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.

I’ve been using a particular software tool for several years. I pay an annual rate based on the number of seats (i.e., licenses) I need and pay the full amount once a year. At renewal time, the price has always been the same as on the original contract I signed, and I’ve happily renewed for another year of the service.

I recently received a renewal notice, and it included a cost increase. It points to a clause in our agreement that gives the company the option to automatically increase pricing annually. I’m fine with the increase, but I became curious. Why enforce this clause this year after not enforcing it in past years?

A SaaS entrepreneur I talked to had a hypothesis. During the last few years, the company grew quickly. Its product is quite good and has been popular. (I personally referred a few companies to it.) It probably added new customers easily. The entrepreneur believes the company’s revenue growth from new customers was so impressive that it didn’t need to enforce the contractual price increase (or didn’t think to).

 Now, in 2023, it’s a different story. The product is still good, but many of the technology companies it sells to have cut employee headcount and budgets. He suspects this led to a material reduction in the number of seats companies renewed for and that, in some cases, companies declined to renew their contract at all. The company likely wants to show revenue growth (or mitigate revenue decline as much as possible), so that’s why it’s exercising the contractual price increase option.

It’s an interesting hypothesis. I have a call scheduled with the company to discuss my contract. I’ll end up renewing, but I’m going to ask if that hypothesis is true.

A few days ago, I shared that Bessemer Venture Partners posts the deal memos of some of their most successful investments online. Along the same lines, I recently found an interview in which First Round Capital Board Partner Chris Fralic talked about the firm's thinking when it invested in Roblox. First Round Capital is a seed-stage venture capital firm and often writes the first institutional check into a company. Roblox is an online gaming and game-creation platform. Per Fralic, Roblox was one of the firm’s best-performing investments. 

A few interesting takeaways from the interview:

• In early 2009, First Round passed because the $10 million valuation was too high
• Chris watched his son and his son’s friends spend increasingly more time on Roblox throughout 2009
• Chris maintained a relationship with Roblox even though his firm had declined to invest
• Six months after declining to invest, the firm wrote a $500k check at a $14 million valuation
• In May 2011, the firm wrote a $3 million investment at a $40 million valuation
• Roblox was a company that was mostly substance, not hype, so it flew under the radar of many venture capital investors for many years
• First Round sold some of its shares along the way before Roblox went public
• First Round owned more than 5% when the company went public via direct listing in 2021

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. According to Roblox’s S-1 filing (page 172), First Round owned 6.8% of Roblox when the company went public. Its position was worth ~$2.41 billion when shares began trading.

It was interesting to hear a VC firm partner recap how he decided to invest at the seed stage of what ended up becoming a very large company.

For those interested in learning more, Chris did a great job of detailing his reflections, lessons learned, and more about First Round’s partnership with Roblox in this blog post too.

A few days ago I shared my big takeaway from an article about Andrew Bialecki, founder of Klaviyo: he bootstrapped his company at first and advises founders to raise the least amount of capital needed to get traction in the early days.

Andrew owned 38% of his company when it went public, which is a bigger share than you normally see. I usually consider 10% to 15% a big win for the founder.

Digging into Klaviyo’s early fundraising, I learned that the company was founded in 2012 and didn’t raise capital until 2015. In that three-year period, it surpassed $1 million in revenue and became profitable, per Forbes. The company then received a $1.5 million investment from Accomplice and a few angel investors, according to a press release.

Andrew’s advice about raising minimal capital early on sprang from his own experience in doing so, which likely was a material factor in his ability to maintain a large ownership stake. Andrew’s advice and his outcome are useful things for early-stage founders to consider when they’re thinking about their fundraising.

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

• Valuation – I spent time enhancing my investing framework. Valuation is part of that framework. Traditional valuation approaches don’t make sense for some business models or companies. Digging into the data, using common sense, and applying a valuation approach tailored to the situation more accurately captures their value. In fact, doing so can uncover value that others are overlooking (or don’t understand).
• IPOs – Arm Holdings, Instacart, and Klaviyo have completed their public offerings. Time will tell how receptive public markets are to these companies. Recently, I dug deeper into a few IPOs and the liquidity they generated for the early-stage venture capital firms that backed them.
• Solopreneurs – I chatted with a few solopreneurs recently. Anecdotally, more people are wanting control of their professional trajectory and their time and are considering solopreneurship.

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

I read an article about Andrew Bialecki, founder of Klaviyo. He started the company in 2012, and it went public this week. As of the writing of this post, the company has a market capitalization of $8.5 billion. Bialecki owns approximately 38% of the company— shares worth over $3 billion.

In the article, Bialecki gives a simple, but important, piece of advice: “My advice to founders: Raise as little as you need and prove some traction with customers. Once you do that, fundraising for the rest of your life gets a lot easier.”

Bialecki and his cofounder didn’t have venture backing when they started the company; they bootstrapped it. They focused on getting to profitability and then went out to raise capital after they had 1,000 customers and $1 million in revenue.

That approach put Bialecki and his cofounder in the driver’s seat with investors and ultimately led to their owning an outsize percentage of the company when it went public.

I like this advice and their approach. It drives founders to focus on building something customers will find value in and pay for—versus building something investors are interested in. If you create value for enough customers and they pay for it, investors will always get on board. But if you’ve had your eye on investors instead of customers, you may be disappointed.