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 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.

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.

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.

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.

When early-stage founders pitch investors, the process can be long and exhausting. They end up pitching countless investors in hopes of one or two saying yes. By employing a bit of scheduling strategy, they can improve their chances of getting a yes.

Great pitches are the result of practice. The more you pitch, the better you get. The more you pitch, the more you realize what isn’t resonating and adjust. The more unanticipated questions you get, the more you incorporate the answers into your deck (or an appendix). After countless reps, the pitch flows smoothly and you’re more confident. The chances of getting a yes are better.

Most founders aspire to have a particular investor on their cap table. Maybe it’s an angel investor or venture capital firm with industry expertise and relationships. When you pitch your first-choice investor, you want to put your best foot forward. You want them to be blown away by your pitch (or at least interested enough for another meeting).

Because practice leads to a great pitch, it may not make sense to schedule your preferred investor early in the fundraise process. If you do, they’ll get a pitch that still needs work. Instead, pitching the investor you really want to land after you’ve done more reps pitching other investors and fine-tuning the pitch can be a good idea.

Scheduling meetings with several investors is great, but you want to be thoughtful about when you reach out and schedule time with your first choice.

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).

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? 

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.