20VC: Elad Gil on Startup Offense and Defence in a Recession, How The Venture Landscape Has Shifted & All Things Valuations, Secondaries and Layoffs

Elad Gil is one of Silicon Valley's most successful and prominent angels of the last decade with a portfolio including the likes of Stripe, Square, Airbnb, Pinterest, Instacart, Flexport and Brex to name a few. Prior to solely company investing, Elad was an operator as Founder and CEO @ Color Genomics for their first 3 years. Before Color, Elad was a VP of Corporate Strategy @ Twitter following their acquisition of the company he founded, Mixer Labs. Before founding Mixer, Elad spent 3 years at Google where he was involved with 3 acquisition including the Android acquisition. In Today’s Episode You Will Learn: 1.) How Elad made his way into the world of startups and how that led to his investing in some of the most prominent companies of the last decade? 2.) How is the venture and startup landscape shifting right now? What does Elad make of the large multi-stage funds re-entering seed? How does Elad advise founders when it comes to taking secondaries? 3.) What are the core elements startups need to assess to fully understand their cash position? What is the optimal runway to have and to raise for today? How can founders stress test their runway models? Where does Elad see the most mistakes when it comes to runway? 4.) Does Elad believe the VC messages of "Open for Business" during COVID? How does Elad advise founders when it comes to valuation sensitivity today? What are the core terms that founders should watch out for when raising? How does Elad see venture fund reserve allocations changing? 5.) What are the core tenets of an effective layoff strategy? How should they determine the right level of aggression with which to make cuts? How can layoffs be done in a way that maintains internal culture and morale? Where does Elad see many going wrong when it comes to layoffs? 6.) Which business will thrive in COVID times? Which will die? What are the leading indicators of each? How does Elad determine in the businesses that are growing immensely during COVID, those that are sustainable growth and those which are purely due to COVID? Items Mentioned In Today’s Show: Elad’s Fave Book: Master of the Senate: The Years of Lyndon Johnson Elad’s Most Recent Investment: Deel As always you can follow Harry, The Twenty Minute VC and Elad and on Twitter here! Likewise, you can follow Harry on Instagram here for mojito madness and all things 20VC.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  This is the 20 Minute VC with me, Harry Stebbings, and I'm so pleased to bring you today's episode. This guest wrote an incredible blog post on defensive and offensive strategies startups can take in a recession. Someone who's been an incredible advisor to me over the years, member of the ecosystem and just all round a wonderful person. I'm so thrilled to welcome back to the show today, Alad Gil, one of Silicon Valley's most successful and prominent angels of the last decade, with a portfolio including the likes of, check this out, Stripe, Square, Airbnb, Pinterest, Instacart, Coinbase, Flexport and Brex, just to name a few. And prior to solely company investing, Alad was an operator, as founder and CEO at Color Genomics for their first three years. Before Color, Alad was a VP of Corporate Strategy at Twitter, following the acquisition of his company that he founded, Mixer Labs.

• 0:42Harry Stebbings?

  And before founding Mixer, Alad spent three years at Google, where he was involved with three acquisitions, including the acquisition of Android. But before we move into the show today, I wanted to take a moment to mention HelloSign, a great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution, used by millions to securely send and request legally valid digital signatures and agreements. They raised a total of $16 million in funding and recently got acquired by Dropbox for an impressive $230 million. Check out hellosign.com/20vc to join the thousands of companies and founders who value fast, secure and simple e-signatures. And also, everyone knows that building great mobile products is really hard and it takes time.

• 1:25Harry Stebbings?

  With Headspin, product, dev and QA teams know the exact behaviour and performance of any mobile app running on any device and any network anywhere in the world. Headspin began in April 2015, when founders Manish and Brian both had painful first-hand experiences as lead engineers building mobile products at Amazon, Zynga and Google. And so, starting from a blank page, they both created a platform to give mobile teams, developers, QA engineers and product managers, the ability to experience their mobile app or site the way users do, running on any device and any network anywhere in the world. And within a year, Headspin had set the new standard for mobile end-to-end testing, performance monitoring and user experience analytics, with more than 100 of the top 200 global mobile apps relying on the platform.

• 2:07Harry Stebbings?

  Join the best in mobile today at headspin.io, that's headspin.io. But that's quite enough from me, so now I'm very excited to hand over to the one and only Alad Gil.

• 2:22Speaker 01

  You have now arrived at your destination.

• 2:25Harry Stebbings?

  Alad, it is such a pleasure to have you on the show today. It's been over three years since our last episode. What a three years it's been, but thank you so much for joining me once again today.

• 2:33Speaker 02

  Ah, thanks so much for having me on.

• 2:34Harry Stebbings?

  Not at all, but I do want to start with a little context for those that maybe missed our first episode. So hit me, how did you make your way into the wonderful world of startups, but also come to be one of the most prominent and successful angels that you are today?

• 2:45Speaker 02

  So my career has been split between launching products, starting companies and investing. So I first moved out to Silicon Valley in 2001 to join a startup, which was perfectly awful timing since I showed up right as the dot com bubble was collapsing. And at the time I joined a startup that was backed by Sequoia and Matrix, it was about 120 people, it grew to 150, and then it shrank to 15 people over five rounds of layoffs. I then ended up joining Google, started the mobile efforts there, was involved with buying Android, left in 2007 to start my first company, which was called Mixer Labs, which is one of the first API and developer centric tool companies. That was acquired by Twitter in 2009 and I was a vice president of corporate strategy at Twitter for a few years. So I helped scale Twitter from 90 people to 1500 people. I then left to start a company called Collar Genomics. I was CEO there for the first three and a half years or so.

• 3:29Speaker 02

  Stepped down about three and a half years ago, my co-founder took over. And as an investor in parallel, I've now backed 23 or 24 companies worth a billion dollars or more, 16 of them at the seed or series A. So as an investor, I'm involved with companies like Airbnb, Airtable, Andrel, Coinbase, Gusto, Instacart, Notion, PagerDuty, Pinterest, Samsara, Stripe, Square and others. And I also, I think the last time I was on with you, I'd just written a book called The High Growth Handbook, which was really around tactics for scaling companies from 10 to 10,000 people.

• 3:58Harry Stebbings?

  Absolutely. And what a book it is. And whenever I say about your portfolio, I basically say, do you know any of the Deca Corns from the last decade? Well, Elad's in all of them. So um yeah, that's his portfolio. So very funny to hear that. I do want to start there today because it's an uncertain landscape and I want to kind of understand where we sit today. So when you look at the startup and venture landscape today, how is the startup and venture landscape fundamentally shifting right now, do you think, Alad?

• 4:20Speaker 02

  Yeah, obviously there's a huge backdrop of a few big shifts. Covid has obviously been changing everything and I think it's really shifted three things for us. One is just the economy and how work will be done. So unemployment right now is at 20% or, you know, some people think it'll land at 20 to 30%. Retail spending is the lowest. It's been on record. Factory output is the lowest since World War II. Some sectors are clearly really hurt. The Mayo said it'd have a $3 billion shortfall. State and local governments are having big shortfalls. Travel is decimated, restaurants are decimated, and yet the stock markets are slightly down. And so I think all that's going to be reconciled. So one is there's a big shift in the economy and we can talk about how that's going to impact startups pretty dramatically. Second, there's a shift in how work is being done. As people have to social distance, as they have to think about going back to work or not,

• 5:04Speaker 02

  there's a really big shift in terms of people extending, working from home or making it primary, like what Coinbase is doing, Square is doing, Facebook is doing. And then lastly, I think the third biggest shift is in financing and capital and how money's being allocated. And so really it's how work is done, what's going to happen with customers, do the economy? And financing is a metric capital and then you can look at those three dimensions in terms of early-stage companies versus late-stage companies and how it impacts them.

• 5:28Harry Stebbings?

  Essentially, every element of the value chain is changing pretty dramatically. And you wrote an amazing piece deconstructing essentially the two sides of the coin when it comes to startup tactics, both offensive and defensive, as you put it. And so I want to start on the defensive. And we mentioned kind of understanding the health of the macro economy there in the venture landscape. If we go more maybe to the micro company level, what core elements do you think we need to understand, fully assess our situation at a company level? If we're in a hypothetical company scenario?

• 5:55Speaker 02

  Yeah, when all said and done, I think it really boils down to two or three core things. One is your costs and your burn and what's related to that. And then second is your revenue. And obviously that's a very obvious equation, but each one of those has a few different components that you need to start digging into. In general, as a company, you want to have two and a half to three years of cash on hand or the ability to get to that point or to be profitable. And the two and a half to three years is really driven by the fact that, you know, my belief is that we're going to see a second wave of COVID in the fall and there'll be a subset of states that will lock down and a subset of countries that will again. And if you look at your company, the next six to 12 months are going to be uncertain and or rough for some companies. I mean, some companies are doing better, some companies are clearly doing worse. Invaluations are likely to both come down, but also capital is likely

• 6:38Speaker 02

  It gets scarcer and so you're going to have six to 12 months of uncertainties, six months that stabilize and then you want to show two to four quarters of growth so that you can raise your next round. So that really means you need cash for at least two to three years.

• 6:49Harry Stebbings?

  Yeah, no, absolutely. On the kind of two to three year runway there, you've spoken before about a stress test model that we can really employ to determine the kind of the health of that runway. What did you mean by the stress test model and how do you think founders can really enact it to determine the health of their revenue?

• 7:02Speaker 02

  Yeah, I think there's two types of stress tests you can do. One is at the customer level and one is at the sort of broader just financial modeling or revenue level. At the customer level, if you're an enterprise or SaaS company, you really want to look at your top end customers. It could be 10, it could be 100, but sort of the folks who make up the bulk of your revenue as well as the bulk of your pipeline. And you need to ask who's going to be hurt, who's likely to cut spend, what are some warning metrics you can start tracking? And so, for example, if you have a lot of customers in the travel vertical and they're all cutting headcount, they're cutting costs, your product may or may not survive those cuts. They may either churn off or they may dramatically reduce what they pay you. So that's something that you have to model out so you can do sort of the bottoms up version of it. You can also do it vertical by vertical if you're dealing with SMBs or sort of broader market segments.

• 7:44Speaker 02

  And then on the revenue level, so that's sort of the customer stress test. On the revenue stress test, you can basically make assumptions. Instead of growing 2X this year, what if I grow 50%? What if I grow 20%? What if I'm down 10%? And then what happens to cost and burn across the company? If you're not assuming anything about a specific customer, but you're more looking at the overall situation and that can really change your behavior because you may realize that you have enormous buffer in terms of your efficiency and cost relative to revenue changes, in which case you're in good shape. Or it may turn out that if revenue is 30% off a plan, you're going to burn dramatically more capital and you may not have the runway to be able to do that. And ironically enough, some of the late stage profitable companies who suddenly saw their businesses impacted were the ones who were left in the worst spot

• 8:27Speaker 02

  because they had the least amount of runway in terms of capital raise. They just thought they were going to coast on profitability, which usually is a great thing to coast on. And I've seen a number of late stage companies now have to go and do an emergency fundraise, not because they weren't great companies who weren't, they were profitable three months ago. It's just COVID hit them so hard, suddenly they needed to raise money in a very unexpected fashion. And that's usually not where you want to be.

• 8:46Harry Stebbings?

  I mean, there's a couple of things I just have to unpack there. You said first about the word plan. And often VCs can be known for maybe bashing founders when they don't hit plan. My partner Fred always says that plans are a view of the mind. You have to be plastic around them. How do you advise founders and VCs in terms of their approach and relationship to hitting plans, so to speak?

• 9:04Speaker 02

  Yeah, I think right now there's a lot of uncertainty in general in the environment. And the uncertainty in part is driven by the fact that usually when you have a big economic downturn, it's a series of cascading effects. It's almost like dominoes tipping each other over. And you don't have a situation where today we know everything that's going to happen over the next six months or the next set of sectors that are impacted, right? All the people who are selling to hospitals and selling to travel and selling to government and selling to all the verticals I just mentioned are going to start to see that impact. And they themselves are going to cut costs. They're going to cut headcount. They're going to buy less software. And that's going to cascade to their customers. And so these things sort of cascade out over a period of a couple of quarters. And we're only two, three months in really. So most of the effects have not happened. Most companies are going to fall into one of three buckets, which are very obvious.

• 9:48Speaker 02

  And to some extent, actually, I view it almost as like a two by two matrix. You have companies that are going to accelerate due to COVID. Instacart is a great example. Their business is booming. More people are using them than ever before. There's going to be companies that do much worse. So basically, anything in travel right now is doing dramatically worse. And then the real question is, are those things going to sustain or not sustain over time? So Instacart, I think, even if it snaps back to half of where it is today, it's still going to be massive acceleration of the business. Some corporate travel company like Trip Actions, I don't know anything in detail about them, but I'm assuming their business is way down, but in a year or two, a lot of it will come back. Enterprises will start to travel again. The question is, what are the things that are being decimated business-wise right now that won't snap back? And alternatively, what are the things that are really accelerating right now that aren't sustainable?

• 10:32Speaker 02

  So maybe there are certain types of ed tech companies, like my kid is doing some online learning things. The second school's reopened, we're going to stop doing that, right? And so I think there's going to be certain areas that are really accelerating right now that are going to vaporize. And if I was the CEO of one of those companies, I may consider exiting right now because suddenly your business is way up, but it's unclear if it's sustainable. So from a planning perspective, I think the easiest plans to make in some sense or the easiest forecasts are the things that are Clearly accelerating, you just kind of extrapolate out and you discount based on when you think COVID will slow down, or it could just be a systemic shift at this point. For things that are clearly decimated, you basically have to ask, how long do I need to make cash last? And how do I do that, assuming my business is continuing to be affected? Do I need to raise money? Do I need to continue to cut costs? What do I do? And honestly, I think the hardest thing to assess of the companies in the middle,

• 11:17Speaker 02

  where it's still not quite clear what COVID is going to do to them and this sort of cascading economic effect that I mentioned. For example, there are companies that closed business in March or April that they started on six months ago, when their salesperson could fly in live and meet with the team and those deals closed out of momentum. What happens with all the deals that you start now over the next two quarters? And I think that's the place where there's the most uncertainty.

• 11:37Harry Stebbings?

  Can I ask one thing that I'm really interested by is in the aspects that have been decimated. Say, take travel, for example, you have your Airbnbs and you have your, you know, maybe trip actions. It's a slightly different, obviously quantum compared to Airbnb. But what's the difference between inherently vulnerable and then actually enough behind it to last? Like a trip actions, maybe. Is it purely quantum of capital? How do you think about that transition between potentially vulnerable versus sustainable and defensible?

• 12:02Speaker 02

  Yeah, I think it depends on the vertical you're in. There are some verticals where you can change what you're doing or reposition what you're doing. And a lot of SaaS software, which were sort of the nice to haves and were the first things to get cut. And I saw sort of a number of companies start to see high churn in March or April. And those were sort of the SaaS companies that I felt in some cases were the least necessary pieces of software for an enterprise. So one is sort of what vertical you're in and can you pivot or change what you're doing? Or is it too big of a shift and how late stage are you? And travel in particular, you may want to segment it a little bit by corporate versus personal travel. And trip actions is a good example where they have a lot of very large customers. The second those customers turn back on travel, they're probably going to need some solution to help manage that travel. And so it's really a waiting game. You basically have to ask how long before these things turn on.

• 12:46Speaker 02

  But that feels like a very core service. I'm guessing there's a number of corporate travel services that are not core. And I'd be very worried if I was the CEO of one of those companies, because even if you can bridge it all the way back to things turning back on, you're likely to start business at a lower baseline. And the question is, can you sustain or not? And will people really buy your product or not? So anything that's marginal versus core, I think, is really going to get hurt.

• 13:08Harry Stebbings?

  Absolutely, I do agree with you there, especially on the kind of re-acquisition or acquisition again of those customers. I do want to touch on the fundraising environment because we touched on it a couple of times there. In terms of kind of the Twitter sphere, there's a lot of VC sentiment around being open for business. I'm too intrigued on this one, Alad. Do you buy the open for business messaging or is it VC marketing bluntly?

• 13:27Speaker 02

  I think it's a mix of both and it depends a little bit on the venture firm and the type of capital. I would view it almost as traditional capital versus non-traditional venture capital and then early stage versus late stage. So traditional VCs are still doing a lot of investing on the early stage. I think everything is just kind of trucking along. Valuations have been coming down because companies need to be able to raise their next round. So if you're raising a seed round, the bar for a series A may now be either higher or alternatively the valuation is lower, which is sort of saying the same thing. So that means that seed companies' valuations themselves are drifting down a little bit, although there's still a lot of capital in the system. On the late-stage side, a lot of VCs I know have first and foremost focused on the companies that they're very close to already, who are already in their portfolio, or a small number of sort of hot brands, you know, that'd be like Figma or somebody raising money.

• 14:13Speaker 02

  And those are the companies that they've been focusing on. And for the ones that are sort of in the middle where it's unclear what's actually going to happen in terms of revenue due to COVID, with, you know, again, there's a set of companies that are accelerating, there's a set of companies that are decelerating, there's a bunch in the middle. Those are the ones that a lot of venture capitalists don't know how to put a price against. Because if the company grows 20% instead of 2X this year, that creates a very different valuation expectation. And so a lot of people are kind of sitting and waiting to see what happens on the late stage, even if they're funding things on the early stage. For non-traditional capital, family offices, hedge funds, et cetera, many of them are spending much more time on public markets right now because there's really big shifts in volatility and pricing in public markets. And they view that as a great place to get returns where they're liquid the whole way, they're not locked up for five years, et cetera.

• 14:56Speaker 02

  And so where I've seen real capital shifts is hedge funds and family offices temporarily exiting late-stage private investing so that they can focus on these public market opportunities.

• 15:07Harry Stebbings?

  Can I ask, is that a good thing for the ecosystem? I had Bill Gurley on the show and he said that the sheer explosion in late stage and just pure quantum of capital was his biggest challenge. Do you think maybe from the non-traditional tech investors exiting, it's actually maybe a good thing in terms of a flight to quality? Or is that being too optimistic?

• 15:23Speaker 02

  Well, it depends on your perspective. I think if you're a founder, it's always great to have more sources of capital. If you're an investor, you don't want more competition. So it depends on which part of the ecosystem you're talking about. As somebody aligned with founders, I think it's good to have more sources of capital and more ways to fund a company.

• 15:38Harry Stebbings?

  I do agree with you there. In terms of the kind of more sources of capital, it obviously affects prices. And we mentioned valuation changes there. How would you advise founders on how valuation sensitive to be and how to approach valuation today in the context of new funding rounds?

• 15:51Speaker 02

  It comes down, when all is said and done, to how badly you need the money and also how much buffer you want. And then how much dilution are you really taking? Because if it's the difference of taking 9% dilution or 10% dilution, I would just go and get the deal that's a fast, easy, simple, non-complicated investment from people that you like. If it's the difference between 10% dilution and 30% dilution, then obviously there's, there may be more room for optimization. So it depends on the trade-offs that you have to make. If it's small trade-offs, I would just focus on getting things done quickly. I think May to July, or May to August, or May to September, or something like that, is going to be the valley of false hope in some sense. And I hope I'm wrong. You know, the COVID cures are supposedly coming any day now. It's sunny out. We've flattened the curve. People are starting to leave their homes more.

• 16:34Speaker 02

  And I think people are feeling very optimistic. The stock markets are up. And there's this weird dichotomy where the underlying economy or the economic engine is really impacted quite badly. But the Fed is pumping a lot of money into the system. And I think a lot of people are kind of expecting everything to get bailed out, right? The state of California will get bailed out despite its implementing harsher shutdowns than what the federal government has suggested. Hospital systems are going to get bailed out. Everybody's going to get bailed out. And the question is, is that really going to happen or not? And if that doesn't happen, then we're in pretty dire economic straits. So if I was raising money anytime in the next six months, I may just front-load it to now and raise money while everybody's still very cheery and optimistic. And if in the fall and in the next year, things are going great, it doesn't matter. You've raised some

• 17:17Speaker 02

  Money and you're fine. And if things get really bad, then you have that extra buffer to help you basically mitigate what may be coming.

• 17:23Harry Stebbings?

  I mean, this is very macro, but it is something that I'm actually concerned about, which is in the case of kind of excessive QE strategies, like you mentioned there. Are you concerned about kind of mass hyperinflation?

• 17:32Speaker 02

  You know, right now, we're in an odd situation where things are reasonably deflationary because demand is dropping. And so if you look at China as an analog, the last report I saw, which is maybe a week or two old now, production was still down about 10% in China. And consumer demand was down around 20, 30%. So if you see these big shifts in demand, usually that creates deflationary pressure, pricing pressure comes down, costs come down. I was talking to a friend of mine who's a real estate developer in San Francisco. And he said, a lot of the general contractors he work with have told him that their subs, their contractors are coming in with 30, 40, 50% lower bids than they used to. Cause they just want to get back to work. So all those things are going to drop prices versus raise prices. But again, I don't know how this is going to play out long term, and I'm definitely not an economist or macro investor.

• 18:17Speaker 02

  I just think it's important to keep your eye out for these things as they happen.

• 18:20Harry Stebbings?

  Absolutely. Neither secondary factor always felt. I do want to ask that in terms of kind of post the pricing element, there's always the terms of the deal. And I've seen on Twitter, a lot of suggestions about could this be the reentry of kind of culture VC days? How do you advise founders on the terms and structures to avoid or be wary of in times like this?

• 18:37Speaker 02

  Yeah, I mean, the very best thing you can do is keep the round as clean as possible, which means non-participating preferred and one X liquidation preferences and things like that. Often there's two reasons that a structure will come into play into an investment. And structure means something where the investors are guaranteed a certain type of payout or return. Or a structure may mean some forced timeline for IPO. There's all sorts of things like that. And there's basically two types of structures that come into play. One type of structure usually comes in when the investors and the founder can't agree on the valuation. There's a big difference and the investor may say, as long as you guarantee me a certain return. Say as long as we get to a two X within three years or four years or whatever it is, as long as you clear that two X hurdle, I'm fine with whatever you do.

• 19:19Speaker 02

  It's sort of capped upside for the investor. The structure goes away if you hit certain milestones. That's often a perfectly okay type of structure. Type of structure is one where even if you win at the end of the day, you go public, whatever it is, you're still not happy about winning. Then that's a very bad structure and sometimes that happens. There's a bunch of companies that are very good companies that ended up putting in structure over time in later stage rounds. Zappos did it, for example, because they couldn't agree with Sequoia on valuation. And then later they got bought by Amazon. Square had a structure in its last round where I think there was some sort of IPO conversion clause or ratchet. If they didn't go public at a certain valuation, then more shares were issued the last round in. I think Box had a structure. I think even Spotify, I think invested the direct listing to get around some structure that a PE firm went in around an IPO.

• 20:04Speaker 02

  And that's why they didn't do an IPO. They invented direct listings to get around a structure as far as I know. So some really great companies have had structure as part of their rounds. So I don't think it's the death knell or terrible thing or something else. It's just something to understand well. And as long as it's not something that's going to backfire on you in a big way. You know, if it gets a deal done, sometimes you just have to do it.

• 20:22Harry Stebbings?

  You mentioned that kind of ideal if you don't have to do it. And if you have to do it, then you have to do it. In terms of kind of having to do it, a lot of companies then, well, in these coming months, will struggle maybe to fundraise and reserve allocations change for existing venture fund portfolios. How do you see reserve allocations changing? And how do you think that impacts the market for inside rounds?

• 20:41Speaker 02

  I think a lot of inside rounds are happening right now, actually. And this is back to VCs both investing in their best companies a bit preemptively to give them a little bit more runway or make sure that they bridge what they're doing. And I think they're close enough to those companies that they feel like they understand the business well enough that they can actually price the company. In other words, they can put a valuation on it. And for companies that are new to them where they have less history, they don't feel like they can do that. So it does feel like a lot of people are sort of preemptively putting capital that they would normally put aside into or invest into the companies that they're already closely associated with. And I think that trend has another month or two on it. And then I think late stage VCs will start shifting their perspective. For early stage investments, I don't think it changes at all. I think if you're investing a million dollars in a company or two million dollar round, it's going to be the standard approach that everybody's always taken.

• 21:26Speaker 02

  I do think that there are going to be a handful of venture funds that are going to find it increasingly hard to raise their next venture fund sometime next year if the economy shifts to bad in terms of, you know, the stock markets and other things. Because the people who invest in venture funds, these folks known as limited partners, themselves are a little bit dependent on shifting their own allocations into venture capital versus hedge funds versus public markets versus real estate versus what have you. And if the stock markets fall, a number of them end up having to reallocate out of venture capital and into other asset classes. And so there's a possibility that that'll happen next year. But again, it all comes down to how the macro picture fills out.

• 22:01Harry Stebbings?

  Can I ask, because you mentioned there about kind of funds struggling to raise in the next maybe 12 to 18 months. Because we saw a kind of, not a generation, but a couple of years of funds deploy in incredibly fast cadences, 18 months, sometimes even 12 months. Do you think we will see that dearth of venture funds who have deployed too fast, gone out the gate too fast, and now have a ton of hungry mouths in terms of the portfolio to feed, that they really can't finance and feed?

• 22:23Speaker 02

  I think it depends on what they invested in. If they invested in great companies, they'll be able to raise money fine. I don't think venture capital is an asset class is going away, and it's still a reasonably small proportion of the overall pie that's out there. But if you made a lot of late-stage investments and things that are now having serious problems, it's going to be harder and harder for you to raise follow-on funds. And so SoftBank would be an example of that, where they invested a very large amount of money in a number of companies. A number of those companies are now below where SoftBank has invested. A number are well above, like Garden. And it looks like the second vision fund is taking longer to raise. I mean, that's a massive amount of capital, so it's not necessarily comparable to any arbitrary late-stage fund. But I think you'll see similar dynamics in terms of what's the portfolio, what is the return profile, how are you actually doing?

• 23:07Speaker 02

  How are those companies doing? And therefore, will you get more money? The other thing you could see is just some of the fund sizes shrinking. And so that's the other way that you could see adjustments happening, is people will say, well, you know, before I wrote you a $50 million investment as a limited partner in your billion-dollar venture fund, now I can only write a $25 million investment. And so suddenly, that fund will shrink in size from a billion dollars to the next fund being $500 million, whatever it is. So I think you'll also see shifts that way versus just somebody going out of business.

• 23:31Harry Stebbings?

  I mean, speaking of kind of shrinking of funds there, the obvious thing that also happens very sadly in these times is kind of the shrinking of teams. Customer bases obviously can be lost and revenues go down and layoffs occur. I guess my question to you is, what are the core tenants of an effective layoff strategy in your mind?

• 23:46Speaker 02

  Yeah, I think there's a Few core components of doing a layoff well. And we're in an unfortunate time where a number of people have to do these layoffs. And I myself, as mentioned, got laid off from the first startup I joined. I was laid off, I think, in the third out of five rounds that the company did. And in general, when you do a layoff, you want to be able to do something significant all at once. So when cutting, you should cut more deeply than you think you should. And anyone who's marginal or you need to figure out, unfortunately, you should default to cut versus keep. And the more times you do layoffs, the more demoralizing it is. You know, when I got laid off in the third round of that company that I mentioned, by that time, the morale of the company had really been devastated because you never had certainty as an employee in terms of when it was going to end.

• 24:29Speaker 02

  And I remember they actually bought a pool table to try and increase employee morale. And anybody who spent a lot of time playing pool disappeared in the next round of layoffs because clearly they had nothing to do. And so it was really awful. So my first suggestion would be when you cut, cut deeply and cut more than you think you will need to, just so you don't have to do it again. You should do it now while there are still new jobs to land for people. So if they get laid off, you can direct them to other companies. You can have your recruiters on your team actually help place people. Don't pre-announce the layoff and then wait a month to do it. You should plan it, maybe plan it over two weeks and then do it in a single day if you can. So you want to do them quickly and get rid of any uncertainty in the system. You want to be generous with people on the way out and treat them well. Given we're in the time of COVID, you want to make sure that they have health insurance, hopefully through the end of the year.

• 25:13Speaker 02

  You help them find jobs and help them with placements. And then lastly, you should focus on the people who are left. You should explain why this was done, that it was done to give the business stability and therefore to give them and their family stability in terms of their job. You can walk them through the numbers and why it was necessary. And often the place where it gets tough is say that you have $100 million in the bank and you did a layoff. Sometimes the employees who are left or the employees are leaving say, well, you had $100 million. Why did you do this cut? You know, why didn't you keep everybody on? And the reality is if you're ramping burn much faster than you're ramping revenue, you need to be able to bridge to profitability. And it's about saving the company and saving everyone's jobs at the company who's still left versus keeping everyone, but then slowly dying as a company. And so it's really about the long-term health and survivability of what

• 25:57Speaker 02

  Everybody has worked so hard to build. I think you really need to make sure that the people who leave are treated well. And then the people who are left are both treated well, but also given a sense of stability and an understanding that in part, this is being done to help save their own jobs.

• 26:10Harry Stebbings?

  It's really interesting you said that about kind of when you have, like you say, a hundred million in the bank. And it's a case of kind of optimization of resources and kind of bridging to profitability. My question is, you know, we hear always about the brilliance of transparency within organizations. And transparency would also be kind of being open about runway and being open about cash balances, which a lot of founders say they are on the show. But then you get challenges like that, which to leaving people who've been laid off is in many ways fair. How do you think about the limits to transparency, especially in cases like this where it could potentially really backfire?

• 26:39Speaker 02

  I would just be open and honest with people and explain it. I think people largely will understand this. When all is said and done, you need to focus on the survivability of the business. Because if you set things up where you go from a hundred million to twenty million to zero, you've destroyed the business, right? And so this is about ensuring that everybody who spent four years, six years, ten years, however long it's been, building the company sees that company survives, sees that their stock is worth something, but also that a lot of people are left with jobs versus nobody having a job. So I would just come back to that because that's really the reason you're doing it. You're trying to create a sustainable business. And at the same time, if you make sure to treat people well on the way out, that helps a lot too. Because, you know, they're friends of yours, the people running the company, right?

• 27:23Speaker 02

  Like unfortunately, some of the people who are going to be laid off are people that you knew well and that you worked with side by side with for years. And they're friends with the people who were also left at the company. And so you want to make sure to treat those people very well for multiple reasons, including that.

• 27:36Harry Stebbings?

  Yeah, absolutely, especially kind of treating well on the way out. A slightly kind of, it's related to layoffs, but it's a question that I often think. And it's Max Levchin said on the show, when there's doubt, there's no doubt. And he was specifically talking about kind of acquiring talent, but also thinking about layoffs as well. So both sides of the spectrum. Would you agree when there's doubt, there's no doubt on talent acquisition and letting go? Or is it more nuanced, do you think?

• 27:57Speaker 02

  I'd absolutely agree with that. Yeah.

• 27:59Harry Stebbings?

  Oh, good. Okay. I'm often told it's too short sighted and glib, and so I'm glad that I'm okay doing that. And do you want to kind of? Because we spoke about companies that essentially can thrive in a kind of time like this. You said in the article a brilliant quote, which was never waste a good recession. Who will win and thrive in this time? Who will die?

• 28:17Speaker 02

  Yeah, I think there's a number of companies that are clearly going to win during this period. And there's a number of companies that could win. And so really, I think you have to start asking, how can I use this shift to my advantage? In some cases, there are companies that are just seeing accelerated growth due to the shift. It could be online collaboration tools, it could be food delivery, it could be a variety of things. And so sometimes the business just naturally fits the environment, which is what's happening here. Some people are repositioning what they're doing. So they're focused on how their tool or their product, if it's a vertical SaaS product, for example, is helping with, you know, making teams more efficient or reducing costs or things like that. Or it could be around taking a traditional retailer and enabling them to be more online centric. Like Square has actually done some really interesting things there recently. So there's lots of different ways to reposition what you're doing so that it can help accelerate your business.

• 29:03Speaker 02

  And then relatedly, there may be new verticals or areas. So for example, I think there's an opportunity for a lot of social products to grow rapidly while everybody's stuck at home and is kind of being forced to just shelter in place. There's the opportunity to really tap into that demand for more social experiences and interactions and things like that, which people aren't getting as much of.

• 29:21Harry Stebbings?

  I totally agree with you, Dan. I think we've seen it with, you know, the likes of Clubhouse, say. And this is the kind of a big question that maybe expands beyond social. But it's like, how do you think about those companies where they grow insanely fast in these times? And it's not sustainable versus the sustainable growth of other businesses? How do you think about that kind of transition and difference between sustainable and unsustainable?

• 29:40Speaker 02

  I think that there are clearly going to be companies in both camps. And sustainable is a little bit of a gradient because say that you grow 5X and then when this ends, you snap back to 3X instead of 5X. That may still have saved you three years of work as a company, right? And so sustainability is a little bit relative. If you go from 1X to 100X down to 3X, that's really a lack of true sustainability. And I think that will happen to a subset, but not all of the ed tech companies. The example that I mentioned around preschool kids, like I just don't think that's going to continue to be a massive online tooling area, although I could be wrong. And so I think part of it too is just asking your customers, you can just ask directly. What is it agreed to which you'll continue to use this? And how essential do you view what I'm providing to you today versus three months ago versus two years from now?

• 30:25Speaker 02

  And you can start to get a sense of a lot of people are going to turn off unless we change what we're doing. And you should try and get ahead of that sustainability. And the big mistake would be to hire up aggressively, build a massive team. And then suddenly we come out of the COVID era and your company really shrinks dramatically in terms of revenue. And then you have to do layoffs after COVID or you really have to readjust what you're doing after. So I think it's a very important thing to track.

• 30:47Harry Stebbings?

  Yeah, absolutely it is. You mentioned the ad tech market then, kind of while enjoying the surge, potentially if there's M and A opportunities that arise, maybe take them and consider them more than one would normally. In terms of the M and A market itself, how do you expect the M and A markets change over the next kind of six to 24 months? Given the volatility of the market?

• 31:05Speaker 02

  I think there will definitely be a number of buyers coming into the market. And that's actually one of the offensive things that you can do as a company. If you're late stage is you can start planning ahead in terms of what are the companies you want to buy? And how do you want to start thinking about which founders to get to know or who to pursue with an eye towards six to 18 months ahead of time? Fundamentally, if you look at big enterprises in the time of COVID, the first two weeks were spent just figuring out what's COVID. The next month for a traditional enterprise was figuring out how to transition to work from home. They've never dealt with Slack or Zoom or some of these other tools. And so a lot of progress just got stymied by a month of figuring it out and people setting up systems at home or whatever it is. And then there's a month of planning, financial planning, how are our customers doing?

• 31:50Speaker 02

  A lot of the stress testing that I mentioned are things that big companies are just doing naturally. And then they act on it and they act on it may be we now have to lay off 20% of our employees. Or they act on it may be we now have a freeze on new purchases of technology. Or we're going to get rid of all non-essential software or whatever it is. And then act on it may also include an M and A and saying as valuations drop for certain types of companies, we're going to look aggressively at picking them up because as a company, we still have a big enough market cap to make interesting acquisitions. Or we have the cash position to do it. And so I think a lot of companies are going to start dipping into the market more aggressively in terms of buying things over the next six to 12 months. I think first people had to get through their own planning, their own dealing with COVID, their own understanding of working from home and other issues. Then they had to look at the health of their business and then the step after that is going to be M and A.

• 32:35Harry Stebbings?

  Can I ask, M and A is probably one of the biggest areas of kind of contentional misalignment I see. And you know me, I love venture and I'm a product of the venture ecosystem in many ways. But it's kind of the biggest misalignment I see between founders and VCs. Cause you can have, say, we're an ad tech company today, we're the two co-founders of ELAB and sells for a hundred million. We've got a hundred million offer on the table and we have fifteen percent each. That's a life-changing amount of money for us as individuals. We never have to worry about money again in many respects. For VCs, that is not a good exit and they're ten percent holding on their five hundred million fund or four hundred million fund. It means it's a drop in the bucket, so to speak. Do you agree with that misalignment? And how do you kind of advise founders to think about it when they get M and A offers come through?

• 33:14Speaker 02

  I think fundamentally, the founders should be good fiduciaries for everyone. And everyone includes themselves because they're major shareholders of the company. And usually people sell for one of three reasons. They sell because they're tired. They've been beaten up over five years of building a company and they're just kind of exhausted. They sell because they need the money. They need to buy a house and put their kids in school because their life has changed. Or there's a family health emergency or they just want to have that stability. Sometimes you can deal with that through secondary sales, sometimes you can't. The third reason is that they're about to get crushed by a competitor. So it makes a lot of sense to exit. And the fourth is that somebody's offered them an outcome that pays well ahead of where they are. And it may de-risk them or it may help on a relative basis with dilution and everything else incorporated.

• 33:57Speaker 02

  It may be a much better outcome for everybody to sell now than to wait three more years and dilute a bunch and keep going. And then maybe sell for two X evaluation three or four years later. So usually I would look at those factors and try and figure out what's the real reason to sell. And I mean, I sold my first company two, three years into it. So I'm perfectly fine with an early exit. And I think sometimes it's absolutely the right thing to do. I think there's other times where you really regret selling because suddenly it turns out what you were doing was ten times or fifty times bigger than you would ever have guessed. And then other times you really should have sold. And in hindsight, you know, the people who had early offers from Facebook or from Google in terms of selling their companies probably kick themselves on a regular basis because the outcome ended up being so large that, you know, imagine Google tried to buy you and they're worth a billion dollars.

• 34:41Speaker 02

  You have a thousand X multiple on whatever that sell price was. So if somebody offered to buy you for $10 million, then it's $10 billion today, right? I mean, obviously you would have sold along the way. So I'm just saying it's, you know, these things can really add up. And so if you do sell, if you can sell to a company that's breaking out itself and has a clear 10x on it, that may actually be the smartest way to exit, all else being equal. A, because you're going to end up with a much bigger financial outcome, because, you know, the thing is 10x more than whatever they paid for you. But you'll also probably get way more responsibility because if that thing still has 10x on it, it's growing quickly. The best people are joining it. You're building an amazing network. You have a great brand for the exit. Like, all these really positive things come along with that.

• 35:20Harry Stebbings?

  In other words, if you were bought by Shopify, congratulations. But I do want to move into my favorite, Elad. You know how this goes. It's a quick fire round. So I say a short statement and then you give me your immediate thoughts. Are you ready to dive in?

• 35:32Speaker 02

  Let's do it.

• 35:32Harry Stebbings?

  Okay, so my favorite book is obviously High Growth Hamburg. What's your favorite book and why?

• 35:36Speaker 02

  Yeah, I think on the nonfiction side, I don't read a lot of business books. So maybe I'd say Master of the Senate, which is about Lyndon Johnson, by Caro. That's a very good book. And then on the fiction side, I have a thread on Twitter that I keep adding to, which is good recent sci fi books.

• 35:49Harry Stebbings?

  Got it. Tell me, you've seen some of the most incredible boards over the last years. Best board member you've sat on a board with, or most memorable? Obviously, it's tough picking best. And so best is a bad one. But most memorable that you've sat on a board with and why?

• 36:01Speaker 02

  One board member who I think is awesome is Sue Wagner. She's the independent board member we added at Color, which is a company I co-founded. And she co-founded BlackRock, was COO there for many years, drove a lot of their internationalization, M and A strategy, et cetera. And she's on the boards of Apple, BlackRock, Swiss Re and Color. And she just has a very different perspective coming from the New York financial services world. But at the same time, she's been a founder, she's operated at scale. And so I've just really appreciated her views.

• 36:27Harry Stebbings?

  That's an incredible board member. Tell me, do you agree with Samuel Shaw in terms of founders are voting with their feet and taking multi-stage money at seed?

• 36:35Speaker 02

  I think that's true sometimes. I think about half the rounds at the early stages are multi-stage capital and half are not. I still think there's lots of angels and lots of angel money and angel funds. So I think founders are doing both.

• 36:46Harry Stebbings?

  How do you advise founders when it comes to secondary opportunities? We mentioned them earlier. How do you advise them when they arise?

• 36:52Speaker 02

  In general, I think it depends a little bit on the stage of the company. I think there are two circumstances under which it makes sense to do it. One circumstance is the company is stable, there's a clear path forward, and you basically want to de-risk your position with the company. And you want to have money to be able to keep going. You don't want to feel like you need to sell because you want to put your kids in school or something. That often happens at around a 500 million to 1 billion dollar valuation. It's sort of a crossover point where often that reflects a pretty stable company. The other reason to do it is you may just have a deep life need to do it. You know, you have a sick family member or you want to buy a house. You know, there's some impetus for it. And either way, I think if you do it, you may want to figure out how not to sell too much of your stake

• 37:33Speaker 02

  too early with the hope that it appreciates, but still take money off the table so that you have that stability. So for example, at 500 million, 1% of the company is 5 million dollars. It's a significant amount of money. And at that point, founders will often own, you know, 20, 30% of the company. So 1% of that isn't that much.

• 37:50Harry Stebbings?

  Yeah, absolutely. Tell me, what's the hardest element of your role as an angel today?

• 37:54Speaker 02

  Today, it really is managing family obligations because with schools closed and COVID, there's a lot of extra childcare burden. So it's a non-industry specific challenge.

• 38:05Harry Stebbings?

  Absolutely, but a very important one. Tell me, you're at the ADP Center of both kind of funding and entrepreneurial communities. What would you most like to change about the Valley today?

• 38:13Speaker 02

  I think there's two things worth changing, and I think they're actually shifting. One is I felt like there was this creeping cynicism coming into Silicon Valley, and more and more people were showing up just for the money. And I think for me, traditional Silicon Valley has been a force of optimism and using technology as a force for change and for good. And I feel like there was this sort of snide-ness that was starting to come in. It was clearly in the media, but I also feel like some people who were participating in the ecosystem were joining in very cynically and were very entitled. And I think a lot of that wasn't great sort of additions to the scene. The second is just city governance. I think San Francisco has the opportunity to be a golden age city. And unfortunately, it squandered some of those opportunities. So really, San Francisco should be this Mecca. It has the revenue to do it.

• 38:57Speaker 02

  I think the city budget is 12 billion dollars a year, which is a massive amount if you look at it relative to the headcount of the city. And it was already going to run a multi- Hundred million dollar deficit before COVID, despite all the problems with cleanliness and homelessness and crime and everything else. And so I do think fewer companies would be announcing this sort of permanent work from home approach. If San Francisco was cheap, clean and livable, and it really should be. I mean, it has all the resources to do it.

• 39:21Harry Stebbings?

  Yeah, if I see another personal news, I'm moving out of San Francisco on Twitter, I think I'm gonna scream. Certainly with you there.

• 39:28Speaker 02

  Yeah, and I think most people are gonna stick around and I think no matter what, the Bay Area will continue to be a tech epicenter. I just think it could really scale from here in ways that bad governance will prevent.

• 39:37Harry Stebbings?

  Absolutely. No, I do agree with you. Final one, most recent publicly announced investment, Elad, and why did you say yes and get so excited?

• 39:44Speaker 02

  So this morning, a company called Deal announced that it raised a fourteen million dollar Series A with Andreessen Horowitz. I had prior invested in their seed round as an angel. And in general, even before COVID, I was a big believer in the general trend of more remote work happening. And the need to be able to support remote contractors and employees. And so that's the reason I invested. And obviously I also invested because the team is awesome.

• 40:06Harry Stebbings?

  Yeah, Alex is fantastic. But listen, I loved having you on the show. As I said on the tweet, I always so enjoy our chat. So thank you so much for joining me today, and this was fantastic.

• 40:13Speaker 02

  Ah, thanks so much for including me.

• 40:17Harry Stebbings?

  Such a fantastic member of our ecosystem, and I always so enjoy my discussions with Elad. And if you'd like to see more from him behind the scenes on Twitter, you can at Elad Gil. Likewise, it'd be great to welcome you behind the scenes here on Instagram at H Stabbings nineteen ninety six with two Bs. However, before we leave you today, I wanted to take a moment to mention HelloSign. A great example of a company that found success in building a product focused on user experience. HelloSign is an effortless e-signature solution used by millions to securely send and request legally valid digital signatures and agreements. They raised a total of sixteen million dollars in funding and recently got acquired by Dropbox for an impressive two hundred and thirty million dollars. Check out hellosign.com forward slash two zero VC to join the thousands of companies and founders who value fast, secure and simple e-signatures.

• 41:02Harry Stebbings?

  And also, everyone knows that building great mobile products is really hard and it takes time. With Headspin, product, dev and QA teams know the exact behavior and performance of any mobile app running on any device and any network anywhere in the world. Headspin began in April 2015 when founders Manish and Brian both had painful firsthand experiences as lead engineers building mobile products at Amazon, Zynga and Google. And so, starting from a blank page, they both created a platform to give mobile teams, developers, QA engineers and product managers the ability to experience their mobile app or site the way users do, running on any device and any network anywhere in the world. And within a year, Headspin had set the new standard for mobile end-to-end testing, performance monitoring and user experience analytics, with more than 100 of the top

• 41:45Harry Stebbings?

  200 global mobile apps relying on the platform. Join the best in mobile today at headspin.io. That's headspin.io. As always, I so appreciate all your support and I can't wait to bring you another fantastic episode this coming Friday on Founder's Friday.