we agreed that consistently making rational decisions is the exception, not the norm. Those who naturally possess this trait have a superpower that helps them in making business and investing decisions.

I received an email about a small SaaS business that’s for sale. It has a few hundred thousand dollars in revenue and is profitable. I was curious how the market is valuing small companies like this, so I read through the email. Here’s what I found:

• $594k revenue (I assume trailing twelve months)
• $39k monthly recurring revenue
• Revenue has declined since purchase by new owners in 2020
• 1500+ customers
• ~$600 customer lifetime value
• 4.8% revenue churn (I’m assuming annual)
• $240k seller’s discretionary earnings (SDE)
• $750k asking price (i.e., 3.1x multiple on SDE)

If I were in the market for something like this, I’d have lots of questions for the seller, especially about the quality of the revenue and profits.

One thing that got me thinking was that this business was purchased in the last three years or so and has seen the revenue decline. I wonder about the cause—is this a case of customers seeing less value in its solution, or is it less-than-stellar management by the current owners? Not an easy question to answer until you dig into the business, but depending on the answer, the business could be a great investment opportunity or a less than ideal one.

I wonder how many small businesses have been purchased in the last three years and have been declining since then? How many have turnaround potential and will be put up for sale in the short or medium term? 

Over the last few weeks, several things have been top of mind for me. I had a feeling they were related, but the connection wasn’t clear, and why they stayed top of mind wasn’t exactly clear either.

This week, I decided to get some clarity by writing about them. I created a document and recorded in it my thoughts about all these ideas. Over a few days, I ended up crystalizing my thoughts about each of them and uncovering a connection between all of them.

I already knew there’s power in writing, and this document reminded me of it. Writing helps me refine my thoughts and uncover connections and insights that I’m not conscious of. The process also better prepares me to orally explain my thoughts to others.

I think of writing as a mental clarity tool that’s accessible to everyone, yet few take advantage of it.

In many VC firms, someone leads each potential investment. This deal lead develops conviction about the company by learning as much as they can about it. Once they’re convinced the firm should invest, they turn their energy toward convincing others in the firm of the merits of investing.

This effort usually involves preparing an internal deal memo that details what the deal lead has learned about the company and lays out the case for an investment. To those who see them, these memos provide a rare glimpse of how VC firms evaluate a company for investment.

These deal memos are often protected work product that VC firms don’t publicize. Bessemer Venture Partners, though, has made deal memos about some of their successful investments—Yelp, LinkedIn, Pinterest, Shopify, and others—available for public viewing. These memos aren’t recent and likely have been scrubbed, but they still provide a great perspective on how Bessemer’s deal lead evaluated each company for investment.

If you’re interested in reading Bessemer’s deal memos, you can do so here.

I’ve spent time with a few entrepreneurs recently. One of them is gifted at finding undervalued assets. He buys them at deep discounts, improves them, and sells them for premium prices. He’s got a great eye for opportunity and has a top-notch business. 

He said his main constraint is capital. He doesn’t have a deep network of people who invest in projects like his. So, he has relied on a single wealthy investor to back his projects. This has worked, but it’s put him at a disadvantage in negotiating terms. It also has limited the opportunities he could pursue because the investor, who must sign off on each project beforehand, doesn’t understand the potential of some of the assets.

It amazes me that an entrepreneur with a decade-long track record of success is constrained by capital availability. I suspect there’s a large, fragmented market of entrepreneurs like this one. Seems like a big opportunity!

I found a report from Carta, the equity management platform, that’s full of data and very helpful. It’s called State of Pre-Seed: Q2 2023. Carta defines “pre-seed” as “any company that has yet to raise a priced equity round.” Lots of companies begin by raising capital on convertible instruments and do priced equity rounds as they mature. Carta doesn’t explicitly say this, but I assume it also caps valuation of companies included in this report.

The report is full of useful data. In addition to high-level data, it provides granular data broken down by the two most common convertible instruments used by early-stage companies to raise: simple agreements for future equity (SAFEs) and convertible notes.

One point that stood out to me was that 52% of pre-seed companies that raised in the first half of 2023 were in California and New York. These companies were also more likely to raise more than $2.5 million in their pre-seed rounds.

The report is a great resource for anyone curious about the state of fundraising for early-stage venture capital companies in the first half of 2023. The report can be downloaded for free here.

This is my one-hundred-eightieth weekly reflection. Here are my takeaways from this week:

• Limited partners’ appetite – I had a long conversation with a good friend in private equity this week. He’s seeing that existing and prospective limited partners have a strong appetite for cash-flow-positive businesses and fund managers with operating experience who can improve portfolio company results by rolling up their sleeves.
• Impatient – This week was a reminder that I’m still impatient about certain things. Some projects take time to show results, which is frustrating. I’ve worked on being more patient over the years, but I still have my moments.
• Ground-level data – I was also reminded that in some instances, data collected at the ground level can help me get a better understanding of what’s happening—and much sooner—than aggregated high-level data in publications or from trade associations.

Week one hundred eighty was another week of learning. Looking forward to next week!

I recently reviewed an early-stage founder’s fundraise deck. He’s raising capital for his start-up. His first start-up was shuttered when he couldn’t attract paying customers. He mentioned the first start-up to me but positioned the idea behind that business as a success because another company executed on it and is worth $10+ billion. Even though his business failed.

Most start-ups fail. Failed start-up attempts, while painful, can pique an investor’s interest. The failure itself isn’t what they focus on. What they want to know is what you learned from it and how you’ll apply that knowledge to the next attempt. If you learned valuable lessons that will increase your chances of success and speed of execution, that’s a positive founder trait to many investors.

Founders shouldn’t shy away from their failures. Instead, they should own them, share what lessons they learned from them, and articulate how those lessons increase their chances of success as a repeat founder.