I read an article this week about Airbnb. My experience with marketplaces makes them an area of interest for me. I enjoy reading how publicly traded marketplace companies navigate the complexities of the business model at massive scale. In the article, Brian Chesky, CEO and cofounder of Airbnb, was very candid about his company. 

Chesky said the company isn’t on a solid foundation. In fact, he claims the company never built a solid foundation. The Airbnb system was intended to serve a much smaller company, but Airbnb ended up growing “like crazy.”

Chesky outlined a few things they need to do to get their house in order. The one that really caught my attention was a focus on reducing prices. Chesky said attractive pricing was what drew people to the service. It sounds like he wants to return the company to being known for affordability.

That makes sense, in a way. Lower price points usually lead to an increase in demand. On the other hand, there could be a limit to how low some hosts can go. Especially when you consider that some of them have leverage (i.e., debt) on their properties.

Those are just two of the many things I thought about after reading this article.

Marketplaces are hard. Keeping the customers (the demand side) and the merchants (the supply side) happy is no easy task. In my experience, when changes are made that materially affect how much revenue the supply side receives, a period of uneasiness and “adjustment” usually occurs.

Airbnb is massive, so I’m curious to see how this all unfolds and what the impact will be on Airbnb’s financials and on the entrepreneurs who make a living as hosts on the platform.

Today I had a long conversation with a friend who recently bought a business. After being in corporate America for many years, she took the leap to become an entrepreneur through acquisition. During our chat, she shared a few things I found interesting.

Transitioning from a structured world with established processes, systems, infrastructure, and support staff to the less structured entrepreneurial world has been a challenge. Simple things she never had to think about, such as email domains, cloud storage, and verifying invoice accuracy, she now has to navigate. It’s a bit overwhelming, but also exciting.

Her mindset has shifted from worker to owner. It hadn’t occurred to her that she had a worker mindset, but she realized that she thinks and acts differently now that she’s an owner.

She views entrepreneurship as the best vehicle for elevating her financial life and leaving a legacy for her children. The benefit of business cash flows and value appreciation is hard to find outside entrepreneurship.

She wants more flexibility. She views entrepreneurship as a way of ultimately (after the business is running smoothly) controlling her time. Flexibility is important because she doesn’t want to miss important family moments because of a work schedule she doesn’t control.

Entrepreneurship is powerful. It drastically changes an entrepreneur’s life. My friend realized this and decided it’s the path for her. I’m super happy for her and can’t wait to see her business flourish. 

Recently, a friend shared a quote from Steve Jobs, the legendary founder of Apple:

Picasso had a saying—“good artists copy; great artists steal”—and we have always been shameless about stealing great ideas. 

I hadn’t heard this before and wanted more context about when Jobs said it. So, I did a little digging. I found this video clip.

Jobs’s point was that you don’t need to reinvent the wheel. Instead, get exposure to great ideas that have already been tried. Then incorporate the best of them into what you’re trying to do.

Repeating (sometimes with a tweak) what’s already been proven to work is a great recipe for success.

One of the founders I work with recently kicked off his fundraise. He decided he wanted a well-run, tight process to boost his chances of completing his fundraise before the holidays. One of the things he’s doing is sending a weekly recap of the week’s activities to all his existing investors.

I really like this. My favorite part of the recap is that his fundraise process is displayed as a funnel, and he quantifies how many venture capital firms are in each stage. As an investor, I can quickly understand, looking at the funnel, where he is in his process and gauge the likelihood of it being successful as it progresses.

In addition to the funnel, he includes in his recap a few bulleted highlights and planned activities for the upcoming week. 

In a minute or two every week, I get a good idea of where he is, what he’s planning to do, and how I can help (if I know some of the investors he’s about to pitch or already has pitched).

I’m a fan of this fundraise update email. It’s a great tool to help founders focus, run a tight process, and keep stakeholders informed throughout the fundraise process.

This weekend I had the opportunity to listen to friends discuss the topic of public disagreements. To be clear, a disagreement is a calm expression of a difference of opinion or differing viewpoint. “Public” means at least one person other than the two disagreeing is observing. An example is two people disagreeing in a meeting at work attended by five people.

It was interesting to hear the various views on this. People have different comfort levels when it comes to conflict, and that’s reflected in their views on disagreements, especially in a setting with others watching. Those who are less comfortable with conflict are less likely to disagree publicly. They prefer to chat with the other person one on one. Those more comfortable with conflict are more likely to disagree publicly.

I’m a fan of constructive conflict. I’ve been part of and seen the result of getting smart people with different viewpoints together. The process of listening with the intent to understand someone else’s perspective can lead to amazing outcomes. The insights or solutions that result can be great and wouldn’t have been reached absent the conflict and listening to understand.

To be clear, conflict for the sake of conflict isn’t a good thing. It can create a toxic culture. Nor is conflict that doesn’t adhere to the golden rule. But constructive conflict in a public setting where people are (1) trying to understand other perspectives and (2) focused on getting to a solution (not being right) can lead to powerful outcomes.

This week I received an email from Carta, the equity management platform, about a report called State of Startup Compensation, H1 2023. It’s a great report with lots of data on start-up compensation and hiring trends. As expected, the pace of hiring in the first half of 2023 was significantly below the first half of 2022. Anyone who’s interested in the report can find it here. 

What I found more interesting was information Carta shared in the email, with charts, about start-up shutdowns. (I’m assuming a report on this is in the works.) I’ll summarize my big takeaway.

Through the first nine months of 2023, 543 companies using Carta for cap table management shut down. For context, Carta recorded 467 companies shuttering during the entire year of 2022. For the first nine months of 2022, 342 companies shut down, according to Carta.

That means that Carta is seeing a nearly 60% increase in shutdowns in the first nine months of 2023 as compared to the same period in 2022. And in 2023 Carta has recorded more shutdowns in nine months than it recorded for the entire calendar year of 2022.

In light of this shutdown data, many of the downward trends in the compensation report make more sense.

While all this data paints a somewhat gloomy picture, I’m a bit more optimistic. I think these trends will decrease the number of alternatives for aspiring entrepreneurs and spur the passionate ones in this group to bet on themselves. Said differently, these trends could lead to more people starting companies. It’s counterintuitive, but I think there’s a decent probability of that happening.

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

• Atlanta conferences – Venture Atlanta and A3C are going on this week. Both events brought people to Atlanta to attend. It was great to catch up with people and get a finger on the pulse of what’s happening in other geographies from people on the front lines.
• Teaching – This week, I explained an investing concept to a college friend. He was able to grasp it in a quick phone call, and he said it was beneficial—it helped him think about things differently. It felt good to help someone understand a complex concept quickly. This was a reminder that truly understanding something means being able to teach it to others.‍
• More entrepreneurs – Last week, I wrote about conversations I had with people considering becoming solopreneurs. This week, I spoke with two highly accomplished people considering leaving great organizations to pursue entrepreneurship. They don’t want to be solopreneurs, but this is another anecdotal data point about people leaving stability to pursue entrepreneurship so they can control their own destiny.‍
• Fundraising season – This week was a reminder that fundraising activity is high right now. I chatted with founders and fund managers about their fundraises. Some are going well; others aren’t. I think it’s good to have regular conversations with someone you trust who’s unaffiliated with your company or fund. Sometimes they can help highlight things that down-in-the-weeds founders and fund managers miss.‍
• Q3 is complete – Today was the last business day of the quarter. We’re two-thirds through 2023. Before you know it, the year will be over. I’m optimistic about what’s in store for Q4. I’m also starting to think about 2024.

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

I recently had the chance to have a long meeting with an emerging venture capital fund manager. He launched his fund less than two years ago. He’s been able to secure early investment from a few limited partners (LPs). Enough to assemble a team and begin investing—but nowhere near his target amount. The fundraising environment for emerging venture fund managers has been tough in 2022 and 2023. I was curious how things were going for this manager.

He shared that his journey has been full of highs and lows. Fundraising has been extremely hard. The interest-rate environment has soured many potential LPs on venture capital as an asset class, especially for new fund managers. Some potential LPs who like his thesis have shown interest, but their internal rules won’t allow them to invest because this is his firm’s first fund. (Some LPs consider investing only if it’s the second fund or later.)

The fundraise is behind target, which has created a cash flow issue. He took a pay cut to less than what recent college graduates make, which has made things less than ideal at home. And he’s made other adjustments in the firm to conserve cash.

He doesn’t think he’ll raise the amount he targeted when he launched the fund. It will likely be materially less. He’s traveling every week for the next few months to meet with LPs across the country. His focus now is to get enough capital commitments from LPs to safely execute his strategy with his current team before he legally must end his fundraising process. If he can raise the minimum needed for the fund to remain viable, he’ll have enough runway to build a track record that he hopes will help when he raises for a second fund.

On the positive side, the team he assembled is extremely talented. They’ve refined their approach and have a solid process to discover, evaluate, and win investments into promising start-ups that fit their thesis. They’ve completed investments in several companies, all of which are doing well and have ample cash. One early investment is doing exceedingly well and has raised again from a well-known VC firm. That investment is his firm’s first markup in its portfolio and validation from a later-stage investor.

This fund manager is smart and determined. I have no doubt he’ll ultimately achieve success. It may look different and happen slower than he originally envisioned. But I believe it will happen for him. 

His story is a reminder that the journey of an emerging fund manager can be the same as that of a start-up founder: one of sacrifice and extreme peaks and valleys. Market conditions are making the journey particularly tough. If current conditions persist, they could lead to fewer people launching new venture funds.

Fundraising season is in full swing, and founders are having lots of meetings with VC firms. Many are trying to complete their fundraising before the holiday season begins in November. And many think, because of the rapid decision processes in the 2020 to early 2022 period, that that’s plenty of time.

Getting a quick decision isn’t a given these days. Some firms may still say yea or nay quickly, but many have adjusted their internal processes to spend more time evaluating a company before deciding whether to invest. Said differently, some firms are taking longer to decide.

The best thing founders can do is not assume. During initial meetings, they should ask, “Assuming an investment will be made, what steps are left in the firm’s decision-making process?” “What’s the average time frame to complete those steps?” Who else will I need to meet with before a final decision is made?”

These simple questions help founders set loose expectations and give them a better idea of where they are in the firm’s process. This helps the founder run a better fundraise process and, hopefully, increases the chances of success.

A few days ago, I shared an interview of First Round Capital Board Partner Chris Fralic regarding the firm’s thinking when it made an early-stage investment in Roblox, an online gaming and game-creation platform. Fralic mentioned that Roblox was one of the firm’s best investments ever. That caught my attention and made me wonder just how good of an investment it was. So, I did a little digging.

Roblox went public via direct listing in March 2021. Its market capitalization (i.e., valuation) was ~$35.5 billion when it began trading on the first day and ~$38 billion when trading closed for the day. According to Roblox’s S-1 filing (page 172), First Round owned 6.8% of Roblox when the company filed to go public. The S-1 filing also shows that First Round registered zero Class A common shares in the direct listing (page 172), which I assume means that it planned to sell its entire position. Assuming that First Round sold at or around the $35.5 billion market cap at which shares began trading on the first day, its position was worth approximately $2.41 billion.

The S-1 filing also shows that First Round made the Roblox investment via a single entity, “First Round Capital II, L.P.” (page 172), which likely means the firm invested into Roblox out of its Fund II. Note: When companies go public, you often see venture capital firms have spread investments across several entities, which makes it harder, if not impossible, to calculate the firm’s return. For example, the S-1 lists Altos Ventures as an investor owning 23.6%, but according to a footnote, its ownership is spread across numerous entities (page 172).

I did some digging on First Round’s Fund II. It was reportedly of 2008 vintage (i.e., that was the year it was raised) and totaled $125 million raised from limited partners (LPs).

When VC firms pitch LPs to invest in a fund, they usually communicate a 10-year life cycle to the LPs. This means that VC firm general partners plan to deploy the capital raised from LPs into start-ups, exit those investments, and return proceeds to LPs all within a 10-year period. That’s the plan, but things don’t always go as planned.

At the time of Roblox’s direct listing in March 2021, First Round’s Fund II may have been three or so years past the 10-year fund life cycle. It makes sense that the firm would liquidate the entire position when Roblox went public so it could realize and distribute the gains from the Roblox investment to LPs and start winding down the Fund II entity (assuming that no other active investments remained).

It’s hard to know the exact return on this investment, but I made some guesses at the fund level. If this direct listing resulted in about $2.41 billion being returned to the fund, that means the direct listing alone returned about 19.2x the entire $125 million fund. That’s astonishing when you consider that a stellar return for a seed fund is in the 3x–5x range. It’s even more astonishing when you consider that this estimated 19.2x return doesn’t include cash received from selling Roblox shares in the years leading up to the direct listing (which Fralic confirmed the firm also did) or returns from other companies that Fund II invested in (Uber appears to also have been a Fund II investment (page 266)).

It’s easy to see why Fralic says Roblox was one of First Round’s best investments.