20VC: Why This Time Will Be Worse Than The Great Financial Crisis, Why Down-Rounds, Firesales and Shutdowns Will Happen & The Ultimate Startup Survival Guide; 7 Steps to Ensure Your Company Survives The Storm

Tom Loverro is a Partner @ IVP where he has led or was actively involved in investments in Amplitude, Coinbase, Hashicorp and Datadog to name a few. As a result of his investing success, Tom was named to Forbes Midas List in 2021. Prior to joining IVP, Tom was a Principal at RRE Ventures. In Today's Episode with Tom Loverro We Discuss: 1.) The Entry into Venture: How did Tom make his way into venture first with RRE? How did the role with IVP come about? Does Tom believe we will see many venture investors move firms with much of their existing expected carry cut in half with the changing landscape? What is Tom's biggest advice to someone looking to make their way into the venture world? 2.) The Calm Before the Storm: Why does Tom believe now is the calm before the storm? Why does Tom urge founders to go out and raise now before the storm hits? Is Tom already seeing pricing coming down for both early and late-stage companies? 3.) When The Storm Hits: When does Tom believe the storm will hit? Why does Tom believe when it does hit, it will be worse than The Great Financial Crisis? How will VCs respond when the storm hits? How will it impact their investing cadence? How will LPs respond when the storm hits? Will they cut back their manager commitments? Does Tom have hope that their will be a new class of LPs in this new economic cycle? 4.) The Rounds That Happen When The Storm Hits: Does Tom believe we will see a wave of down rounds when the storm hits? Why are they less common than people think? In the eye of the storm, will we see further layoffs? Will we see firesales? Will we see a tidal wave of shutdowns? Will large multi-stage funds with huge amounts of dry powder change their deployment pace? The Survival Guide for the Storm: 1.) Raise Now: Why does Tom believe that startups should raise now, not later? What amount of runway should they raise for in this environment? 2.) Cut, Cut and Cut Some More: What amount of runway should startups be cutting to get to? How will this impact marketing spend? Why are your marketing dollars more powerful now than ever before? 3.) Focus on Survival Not Valuation: What does Tom mean by this? How can founders gain leverage with VCs when raising today? How can founders instil a sense of urgency in their raise with investors? 4.) Bring on Operators with Experience: Why would operators with experience join a struggling startup? Will operators with experience not have a flight to safety and stay at their well-paid FANNG role? Does this potential operator not shorten runway even further as they are often expensive? 5.) Unit Economics over Growth: How can founders show investors a superior profile of unit economics moving forward? Do investors not want both unit econ and growth today? 6.) Play Your Cards Right and Then Go on Offense: How does Tom advise founders on the right time to go on offense? 7.) Be Decisive, Half Measures Rarely Succeed: How does Tom define a half-measure? What is so wrong with half-measures?

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

• 0:00Speaker 00

  In the lead up to the great financial crisis, mortgages were going bananas, LBOs going bananas. Investors and venture weren't to the same degree. This time it did, so the hangover is going to be worse because you were pre-product and you raised at 300 on a bunch of hype. And now you're at a million ARR. What happens to that company?

• 0:19Harry Stebbings?

  So last week I read the most phenomenal Twitter thread on why this ensuing period will be worse than the great financial crisis. And I thought there was so much more to unpack here. And so I'm thrilled to welcome Tom Loverro, partner at IVP, where he has led or was actively involved in investments in Amplitude, Coinbase, Hashicorp and Datadog, to name a few. As a result of his incredible investing success, Tom was named to Forbes Midas List in 2021. And prior to joining IVP, Tom was a principal at RRE Ventures in New York. But before we dive into the show today, SecureFrame is the leading all-in-one platform for automated security and privacy compliance. SecureFrame simplifies and streamlines the process of getting and staying compliant to the most rigorous global privacy and security standards

• 1:01Harry Stebbings?

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• 2:28Harry Stebbings?

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• 3:10Harry Stebbings?

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• 3:30Speaker 02

  You have now arrived at your destination.

• 3:33Harry Stebbings?

  Tom, I am so excited for this. I've obviously heard so many wonderful things from Samesh. So thank you so much for joining me today.

• 3:40Speaker 00

  I'm stoked to be on the show. Thanks for having me.

• 3:43Harry Stebbings?

  Not at all, but I want to start with a little bit on you, okay? So how did you make your way into the world of venture? And then how did you come to be a partner at IVP today?

• 3:50Speaker 00

  Yeah, so my dad was a serial entrepreneur. And mind you, these were like small three or four person companies. This was not anything big. But I think growing up around that energy, going into some big corporate job was just never really an option. I also grew up in the 80s and 90s at the dawn of the internet, hacking around on PCs and started a website in the 90s. I just, I knew I needed to be in technology. That was the option, right? I knew it was going to be entrepreneurship plus technology. I went to Stanford in 1990. 99 discovered venture, as they say, it was love at first sight and wanted to find my fastest way into the career. IVP came about because I had a great mentor. That mentor is a guy named Eric Weason.

• 4:31Speaker 00

  And he spoke really highly of a couple of the partners at IVP, Jules Maltz, Eric Liao and Samesh as well, as you referenced. I got to know them on some boards and one day they gave me an offer to join the firm and I knew it was an equal partnership. So I jumped at it and that was the beginning of 2015.

• 4:47Harry Stebbings?

  What a journey it's been since then. Now, I loved your Twitter thread. I read it and I was going, yep, I'm so in agreement. Now, before we dive into the thread itself, I think it's helpful to set some context. What context would you like to set before we dive in?

• 5:02Speaker 00

  Yeah, listen, there's a lot going on with the economy that doesn't have to do with entrepreneurs. And I think it's important to back up and think to yourself, the economy is actually in good shape. Public markets multiples are in a good spot. It's a wonderful time to start a company. But I also think it's important to acknowledge that the craziness that went on in 2020 and 21 isn't coming back. And there's some really profound implications for how you run your company. And that's why I wrote that thread. I wrote that thread to give actionable advice to our entrepreneurs and all the entrepreneurs out there today.

• 5:33Harry Stebbings?

  As I said, I thought it was the most brilliant breakdown. I want to just ask a couple of things before we dive in. You said about not going back to 2021. What does that actually mean? Does that mean 20% discounts, 50% discounts, structured rounds? What does that mean? What do these look like for those companies?

• 5:47Speaker 00

  So I would say discounts are the wrong way of framing it because you're just anchoring on something that was totally irrational in 20 or 21. It's all about the fundamentals. Is this a good business? What's the quality of revenue, the unit economics, the founder quality? And then, yeah, you have to think about what's the exit potential for this business and the probability. And in 21, those fundamentals, for whatever reason, right? Macro, interest rates, whatever it is, I'm not a macroeconomist, people became unmoored from that. Diligence was being done in 24 hours by a lot of firms. That sort of thing, I think, was actually unhealthy for the business and I hope it doesn't come back.

• 6:22Harry Stebbings?

  And my question to you is that everyone says we will see this wave of down rounds. And then I saw this tweet from Alba Wenger at USV and he said he's only seen two down In his career, obviously he's a very gifted investor, that might be part of it. But I was looking at that going, they are so damaging. They are so impactful on company morale. Will we see the down rounds or will we not?

• 6:41Speaker 00

  I think this time we will. Look at what Stripe has done. If you're telling me every company from 2021 is better than Stripe, sure, there'll be zero down rounds. But if that's not the case, there may be some. But Albert, I think, had some great insight and he's a fantastic investor, which is they are complicated. People don't want to do them. It's actually a little bit against the nature or the psychology of a VC. You want clean things that go up into the right incentives aligned. And so fewer down rounds happen than probably should happen because VCs don't like them.

• 7:11Harry Stebbings?

  I totally agree. That's actually a concern that I have, which is VCs with dry paddle will keep on artificially inflating books and stipend them to continue enjoying the marks that they have. On the thread itself, you say about startups raising two years of cash in 21, 22, and needing to raise in 23, 24. Transparently, I have 50 companies and I don't have a single one raising until Q3, 24. Now, that's not me bragging, that's just like them extending runway and making it work until then. Am I wrong here? Because I'm not seeing this need to raise in 23 now.

• 7:44Speaker 00

  First of all, if all startups in the US and Europe and abroad have cash through 25, like your portfolio, God bless, that's fantastic. The data we're seeing coming across our desks, the data we're seeing at IVP suggests otherwise. We're seeing, I would call it a trickle, but like a noticeable uptick from Q4 in deal flow. And we saw two potential down rounds this week. So what I tweeted in my thread, we have the data to back it up. I think it's a question, does it become a flood in the second half of this year? And what happens next year? Fair enough, those are predictions, but we are seeing the market correct in real time and companies begin to come back to market right now.

• 8:22Harry Stebbings?

  Can I ask, what does your data show? You mentioned the data there and you mentioned the two down rounds that you saw this week. What does it show you and what are you seeing from what you see internally?

• 8:30Speaker 00

  That's a great question. So I think you have to cleave startups into two camps. There's the ones that sort of lived in a bubble somehow. They hadn't raised in 20 or 21. Or maybe they're just coming up and raising Series B, let's say, for the first time versus the ones that raised in 20 and 21 at artificially high prices. And there could be some hangover effect. In the public markets, software companies, multiples there have corrected to what we saw in 2016, 17, 18 to normal multiples. So the question is, is that happening in the private markets? And the data we're seeing, the answer is yes. We announced multiple deals last year in 2022 where they were priced at something like 10 to 15 times forward ARR. That's just those specific companies. It depends on all the specifics of a company, of course.

• 9:16Speaker 00

  You know, pricing is an art. But those were like not dissimilar prices. That's about where things were getting priced before COVID. And so for these companies that don't have the hangover from COVID from those valuations, say in 21, things are back to normal. And so then the question is, what happens to that cohort of companies that raised in 20 and 21? And that's the open question, and that's what we need to see. And we're going to find out.

• 9:38Harry Stebbings?

  Can I ask you? I mentioned my book where I have some of these in my portfolio, but we see many companies who raised a lot and have monster valuations, some as high as a thousand X ARR. Well, what happens to them, Tom? Do they grow into it? They have 10 years of runway. A lot don't really have product market fit. What happens to them?

• 9:55Speaker 00

  Okay, so we have a very special perspective. We do Series Bs and Cs at IDP. We invest post-product market fit. When we see that, we invest. Sometimes it's pre-revenue, but we need to see product market fit. And for that class of companies that's sprinting towards something, they generally raise two or three years of cash. They can cut and extend runway, but what happens to them? At some point, you need growth to become a real company and not a zombie. Some of these companies, they're going to cut so much that they sacrifice too much growth. Maybe the product market fit isn't great and they never figure out a way to hit the accelerator again and attract new capital. And they just go zombie mode, which isn't bad, but it becomes a lifestyle business. And maybe they pay their investors back or not.

• 10:39Harry Stebbings?

  You say about paying investors back. I've seen actually on a couple of rounds where investors have actually asked for their money back. Do you think we'll see that in waves?

• 10:47Speaker 00

  Man, that could happen, but if I were Entrepreneur, I'm not sure why I would do that. Maybe there's a good reason. Maybe if you raised a billion dollars and you only need 50 million, you can give some back. But I hope, I certainly hope most investors aren't asking for their money back. It's, hey, listen, it's a contract, right? Fair and square, and you have to live with the consequences.

• 11:05Harry Stebbings?

  You said now is the calm before the storm. What is now the calm before the storm?

• 11:10Speaker 00

  The way I back into the math says that there's a lot of companies that are going to be raising the end of this year and next year. And what's going to happen is there's only so many hours in a day for the investors who do, say, A, B, and C rounds that are going to be following on to these things. If everybody comes to market at once, people are going to have to be selective. They're going to have to triage their time towards whatever they think is the best company. It's just the effect of too many companies, too little time. And so I think unfortunately, some founders might not get the attention, the time that they deserve to look at those rounds or maybe do the hard things like down rounds. And once again, that's why I'm trying to give the advice, don't raise at the last second, get out in front of it.

• 11:49Harry Stebbings?

  I totally agree. And so if we speak about getting out in front of it, quite often they'll go back to their initial investors. And I've got many friends who are partners at A, B, and C firms, and they're underwater with existing portfolio company re-ups, extensions. How does this change reserves and reserve management?

• 12:06Speaker 00

  It isn't a big deal during good times. It's pretty easy because companies can raise capital. And you're really like, how much money can we make on our incremental investment? That's the psychology we've all been in for the last few years. But all of a sudden, it changes during the darker times where it's, if I don't put money in, there's going to be, the company's either going to go out of business or there'll be a pay to play, and I lose basically all of my ownership. Pay to play means if you don't put in money in the round as an investor, your existing investment just gets crushed. It gets diluted massively. And I think the trick is for investors, especially those who didn't live through the dot com bubble or the great financial crisis, when they're putting together these bridge rounds, really just going back to basics and saying, what is this a bridge to? What are the milestones we're going to accomplish?

• 12:49Speaker 00

  Because too often, especially when I was an early stage VC, I saw bridges to nowhere that would give companies a month or two of runway on some unfounded hope that they would sell the company. Within a month or two, a good bridge round's at least six months. So I would ask really hard questions about any bridge round that measured in weeks or a month or two.

• 13:08Harry Stebbings?

  Have you ever had a bridge round work bluntly? Despite my youth and good looks, I've been doing this for eight years. I've never had a bridge round work, still the optimist. But have you ever had one? And actually, do you not now think it's probably a bridge to nowhere 99% of the time?

• 13:23Speaker 00

  In general, they're not necessarily the best use of capital in terms of a bridge round. I think that's what the math would show. Now, in my career, have I seen one work? Yes, at RRE, there was a bridge round we did for what is now a very famous fintech company that got the company to a sale. Ironically, though, in retrospect, that was just a good company and they should have just raised more money and kept going. That company was Venmo. It's probably not about whether it's a bridge round. If it's a good company, give them a lot of capital and if it's not, zero. That's probably the right decision framework.

• 13:56Harry Stebbings?

  No, I totally agree and I like the simplicity bluntly. You mentioned get out ahead of it, the storm hasn't quite hit yet. When does the storm hit?

• 14:03Speaker 00

  Here's how I back into it. I think a lot of firms or a lot of startups are going to be raising later this year. And that usually means like Labor Day and everybody wants to get in front of that. So my guess is July and August, we start seeing a lot more businesses come to market, knowing that other businesses will be out in Labor Day. It's just a guess, but predictions are fun.

• 14:21Harry Stebbings?

  Predictions are always fun. I've always learned that venture investors make the best armchair macroeconomists. And so I like to do predictions. You said this will be worse than the GFC. Why do you think this will be worse?

• 14:31Speaker 00

  Okay, in the lead up to the great financial crisis, mortgages were going bananas, you had LBOs going bananas. Investors and venture weren't to the same degree. You didn't see companies in the public markets in tech or the privates trading at hundreds of times revenue. I think the dot com era was too fresh in people's mind for that to happen. This time it did, so the hangover is going to be worse because you were pre-product and you raised at 300 on a bunch of hype. And now you're at a million ARR, but you had to cut burn, so you're only going to go to two next year. What happens to that company? Is that an up round? Is it even a flat round? Probably more a down round. We already covered that the psychology for a lot of VCs. It's not to do down rounds. And so, man, those are tricky situations.

• 15:14Speaker 00

  And that's where I think a founder needs to be super proactive about figuring out the capital needs for the company and how to adjust that price in a way that's not going to prevent them from raising that next round.

• 15:24Harry Stebbings?

  We're going to get to the survival steps. I had Jason Lamkin on the show not too long ago. And he said, anyone who joined a billion dollar startup as an employee in the last two or three years, I can't remember what his timeframe was, but to say two years, they won't make any money from their equity in 99% of cases. Do you think that's a fair assessment?

• 15:41Speaker 00

  Oh, man, maybe I'm an optimist, but I think it's a lot better than that. Why? The initial equity grants could be underwater, but there's a couple of things going on. One is those preferred rounds, that's a different thing than the 409A price that the options get set at. And I think the 409As may have been high, but not quite as high as some of the preferred rounds that venture firms did. So that's one thing. The other thing is it is in the power of the board and the CEO to figure out how to incentivize people going forward and make sure that employees are incentivized to stay and have upside. And so you can get creative there. That's incumbent upon the companies to make sure their talent's not going to leave because if their equity is totally upside down, the best ones are going to be gone real soon.

• 16:23Harry Stebbings?

  When the storm hits, what do the GPs do? How does this change what investors want in companies? And also, how does it change deployment cadence?

• 16:32Speaker 00

  The deployment cadence is probably the first thing, and that's already changed. I think GPs saw that happening pretty quickly. So 21, there were a bunch of funds that deployed their capital in nine to 12 months. And you say, why is that a bad thing? Why not just keep doing that? Because when you raise a fund, you generally tell your LPs, hey, it's going to take us two or three years to deploy the capital before we go raise our next fund. And so that LP needs to allocate a certain amount of funds. Let's say there are an investor in your fund and five million in, and they think they're going to put another five million in three years from now. But nine months later, you said, hey, I need another five million. That depletes the books of the LP pretty quickly. Now, LPs start pushing back and they say, I'm not going to commit if you come back in nine months. That's going to change deployment cycles.

• 17:15Speaker 00

  And VCs know that's already happening in the LP's minds. So they're now saying, okay. I have to hit the brakes and I'm gonna go back to that three-year deployment cycle. That's dividing the dry powder route there by a third.

• 17:26Harry Stebbings?

  Do you think the LPs do push back when they do come back to market earlier and say, actually, we didn't budget for this and we can't make that commitment happen?

• 17:34Speaker 00

  Unfortunately, I think that is gonna be the comeuppance that a bunch of funds suffer. The LPs are gonna say no. At IVP, we've been around for 43 years. We are very careful about our deployment. We really didn't go all that fast in 21 and we didn't slow down that much in 22. This is like something we've been harping on as a firm just tirelessly. But for a while, it didn't feel like that was necessarily the winning strategy when everybody was trying to be an index fund, putting money to work as quickly as possible. There were times when we were like, man, are we doing the wrong thing by just being super selective and not trying to index the world?

• 18:07Harry Stebbings?

  And for me, this is the first vintage where we'll really see temporal diversification be a true benefit. Over the last 10 to 12 years, there was no such thing. It was the same cycle. So I think this is where you actually see it and I agree with you. I was incredibly slow to the point where some LPs were saying, why aren't you doing more? Which I'm now pleased about. But a question to you is actually on books and value of books. I'm an LP in funds. They're not marking their books down very much and very reactively, Tom. Do you think managers are marking their books down at all or aggressively enough for the LP class?

• 18:38Speaker 00

  Man, I can't speak to what most venture firms are doing, but I think everybody should have done some sort of markdown in the past 12 months for their venture investments. It's absolutely gravity and gravity may have not been effective in 21, but it's certainly back and it's dragging things down. To what degree? That's gonna depend because you can't look at every private startup and say, how much would it be worth if it were public? Because by definition, the public markets wouldn't accept these things. That's why they're still young in private. So it's definitely an art, but if I were an LP in a venture fund and things were marked up or the same today versus 12 months ago, I would ask some good questions.

• 19:16Harry Stebbings?

  Can I paint a potentially more positive picture? Which is there are a huge amount of European family offices with no exposure to venture. I've spoken to A-plus endowments in this year who have sub 5% exposure to venture and want more. We have the UAE with more money than ever, looking to deploy more and more than ever. I think the line is a trillion dollar project. I'm sure there is a venture fund alone in financing innovation there. Is there not a new wave of LP that actually is born in these generations? Or this kind of economic cycle that we can be hopeful of raising from?

• 19:49Speaker 00

  You make some really good points and I would say it depends on your timeframe. If you zoom out, we're in the best industry on earth, innovation, technology. If you ask me, is venture as an asset class and technology as an asset class? Are they bigger or smaller in 10 years? The answer is obviously bigger. How about 20 years, bigger, 30 years, bigger? I'm an optimist on that. Now, if we were to take a bet, Harry, are there more LP commitments in 2023 and 24? Or 21 and 20 combined? I guarantee you the 20 and 21 number was going to be bigger than the 23 and 24 number. If you really zoom into that small time scale, but over a longer time scale.

• 20:27Harry Stebbings?

  I'm not taking that. That's about that. You're right, this is clear, totally. On a longer time scale.

• 20:32Speaker 00

  Yeah, on a longer time scale, things are rosy, ventures amazing, startups are great. But for the next year or two, there's this hangover, but we'll recover from it, things will be fine.

• 20:42Harry Stebbings?

  Can I ask, a lot of people say there are so many funds though, with so much dry powder. A lot of the big funds raised last year, we saw their multi-billion dollar funds. And for me, a pre-seed and seed, I don't have data that I'm drawing analysis from, but I'm just drawing analysis from 15 companies that I made a week. Prices at the early stage are going nowhere. They are staying strong. And a lot of people are saying the multi-stage funds have so much dollars and dry powder that actually maybe early stage will be immune from this. Do you think that's possible?

• 21:10Speaker 00

  I think it's playing out exactly as the past couple crises and it was predictable. What happens is, here's the waterfall. Okay, public markets multiples correct. Let's say you're like a mutual fund and you do pre-IPO rounds and companies aren't trading at 30 times revenue anymore, they're trading at seven times. And some company is trying to sell you shares at 30 times. You're going to say, no way, I can't lose money on my investment. So they're the first to react, those folks who do those types of rounds. And then the series C investors, they say, I know the series. Investors, those mutual funds aren't going to pay up. So I have to get a markup, so I'm going to price down. That takes a few months. And then the Series B investors, six months later, say the same thing. And then here we are, a year and a half, two years after the correction, and the seed investors get the memo. It takes time.

• 21:55Speaker 00

  It's what happened after the dot com bubble. It happened after the financial crisis. It took a little time. I think it is beginning to happen now. Are prices going to go in seed and Series A back to 2011 levels where great companies were done at one and a half pre? No, not happening.

• 22:09Harry Stebbings?

  Sadly not. The truth is now everyone is searching for the magic L being liquidity. Do you think we'll see a massive rise in secondary selling and buying?

• 22:19Speaker 00

  I think secondary buying, though, tends to be hottest, probably at the worst times. That's when things are overpriced and crypto's high and secondaries are high and all assets are high. On the other hand, liquidity is a good thing and it's a good force. And the idea of secondary was kind of taboo in venture not that long ago. And I think it's been a good thing. I don't think we're rolling back on that. It's a force that's here to stay. How long does it take for secondary volumes to hit what they were a year or two ago? I don't know. But once again, in the longer run, are secondaries going to get bigger? Absolutely.

• 22:52Harry Stebbings?

  I didn't take cash off the table in some winners where I probably should have done over the last years. And that was a big mistake, looking back. How do you determine when's the right time to take some off the table? I find, you know, everyone's like, lean into your winners. Bullshit. The best strategically lean out in stages along the way. How do you determine when and how much to?

• 23:12Speaker 00

  Oh, man, this is probably the hardest part of venture capital is deciding when to sell. And I'll be honest, I think it's been a learning experience for me, for the whole industry. The key is you don't have to get it perfect. And so that means not trying to time things all at once and doing it in stages and de-risking over time. This keeps you from making some really big mistakes. But I do think if there's going to be a couple of things you look at. One is going to be the specifics, the fundamentals of the company. How much do you believe in it? How is it valued? How are they doing? And then the second thing is keeping in mind macro. If you really think company's overvalued and the market's overvalued, then you're going to have Have a bias to action and a bias to sell. How do I feel right now? It feels like things are pretty fairly valued in the public markets.

• 23:57Speaker 00

  So I wouldn't be in a rush to sell everything that's not bolted down. We did feel a little bit like that in 21. And so we took a disproportionate amount of liquidity in 21. But now it really depends on your conviction in the individual name.

• 24:10Harry Stebbings?

  We're going to switch sides now and do the survival guide. This is for founders who are thinking about navigating these tricky waters. You said raise now or sooner than you expected. What I was thinking to that is, okay, if I'm a founder, I have 18 months of runway. If I have nine months of runway, do I raise now? What is that point where it's now you should raise now versus no? Build the fundamentals.

• 24:30Speaker 00

  It's a good question. My rule of thumb, you should start raising by 12 months. If you have 12 months of capital left, you're in the red zone. Does that mean you need to hit go and speak to every venture firm with exactly 365 days to go? No, but it means your strategy is in place. You should have the capital in the bank with about six at worst, at worst, with six or seven months of runway left. So don't start raising with six or seven, be done by then.

• 24:56Harry Stebbings?

  I get nervous when they're at that state, I have to say. But yes, a lot of founders worry about going out and burning bridges, burning relationships by going out maybe before they quite have hit the numbers that they said they would. And then it's difficult to come back. I do always say that to founders. It's really hard to go to Tom in January and then come back in March or May or June, whenever it is. That second, you know, it's a smelly fish. Brilliant analogy. Do you agree with that? It's really difficult to come back.

• 25:21Speaker 00

  You're absolutely right. There are downsides to going out to market and not raising. But you have to ask yourself two questions. One, which is worse, a slight stigma from not raising the first time? Or going out late and not raising and have no backup plan? Because in reality, I think that's a little bit of the dilemma. You have to choose one path. And the second thing though, why go back to the same investors? Segment your investor list that you're going to canvas and go to one set of investors that first time where you're testing the market. But don't go to everybody and have a second set of investors if that fails. So tier them, don't contact them all at once, go in waves.

• 25:58Harry Stebbings?

  I always say the best fundraisers are actually Comedians and what I mean by that is comedians test their audiences brilliantly when they're in the early days and they see what works, what resonate, what doesn't. And then they continuously adapt and then they hit the main stage and they've done it 10 times already. So they know the jokes that work and those that don't. I find it's very aligned to fundraising in that way. I do want to ask, you said one of your tweets was cut and cut some more, but continue to fund core R and D. So again, I'm a founder asking you for advice. I'm nine months of runway and I have the chance to cut and exceed that. How much runway should I be cutting to?

• 26:33Speaker 00

  What are you cutting to? You have to define the objectives. It shouldn't just be based on time. It should be based on achieving certain milestones. Now, time certainly gives you the opportunity to hit more milestone and maybe it's growing into your valuation. But I think that's where you have to sit down with your management team and the board and lay out a really objective view of the world and what milestones you're going to hit.

• 26:54Harry Stebbings?

  I totally agree. Can I ask, the first thing often to go in the cuts is marketing spend, customer acquisition, kind of growth funnels. How do we see marketing spans hit in this leaning of company budgets and this reduction of spend?

• 27:08Speaker 00

  I had a board meeting this morning with a company called Attentive and sat down with the CEO, Brian Long, who's just a fantastic founder. We talked about this very topic. How do you think about marketing during a downturn? And how do you lean in? And one of the tweets I had was about going on offense. We'll think about that specifically related to marketing spend. The truth is the marketing spend that you have now is so much more powerful than the marketing spend you had, say, during 21. Why? Your competition has pulled back. They're not bidding on keywords. So the CAC is down. Competitors may have entirely pulled from the market. So you may not need the same level of dollars to achieve the same objective. And then the other question you have to ask yourself is, okay, if we were going to grow 70% and we pull some marketing back and save a bunch of burn.

• 27:52Speaker 00

  And now we're only going to grow 45 or 50%, what difference does it make? Is there a really strategic reason that growing 70% is so much better? Is it actually a land grab? Can you quantify that you won't be able to get those customers back in a year or two if you decide to hit the? Accelerator after raising your next round.

• 28:12Harry Stebbings?

  In terms of going on the offense, I find a lot of founders still on the offense with regards to valuation. And you said focus on survival, not on valuation. What's your advice to startups raising today? Again, I'm assuming this very hypothetical role of being in your portfolio. How do you advise me? Survival, not on valuation sensitivity? What's the advice?

• 28:31Speaker 00

  I think, listen, as a CEO, your number one job for a portfolio company is not running out of cash. The best way, if you're going to go out and raise or you need more capital, is to get a bunch of term sheets, people to put money in. Don't anchor those potential investors. It needs to be at the last round. It needs to be at X or Y. Go out and get term sheets, bid them against each other. If you only have one bid as a founder, only one term sheet, you've lost leverage. To the extent you can get multiple term sheets, then you have leverage and you control your own destiny.

• 29:00Harry Stebbings?

  How do you advise founders when they say, I love that, but I'm worried about shopping it? And I'm constantly nervous that the VC will feel like I've shopped their term sheet. How do they get multiple without the feeling of shopping a term sheet?

• 29:11Speaker 00

  That's a really perceptive question, and I think that comes down to the relationship. Don't get to know the potential VCs two weeks before you raise. Spend time with them, get chemistry, make sure you want to work with them, develop trust. And then if you go to those venture investors and say, thank you for your offer. I'm running a process and I'm collecting term sheets and they're all due by Friday. Appreciate you putting this on Tuesday, but I need to maximize the value for my company for every shareholder. And thus we're going to see how many offers we get because that's my job as CEO. I think the VCs will respect that and trust you and realize you're doing the best thing for your company.

• 29:48Harry Stebbings?

  I always say to founders, like, VCs need a reason to move. Inherently, I find we're quite an apathetic class, not over the last years, clearly, but generally. And so I say, put a deadline in place and then make sure that it's not too soon where you force them to a no. But it gives them enough time to do the work. Generally, 10 days out allows for people who would move to move. And those that wouldn't shit or get off the can, so to speak, in the UK. Would you agree with that, instilling a deadline to enforce a sense of urgency? And would you add anything?

• 30:17Speaker 00

  A hundred percent. 10 days is a good deadline. Have a deadline. The only other thing I'd add, though, is if you really want people to have maximum conviction, 10 days is like the detailed diligence. But if they understand the business and they have a relationship with you, have that go first. That can take weeks or months. Get that done. And then, yeah, you've got a week or 10 days to review the number, call any customers you haven't. But you're right, a deadline is super effective. Human psychology.

• 30:43Harry Stebbings?

  A fascinating one that you did tweet was, "Bring on operators with experience in C-level or even a professional CEO." The trouble is, they're expensive. So number one, why would they join a company with potential runway challenges ahead and in a difficult spot? Why would great talent at that level join a company that is struggling?

• 31:03Speaker 00

  It's incumbent upon the founders to convince great talent to join any company, but a good executive pays for themselves. If you're hiring a great head of marketing, a VP marketing, and they cost $300,000 or $400,000, and you give them a $10 or $20 million budget or a $5 million budget over one or multiple years, think about that. Somebody who's new and doesn't really know what the efficient ad channels are for your products is probably going to waste a lot of money before they get it right. Somebody who's experienced may go in and hit the efficient frontier on day one or day two. So good execs pay for themselves, but you probably can't have it all. You can't have that amazing exec in every position. And so as a founder, I think having some understanding of your strengths and weaknesses and of yourself is key. And you want to put those

• 31:47Speaker 00

  experienced operators in those roles that most complement your weaknesses as a founder. And then you can hire more junior people for the areas where you're strong.

• 31:56Harry Stebbings?

  Do you worry about ramp time? I hear you and I agree, but we both know that search can take three months and then ramp time can take three months minimum, six months often really, before you get like full and optimal performance. That's nine months. We're back to raising again if we've done the 18-month extension.

• 32:12Speaker 00

  Yeah, there's not much way around that. These processes, bringing in great talent, it takes a long time. But that's why I think if you're an entrepreneur, you want a good board, because you know what good board members say, Harry? They're going to tell you, "Hey, I know your head of sales is fine. They haven't missed a quarter yet, and that's why now is the time to go find one who's more experienced." You have to hire a head of the need, and it's tough, but you gotta hire a head of people messing up.

• 32:37Harry Stebbings?

  One that you said, though, was, and it's related, but it's you need econ over growth. Again, I'm relating actually to Jason Lamkin, but he said, "Not today. We want both." Do you think one is enough? And actually, for founders listening, if they go, okay, unit econ and then growth really takes a hit and it goes from good to pretty average, does that excite investors though?

• 32:58Speaker 00

  You're right, you do need both, but it's a question of timeframe and trade offs because they're not mutually exclusive. As I was saying before, you can have a debate, should we grow 70% or 50%? If it's 0%, that's pretty austere. That may really hurt your chance of raising capital. But it might be the right answer because if your product is broken and you're just pushing a rock up a hill because customers don't like it, maybe you should grow 0%, refactor the product and be out of the market for a couple of months and then go back to market and then hit the accelerator. I think you really have to look at the specifics. But the thing is, it's not a permanent decision. You could always grow again and show investors, hey, listen, our blended growth rate was only 25% over the last six months, but the first three months, we refactored our product.

• 33:41Speaker 00

  And then the second set of three months, we were growing super fast. We were growing 50 or 100%. People care about the most recent data points, not the oldest data points. And you got to show them that.

• 33:51Harry Stebbings?

  I totally agree. I think it was Mattel Collins said, you have to go out and fundraise when you're most confident in your business. And I know that's a luxury because you can't always time it. But I thought it was a good piece of advice that if you feel confident now, go now. What do you say about companies where their profile is often in marketplaces, where you have to project your mindset forward to a different set of unit economics? This is the case for DoorDash, Instacart, I'm sure Masterclass in your portfolio. I'm making assumptions, but I'm sure where great companies, but you have to project out to see the beauty of their unit econ. How do you advise them in this different environment?

• 34:24Speaker 00

  You're right, those companies have a greater challenge in terms of showing their unit economics. And I think that's where though, there's a few things you can do. I think number one, you have to show just how amazing the addressable market size is. It's a risk, but it's a risk worth taking because if you win the market, it's just worth so much money. The second thing is you can show the trend in unit economics over time, which is they were really bad before, they're pretty bad now, and tomorrow they're going to be pretty good. And investors can infer what's happening. And then finally, you need to give them reasons to believe that the Unit economics are going to get better over time, like really concrete data examples and not just hopes and prayers that hey, if we buy more of this widget or hire more people, the price maybe goes down.

• 35:08Speaker 00

  Uber did this well, for instance, by showing, yeah, hey, we're bleeding money left and right. But if you look at our oldest cities, these dense cities like New York, the unit economics are actually fantastic.

• 35:19Harry Stebbings?

  And speaking of kind of unit economics being fantastic in those cities, I'm intrigued. You said about going on offense and we spoke about it in relation to marketing budgets. How do founders know when to go on offense? They've been through this cutting spree. When do they go on offense? And how do they strategically think about that with their boards as well?

• 35:35Speaker 00

  I think it's Maslow's hierarchy of needs. If you have enough cash that you're not worried about survival, then you can think about how to go on offense. So if you've cut to get efficient, you've raised more money, you're not worried about running out of money, then you can think about all these tactics. There's a lot of them, but I think one of them is hiring great people. You may be able to hire people you couldn't hire before, that engineer who probably would have taken that job at Google. Now Google has a hiring freeze and so that person's in the market. And so your product team can go on offense by hiring better people. Your marketing team can go and spend in channels that you couldn't pay for before because the tax were too high. And now you can broaden your reach. So I think you can examine every single part of your business for offense.

• 36:18Harry Stebbings?

  One thing that I'm worried about, actually, you mentioned like, you know, people choosing you over say, Google because they're not hiring. One thing that I'm worried about is talent retention within these large incumbents and a flight to safety. And what I mean by that is people who are there who would have joined startups or who would have started companies now are going, oh, I survived the layoff. I've got a child and a mortgage. Oh, I'm going to stay at Google now. Does that worry you in the same way it worries me?

• 36:41Speaker 00

  I think you're absolutely right. People are going to become more conservative when times are tough. But on the other hand, the type of talent that is too scared to leave a big company might not be a good fit for a startup. And the type of talent that flees a startup as soon as you hit a rough patch, either in the company or the economy, they might not be the right long-term fit for your startup anyhow. And so I think you've just got to be confident as a founder and not stress about these things too much.

• 37:06Harry Stebbings?

  I'm always hiring. Investors for our funds. And everyone always tells me in the last few months, oh, Harry, there's going to be a lot of great talent available. All of their carries just been completely cut in half. I'm not seeing that. They're quite happy with their large salaries. They're quite comfortable in these large funds. Do you think there will be this loosening of talent in venture with the carry like being smashed as it will and has been?

• 37:29Speaker 00

  I think you nailed it on the head, Harry. There's countervailing forces. One is people are less tied to their current jobs in venture. But on the other hand, getting a seed venture is super hard and it just got harder. So maybe you want to hang on to it. I think, Ned, it means that people leave venture firms less often.

• 37:45Harry Stebbings?

  The final step that you said was be decisive. Half measures rarely succeed. What's a half measure, Tom? And what does that look like?

• 37:52Speaker 00

  A half measure is usually something a management team lands on because it's easy. If a decision is easy, it's probably a half measure. If it's hard, if it's really damn hard, if it's controversial, you're probably doing enough of it. The other thing, a half measure often doesn't have an end result or a goal in mind. If you have a really specific goal and implementing that goal is difficult, that's probably doing your job. That's probably what's necessary.

• 38:21Harry Stebbings?

  I want to move into a quick fire, my friend. So I say a short statement, you give me your immediate thoughts. Does that sound okay?

• 38:27Speaker 00

  Absolutely.

• 38:28Harry Stebbings?

  So what did you believe last year that you no longer believe?

• 38:31Speaker 00

  Last year, I have to say, there was this meme that founders didn't want investors on their board, that governance wasn't important and that founders just wanted cheap, easy capital. And I'm not sure I ever fully believed it, but I was damn scared that could be the future of venture. And that idea is dead. It ain't coming back.

• 38:49Harry Stebbings?

  What makes you say that? Because I think founders still don't like board managers, don't like boards and would rather someone give them cash at a high price and sod off.

• 38:58Speaker 00

  That can work when the economy is good, but when you need to raise more money, a bridge round or just building a company is hard and you need help interviewing and you need advice, you want that person who invested in your company to return your damn text message, pick up the phone at 11pm, talk to you on the weekend, and that's what a good board member does.

• 39:15Harry Stebbings?

  You're right. I think also what I've seen actually. With a couple of companies that raised from some firms that will remain nameless is their champion churned. And these firms were not really designed for venture. And so then they're real orphans, actually, and that's uncomfortable. So I totally get that. What would you most like to change about the world of venture, Tom?

• 39:32Speaker 00

  Venture is too hierarchical. We promote people too slowly. But a lot of the talent and the ideas come from people who are younger in their careers. Venture firms need to promote sooner, give mid-level junior people more credit. It'll open up opportunities for more people to come in into the industry. And it'll promote diversity across the industry.

• 39:53Harry Stebbings?

  Do you think people will open up carry pools for that?

• 39:55Speaker 00

  I certainly hope so. I joined IVP because it's an equal partnership and we can be very generous with the carry here. And I certainly hope more firms move in that direction.

• 40:04Harry Stebbings?

  What's the trend most investors are not seeing or they're ignoring?

• 40:08Speaker 00

  The world isn't going back to 2021. And if you're a founder or an investor and you're waiting to fundraise because you think multiples are going back, you're just wrong. You need to get with the program. The best CEOs I work with got the memo very quickly and changed their minds with new data.

• 40:24Harry Stebbings?

  What's the hardest element of your role with IVP today?

• 40:27Speaker 00

  Time management. It's easy to answer that because it's so damn hard. There's so much you need to do as a VC who's helping run a firm and there's only so many hours in the day.

• 40:35Harry Stebbings?

  Spend time with your winners there who return the fund. Do you agree?

• 40:39Speaker 00

  Yes, it's also oftentimes harder because they need less help.

• 40:43Harry Stebbings?

  What's the most crazy thing we saw happen in 2020 to 2022?

• 40:47Speaker 00

  Oh, that's a fun question. I'm going to go ahead with SPACs there. You had pre-revenue companies that had bad business plans going public when they had no business going public. How did we think this would end? Of course, they were going to miss their projections. This is totally bananas.

• 41:01Harry Stebbings?

  What would you say your biggest investment mistake of the last 18 months was?

• 41:04Speaker 00

  The biggest mistakes in investing are not doing the things that make you a lot of money because the opportunity cost there so far outweighs anything else. I feel like my biggest mistake in the last couple of years was not investing in an entrepreneur named George Fraser, who's the CEO and co-founder of a company called Five Tran. I do a lot of infrastructure investing and I think he just created a generational company. I looked at it a couple of times. And didn't get there at the end and I missed out on hundreds of millions a game.

• 41:31Harry Stebbings?

  As we said at the beginning, you gotta miss some to win some. Chin up. The penultimate one, what's the best investment advice you've received?

• 41:37Speaker 00

  I had a mentor named Eric Wiesen when I was at RRE. He's now at Bullpen Capital. He said a couple of things to me. One is have a bias to action as a VC and two, trust your conviction. And so it's always scary to make a new investment, but if you have conviction and you're a selective sort of person, just do it. Don't look back.

• 41:55Harry Stebbings?

  And final one, we're finishing on the air of positivity. What are you most hopeful for when you look out the next 24 months?

• 42:01Speaker 00

  Man, the answer for me is the same every 24 months, which is finding the great founders. It's finding folks like Brian Armstrong from Coinbase or Mitchell Arman and Dave from HashiCorp. These people who are changing the world and just have this incredible energy and ability to execute. If I find more people like that, our returns will be better, but I'm also just a happier person.

• 42:23Harry Stebbings?

  Tom, I can't thank you enough for this. I've absolutely loved it. So thank you so much for joining me today.

• 42:28Speaker 00

  Thanks, Harry.

• 42:31Harry Stebbings?

  I absolutely love that with Tom. Such clear and concise thinking there. And so huge thanks to him for being so brilliant. If you want to see more from us, of course you can on YouTube by searching for 20VC or you can head over to 20vc.com. But before we leave you today, SecureFrame is the leading all-in-one platform for automated security and privacy compliance. SecureFrame simplifies and streamlines the process of getting and staying compliant to the most rigorous global privacy and security standards like SOC 2, ISO 2701, HIPAA, GDPR and others. SecureFrame's industry-leading compliance automation platform, paired with their in-house compliance experts and former auditors, helps you get audit-ready in weeks, not months, so you can close more deals faster.

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• 45:22Harry Stebbings?

  As always, I so appreciate all your support and we have an incredible 20 growth episode with former head of growth at Stitchface and now partner at Greylock, Mike Duboe.