I chatted with a founder who’s building an interesting company. He’s crystal clear about what he wants. He realizes the market he’s going after is small and doesn’t aspire to building a $1 billion company. He’s looking to build one that does $10 million in recurring revenue.

Not all founders want to build a unicorn, and not all companies are solving problems big enough that they could become unicorns. This founder is realistic; he doesn’t have unicorn ambitions.

He raised a few million dollars from investors and accelerated hiring significantly in anticipation of revenue growth. Things haven’t gone according to plan, and they’ve missed revenue targets. Given the revenue and growth rate, the team is now too big. Translation: the company is burning cash too fast.

The founder said he plans to raise more capital if revenue growth doesn’t accelerate. I was surprised. He wants to build a $10 million company but is thinking about raising capital as if he were building a unicorn. Let’s assume he tries to raise another $2 million. A total of $5 million raised to build a $10 million business isn’t appealing to most investors, and his capital raise would likely be difficult. Especially in the macro environment we have now.

I hope this founder can figure out how to grow his revenue. If he can, his company will grow into his current team size. Otherwise, he likely won’t be able to raise capital and may have to reconsider what size team is appropriate for the stage and growth rate of his company.

Over the last few months, I’ve talked with several VC fund managers who’ve experienced fundraising from limited partners taking longer than planned. These aren’t emerging managers. They’ve established themselves with previous funds that returned capital to their limited partners. But as the public market and other asset prices have come down, limited partners have been slower to commit to making new investments.

Today I heard another story: limited partners who’ve signed paperwork and committed to investing in a VC fund reneging. They will no longer provide any capital to the VC fund. Notably, these limited partners are individuals, not large institutions.

This is just one story from one fund manager. I imagine it’s the exception rather than the norm, but it’s something I plan to watch closely. If this starts happening more often, emerging managers and the founders they back will likely be hit hardest.

Today I had the privilege of attending an event where two early-stage founders pitched the cofounders of Tiger Global and partners from Bessemer Venture Partners, Charles River Ventures, and Alsop Louie Partners. The founders did a fantastic job. I was curious to hear what feedback they received—it’s not often you’re able to hear feedback from such accomplished investors regarding early-stage companies.

The comment that stood out most was about metrics. The investors were impressed by both pitches, but the founder who included detailed company metrics was phenomenal. Customer acquisition cost, lifetime value, gross margins, projected revenue, and a host of other metrics were included in her pitch. She spoke confidently and demonstrated that she had a great handle on the levers that matter most and that drive her business. The panel said it was rare to see an early-stage founder have such a great grasp on the metrics of their business so early. They praised her and asked her if they could follow up with her so they could learn more.

If you’re an early-stage founder with a product in the market, identify the metrics that matter most in your business and focus on moving them in the right direction. Understanding these metrics will help you both stand out at this stage and make better decisions.

I listened to an investor and founder give his thoughts on what it takes to win and how he identifies winners. He described how he evaluated one of his most profitable investments: Uber. When he invested in the company early, he was betting on the founder, Travis Kalanick. Travis was intense and had what this investor calls a “burn-the-ships” mentality.

During wartime, when ships arrived at an enemy’s shore, the generals instructed the troops to burn their own ships once everyone had disembarked. The only way the troops would go home, they were told, was by taking the enemy’s ships. There was no turning back—winning was the only option.

I’d never heard an investor describe a founder in this way before, so it stuck with me. I’m all about backing founders who have a drive to win, but I’m not sure that a “burn-the-ships” mentality is a necessary or even good thing. I don’t know enough about Travis or the early Uber story to talk about them. I do believe, though, that there are ways to motivate your team to win without burning the ships.

Last week I chatted with a few investors at Venture Atlanta. With one group, the topic of sourcing came up. I’m always curious to hear how others think about identifying the companies they’ll invest in. I noticed that most of these people had a strategy that focused on driving inbound activity. They had different approaches to accomplishing this, but bottom line, they all involved founders reaching out to investors.

Inbound activity is great for investors, but I think it can also be a double-edged sword for early-stage investors. It’s reactive. Because investors are reacting to founders, the markets they end up investing in are limited by the communications from founders they happened to receive.

Markets matter a lot in venture capital investing. It’s hard to make a big impact on the world or realize outsize returns if you’re in the wrong market (one that’s small or hypercompetitive, for example).

Inbound activity is an important part of an investor’s strategy for finding companies, but it can’t be the strategy if you want to invest in the best founders building in the best markets. You’ll likely have to spend time thinking about what markets you want to be in and then go pursue the founders in those markets.

I listened to someone share an interesting way to think about start-up investments. This person is helping a seed-stage investor rethink their evaluation process, which included considering how big the company could be if things went well. Could this be a billion-dollar company that returns the fund, or would it max out at something smaller? They modified their approach to think about near-term probabilities. Specifically, what’s the probability that the company will raise a Series A? The logic behind this change was that most companies wouldn’t exit for more than $1 billion without raising a Series A, so why not focus on evaluating this?

It’s an interesting approach that got me thinking. The likelihood of a company raising capital from a later-stage investor is something that it’s good to be mindful of. Thinking about the probability of this happening could produce useful insights.

In the last two years, many early-stage companies raised at high valuations by historical standards. I remember seeing a seed-stage company raising at a $100-million-dollar valuation. Given these high valuations early in their life cycle, I’m wondering, what are the probabilities of these companies raising clean Series A rounds?

I had a chat with two friends yesterday about the venture capital (VC) industry. One works in the industry and the other is entering it. We debated the difficulty of breaking in to the industry, the challenge of getting capital if you’re a founder outside the VC network, gender issues, and a few other things.

One of my friends pointed out something that stuck with me. He said VCs that have been successful have accumulated unheard-of amounts of wealth at young ages (relative to historical norms). They’ve achieved this success using a particular playbook. There are certain parts of that playbook that people might not like and that are under fire now. But why change what you’re doing if it’s working so well?

If you look at the history of venture capital, you see that the industry changes when it’s forced to. Said differently, when its economics are threatened, the industry reacts. Masayoshi Son and Chase Coleman are examples of outsiders whose unusual approaches affected industry returns and caused the industry to adapt.

It’s interesting that for all the disruption and innovation VC brings about in other industries, VC itself doesn’t evolve and innovate at a faster pace. The world has changed a lot since March 2020, and I think the VC industry hasn’t innovated enough to keep up with all the changes. I think we’re due to see another wave of changes to the industry caused by outsiders.

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When early-stage founders building high-growth companies think of raising their first bit of capital, they think find a venture capitalist. What they don’t think about is where the venture capitalist gets the money. The people who invest in a venture capital fund are limited partners (LPs). VCs have a responsibility to be good stewards of LPs’ capital—and if they aren’t, they won’t get any more of that capital.

I had breakfast with an out-of-town venture capitalist raising a $100+ million fund that invests in seed-stage (product built, but no product–market fit) companies. They’re not investing at the idea stage, but still early. He worked at a notable fund for years, but this is the first time he’s raised his own fund. We discussed his fundraise and the LP environment. He’s been focused on institutional investors (endowments, pensions, foundations, etc.), given his relationships and experience. He’s gotten good traction with his fundraise, but he’s hearing that many institutions prefer to back a manager at fund three and beyond. They want to get to know you during fund one and two. They want to see the company’s track record and performance and build a relationship with the manager over the first two funds. Once they get comfortable with a manager, they’ll back them over a few funds.

My conversation with this manager reinforced my view that early-stage investing can present a dilemma for LPs because what they’re comfortable with doesn’t align with the flux and transient nature of the early stage.

I walked away from this conversation, and others, feeling like there’s ample capital available from folks who want to invest in early-stage companies. But the current venture capital construct isn’t ideal when it comes to matching capital to founders. I’m wondering, is this an opportunity for an alternative that institutional LPs would like, or will LPs backing early-stage companies forever not be institutions (individuals, family offices, etc.)?

I’ve shared my views on how short-term valuation changes affect psychology. I was reminded of them recently when I had a great dinner with two established, successful founders, one of whom recently sold his company. The topic of public markets came up, and both shared that their portfolios have lost material amounts of money. The most interesting thing they said was that looking at their portfolios regularly is frustrating. One of them even mentioned that he was nervous about checking it given the recent market trajectory. They’re both considering selling losing positions to stop the bleeding.

Liquidity is a big difference between the public and private markets (i.e., venture capital). Some view the liquid nature of public markets as a benefit. There are benefits to it, but I also see a downside. Because of the liquidity of public markets, investors can constantly check the value of their investments. When valuations fall for macro reasons (i.e., the company is doing fine), some investors may sell their investments with the click of a button. Even though the company is doing fine and could appreciate significantly in value in the future, today’s pain is too much to bear, and people sell prematurely.

Private markets are different. Investors can’t check the current value of an investment. Companies are usually valued at the last round of capital raised. As companies face hurdles or the macro market changes, the valuation is still at the latest round. Resetting the valuation usually means raising a new round or a private party transition between two parties. Neither of these options is easy. If a seller is able to coordinate a transaction with a willing buyer, some companies can have the right to block the transaction. All of this means that investors in private companies are more likely to stick it out with private investments when times get tough.

The illiquid nature of private investments makes it hard for some people to embrace them. I think this illiquidity isn’t necessarily a bad thing. For winners, it forces investors to stick with investments during hard times. As companies get past the hard times, these investors reap returns they likely would have missed out on if they’d been able to sell their investment early.

Last year I had a friendly debate with someone about getting more capital to more early-stage founders. At the time, I believed scale was the way to go. Build larger VC firms (not funds) to increase the number of seats in a historically cottage industry. Make it possible to institutionalize the knowledge of how best to fund and support early-stage founders, which would become more distributed as team members left these larger firms. Build firms, not funds, was mostly my thought process.

I’ve had the opportunity to speak with many emerging and established VC fund managers, their limited partners (LPs), academics, and of course founders since then. These conversations have made me realize my original thesis was incorrect (that’s the power of discovery). Scaling larger VC firms with larger funds isn’t the way to get more capital in the hands of high-potential early-stage founders.

Larger funds create challenges for LPs and VC fund managers (emerging and established) doing early-stage investing:

• Smaller funds are a better fit because they enable fund managers to write a check that’s an appropriate size for an early-stage company.
• Early-stage investors need to suspend disbelief and make nonconsensual investment decisions. Otherwise, investors fund what everybody else is funding. That’s hard to do in a large organization, because decisions tend to lean toward consensus when more people are involved. Smaller teams are more likely to make nonconsensual decisions.
• I also believe in a world where great founders are more geographically dispersed—centralized capital deployment isn’t as effective in reaching high-potential founders. A dispersed model would be more effective because it would help capital meet founders where they are.

It’s been interesting to see my thinking on this topic evolve and realize that the person I was chatting with was more right in his thinking than I was.