Is It the Government's Job to Fund VCs?

Earlier this week, OG Canadian investor Matt Roberts wrote a lengthy post on the history of Canadian pension funds and their declining support of Canadian VCs, titled “Who Killed Canadian Venture?” The epic post clocks in at nearly 8,000 words and dives into three main topics:

• A history of the Canadian Pension Plan (Canada’s equivalent of the U.S. Social Security system)

• The evolving investment strategies of CPP and other major Canadian pension funds, like the Ontario Teachers Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS)

• The impact of changes in government investment regulations on Canada’s VC ecosystem — specifically, the elimination of mandates that pension funds invest a minimum amount of their capital into Canadian companies

Matt’s post is incredibly well researched and touches on some of the key debates currently surrounding public pension funds, notably the tension between maximizing fund performance vs. leveraging those funds to drive domestic economic development. If you’re in any way, shape or form interested in Canadian venture capital or private equity, I recommend you give it a read.

All of that said, I must admit that I disagree with Matt on one of the underlying premises of his post: that it is the role and responsibility of public pension funds to subsidize the Canadian venture capital ecosystem.

Some Things I Think

I believe that, all things equal, government-affiliated investors should default to investing domestically.

Of course, this shouldn’t be contentious. (And it isn’t.) The Chief Investment Officer of the Healthcare of Ontario Pension Plan (HOOPP), Michael Wissell, said as much in a statement to Matt,

“…all else being equal, we prefer to invest in Canada when the risk and reward are appropriate.”

Where I diverge with Matt is on what the appropriate expectation should be when investment opportunities are not equal. Should a public pension fund be required to invest in a domestic company — say, a VC fund — when that investment is objectively worse than a comparable investment in an international company?

I don’t believe so.

While I believe wholeheartedly that government can — and should — play a role in encouraging new business creation across all industries (more on that later), I disagree with the notion that a public pension fund should be forced to make investments for reasons other than driving financial returns.

In that respect, I share the perspective of Jim Leech, the former CEO of Ontario Teachers’ Pension Plan,

“You’ve got to create the opportunities. It isn’t forcing or enticing people into Canadian investments, it’s providing sufficient good investments in Canada.”

Broadly speaking, pension funds have a singular goal: to maximize the performance of the fund for the benefit of their pensioners. John Ruffolo, who founded pension-backed OMERS Ventures in 2011 and is now the Founder and Managing Partner of PE fund Maverix, recently echoed this sentiment,

“I’m not in favour of mandating pension allocations,” John shared with Betakit this week, “…the world-renowned success of Canada’s pension funds is the singular focus of their mandates: to get maximum returns on their retirees’ money.”

Demanding that a pension fund do anything other than maximize performance is akin to imposing a tax on the pensions of each-and-every person who stands to benefit from the fund. Nobody would think it reasonable to force a 5th grade teacher from Mississauga to pay a tax to support her local VC. Why is it any more acceptable to force the Ontario Teachers’ Pension Plan to do so?

Adapt, Evolve, Compete or Die

American hedge fun manager Paul Tudor Jones famously used this phrase to describe the need for traders to constantly evolve as markets change, and it very much applies to venture capital funds. Our industry is, by definition, intensely competitive. We have to compete with other investors for the privilege of investing in the most ambitious startups we meet and we have to compete with other asset classes to raise investment dollars from potential LPs.

For VCs in Canada, that level of competition has increased significantly in recent years as Canada’s tech ecosystem has continued to reach new heights. Canada’s tech ecosystem today is amongst the best in the world and Canadian startups are second-to-none. As a result, the amount of venture capital money flowing into Canada from around the world — and from Silicon Valley in particular — is greater than it’s ever been.

Sauron’s eye is turning north…

We can choose to look at this development in one of two ways:

1. It’s a good thing, because ambitious Canadian founders are attracting the best investors from all over the world

2. It’s a bad thing, because ownership of Canada’s fastest-growing companies (and the subsequent returns generated by those investors) is leaving the country

While there are valid economic considerations for (2), as a former founder, I very much align with the first perspective on this and consider it to be a hugely positive shift for Canada’s tech ecosystem. More capital — and more high-value capital — is flowing into Canadian startups, whose founders no longer need to restrict their search for investment to funds located above the 49th parallel.

Of course, that makes my job immensely more difficult than if the most competitive VC funds in the world politely left their ambitions at the border. But that’s the nature of competition.

These days, Canadian founders are rightly looking me dead in the eye and asking, “why should I take your investment instead of one from XYZ Fund from San Francisco?” And potential LPs are looking at me dead in the eye and asking, “why should I invest in your fund instead of XYZ Fund in San Francisco?” And that’s happening to investors across the country.

And across the country, investors are adapting, evolving and competing. Where I’m based in Vancouver, Version One has established itself as one of the best micro funds in North America, investing in mission-driven founders in both Canada and the US. Active Impact Investments, which recently launched its third fund, is quickly becoming one of the world’s premier early-stage climate tech funds. And Evok Innovations, a growth stage clean tech fund, is leading investments in carbon, clean energy and minerals companies around the world.

But it’s a long, hard road to get there. And that’s where government can help.

Calling in the Reinforcements

Here are some of the ways that governments can support the development and maturation of their domestic venture capital industry without forcing that responsibility onto adjacent stakeholders:

1. Lower Barriers to Investing in VC

Governments can make it easier for individual investors in the private sector to opt in to supporting venture capital funds. Many countries (including Canada) impose restrictions around who can invest in venture capital funds, referred to as accredited investor requirements. Reducing and removing these barriers can unlock new sources of capital for venture capital firms and, as a result, startups.

2. Make it Easier to Create New VCs

Governments can support programs and take other actions that make it easier for new and diverse individuals to launch new venture funds. I’ve previously shared some ways that governments and industry groups can support the creation of new VC funds in this blog post.

3. Create Dedicated Government Fund-of-Funds

To the extent that governments want to subsidize venture capital funds through direct investment, they should create and maintain dedicated allocations of capital to do this. In Canada, many individual provinces have taken this approach and can act as anchor investors in new VC funds.

4. Entice the Private Sector to Invest in VC

Finally, governments can establish programs to entice the private sector to invest in domestic VC funds. In many jurisdictions, tax breaks are used by governments to encourage individual investors to invest in tech startups and other small businesses (e.g. QSBS in California, EBC in British Columbia and SEIS in the UK). Similar programs could be established to encourage LP investments into new and emerging funds.

At the end of the day, there are strong economic arguments for local governments to help foster the creation of new venture funds and the development of a healthy domestic venture industry. But they shouldn’t sacrifice the competitiveness of adjacent stakeholders — such as startups and public pension funds — in order to do this.

How to Get the Best Out of Your Investors

The vast majority of the content that has been written about founder-investor relations is about fundraising. That makes sense considering how important the outcome of a fundraising process can be to a startup. But if you think about it, the fundraising dance represents only a small portion of the relationship between a founder and an investor — one that can last 10 years or more. Just like any long-term relationship, you need to put in effort to stay aligned.

Here are 5 things every founder should do to more effectively manage investor relations in order to get the best out of your investors:

1. Send Regular Investor Updates

When I was a founder, I wrote weekly investor updates. Every Sunday night, I dutifully spent 1-2 hours in front of my computer writing them.

And you know what? I hated every minute of it. But it was one of the most important, impactful things I did as a founder.

Consistency breeds trust. And trust is one of the most important things a founder can develop with their investors. Moreover, sending regular investor updates ensures that all of your investors have context into the business, which places them in a much stronger position to help when you need it.

2. Hold Quarterly Check-in Calls

In addition to sending regular updates, schedule a check-in call with each of your investors every quarter. Not just the board members. Not just the VCs. All of your investors.

Many founders deprioritize communicating with smaller investors — particularly angel investors and early-stage VCs — as the business grows. This is a huge missed opportunity. On one hand, you only have so many hours in the day. On the other hand, your earliest investors are the individuals and firms who believed in you from the start. They tend to have the strongest emotional connection to your success and are generally the closest aligned to your goals as a founder. They might not have the largest financial stake in the company, but they’re often the ones most willing to roll up their sleeves when things get tough.

The best founders I know make a point of checking in with all of their investors on a quarterly basis. Part of this is customer success 101 — you want to make sure that your investors ❤️ still you — but it also helps to foster an unfair advantage in your corner. By staying top-of-mind with all of your investors, you increase the likelihood that they’ll opt in to helping you when you need it (whether that’s for introductions, feedback or more money).

3. Be Intentional with All Investor Communications

I can’t tell you how often I get a DocuSign link asking for a signature related to a company I’m an investor in without any context or advanced notice.

A couple of points here:

1. The first time I hear about a legal document shouldn’t be from your lawyer (unless I’m getting sued).

2. The first time I hear about a legal document shouldn’t be the moment you need a signature.

I received the above DocuSign link from the law firm of a startup that I’m an angel investor in, having not heard anything from the founder for more than 6 months. This kicked off a week-long email thread as I tried to come up to speed on the purpose of the legal document, its background context and the implications for me as an investor. The document ended up being completely innocuous, but the unnecessary back-and-forth wasted my time (and that of other investors), plus added weeks to the process.

It also put a spotlight on the fact that none of us had heard from the founder in months.

In the course of your founder journey, there will be countless legal agreements that you need to execute, many of which require investor signatures. Founders often spend so much time working on these documents with their counsel and board that they forget that every other investor needs time to review and digest the documents. If you don’t give everyone a heads-up, you’re likely adding 2-3 weeks to the process (plus making your smaller investors feel unvalued). In contrast, if you send all of your investors a quick email a couple of weeks in advance, you can manage any questions while the finishing touches are being put on the documents and have everyone lined up and ready to sign.

Imagine if, instead of receiving the DocuSign link above as my first touch point, I received this email from the founder:

Dear Chris,

I hope you’re doing well. Just giving you a heads-up that we’re working on X (which is going to require your signature). Here are the implications of X on you as an investor:

…

Feel free to reach out if you have any questions. You can expect to receive a DocuSign from Y in about a week.

(This took me 45-seconds to write…so there’s legitimately no excuse for not doing this.)

4. Don’t Outsource Your Investor Relations

Another common mistake I see founders make is trying to “outsource” investor relations to someone else in the organization (typically a chief of staff or business development role). Similar to (2), I understand the desire to do this — managing smaller investors can seem so far down the list of priorities as the company grows — but it’s an optimization that is rarely worth it.

Given that the CEO is the person responsible for all fundraising, each-and-every investor on your cap table ultimately made a decision to invest in you. Not your company. Not your product. You. Which means that once in a blue moon, that person or firm will want to hear from the CEO. And they deserve to. Notwithstanding particularly needy investors (and let’s be clear, those exist), you should continue to personally field emails and calls from every investor on your cap table — regardless of size — until the finish line.

The big picture cost is minimal — maybe a half-hour every six months. And the upside can be significant. There’s usually a reason beyond money why each investor is on your cap table. Remind yourself of that fact and you can often find the smallest of investors will continue to deliver outsized value for you and your company.

5. Assume Your Investors Talk to Each Other

Another mistake I see many founders make — particularly first-time founders — is that they presume that their investors don’t talk to one-another. While this is typically a reasonable assumption to make when it comes to angel investors (especially if they have no prior relationship), it’s hardly the case with VCs or board members.

By the time the ink is dry on your cap table, you should assume that most of your investors have spoken to each other.

This is not to say that your investors are plotting against you behind your back, but it’s important for you to keep in mind that back-channeling is happening regularly. Investors will often connect after board meetings to debrief on the proceedings or to get another perspective on significant changes in the business. They’ll also regularly speak on topics related to fundraising, investing and potential exits.

More often than not, these conversations are innocuous and beneficial to the business (in my experience, the most common topic of conversation between co-investors is how they can work together to support the startup). But keep in mind that these touch points exist, especially when managing sensitive communications.

Stop Trying to Replicate Silicon Valley

A few weeks ago, I participated in a panel titled, “Building Realistic Ecosystem Dreams”. The goal of the session — part of a day-long conference focused on Alberta’s tech ecosystem — was to discuss and debate what a realistic future for the local tech ecosystem could be and how best to support it’s growth.

It was a fantastic conversation that covered a wide variety of topics. Of course, it was only a matter of time before someone asked the well-meaning but inevitable question,

“How can we make our tech ecosystem more like Silicon Valley?”

I’ve had the privilege of working with dozens of startup ecosystems around the world, and I can say from experience that along with death and taxes, one of the certainties of life is that every politician, journalist and armchair entrepreneur thinks that their city can be (and should be) the next Silicon Valley. There’s Silicon Alley, Silicon Beach, Silicon Slopes, Silicon Wadi, Silicon Glen…

You get the point.

While I completely understand — and support — the desire to build entrepreneurial ecosystems around the world, I’ve always found it odd how many people think it’s possible to replicate Silicon Valley. We don’t think that way about any other industry (when was the last time you heard someone ask, “How can our city be the next Wall Street?”).

Of course, there are plenty of organizations that are more than happy to sell the Silicon Valley dream to anyone who will listen.

“For the low, low price of [redacted], we can drop a shiny new ACME™ accelerator in your city and it’ll be instant success!”

…

“Well, no…we won’t actually invest in any of the companies that go through the program…”

So if we can’t replicate Silicon Valley, are there opportunities to leverage it to foster the growth of global entrepreneurial ecosystems?

Absolutely.

First off, despite my cynicism when it comes to replicating Silicon Valley, I believe wholeheartedly that there are lessons for other ecosystems to learn from Silicon Valley. In fact, that was the original premise behind the first generation of startup accelerators.

There have also been countless books written to encapsulate various aspects of Silicon Valley’s culture and best practices, from The Lean Startup and Zero to One to The Cold Start Problem and Secrets of Sand Hill Road. There’s also Brad Feld’s excellent book, Startup Communities: Building an Entrepreneurial Ecosystem in Your City and its follow-up, The Startup Community Way, both of which offer a cornucopia of lessons from “the Boulder Experiment” and its impact on startup ecosystems around the world.

Which brings us to the million dollar question: what can governments do to support local entrepreneurs if “bringing Silicon Valley to a town near you” isn’t the answer?

They can send local entrepreneurs to Silicon Valley.

“But wait,” you might be thinking, “don’t governments already do that…?”

Sort of.

Governments, corporates and other ecosystem supporters around the world have been sending entrepreneurs on tours of Silicon Valley for years (Canada was one of the pioneers of this, with the C100’s “48 hours in the Valley” program nearly 15 years ago). But that’s not what I’m talking about.

Last month, the Scottish government did something almost unheard of: they paid for 12 startups to relocate to San Francisco for a month as part of the country’s Tech Scalar program.

To be clear: the Scottish government didn’t pay for a startup tourism trip, as many governments do (“Next, we’ll visit Google’s cafeteria…”). Nor did they fly the entrepreneurs all the way to Silicon Valley only to make them sit through a program run by compatriots who travelled to Silicon Valley with them. Instead, they did something revolutionary: they gave the startups office space…and let them work.

It may seem like an exaggeration, but in backing this initiative, the Scottish government made a mental leap that few governments around the world have ever made: they stopped being scared that their entrepreneurs might stay in Silicon Valley and instead focused on the long-term benefit of helping them to work there.

The Scottish government successfully overcame a globally-shared insecurity that is deep within many countries’ cultures: a fear that, if given the opportunity to spend time in Silicon Valley, their entrepreneurs will choose not to return. While there’s definitely some validity to the worry, ultimately this short-term thinking is the economic policy equivalent of an insecure boyfriend who doesn’t want his partner to go out or do anything for fear that they may leave him.

Here’s the thing: if governments really want to accelerate their tech ecosystems, they should be encouraging their founders to travel to Silicon Valley in order to learn from and work with the best. Sure, a few might stay. But the vast majority won’t for a wide variety of reasons. And guess what? Those who do stay will learn a ton while they’re in the U.S. And a good number of them will one day repatriate home and bring back with them the knowledge and experience they gained. And for those who choose not to return, where do you think they’re going to open their first remote office…?

Of course, it’s understandably difficult for politicians worried about getting reelected and corporate executives trying to get their next promotion to support this kind of long-term thinking, but it can be done.

And all it takes is a plane ticket and some office space.

Not a program. Not a detailed itinerary. Not another tour of Google’s cafeteria. Just a plane ticket and some office space.

Imagine the ROI on that.

Treat Yo' Self!

If you spend any time on social media, you’ll quickly realize that there are as many different perspectives on what the founder journey is supposed to be as their are actual founders. On one end of the spectrum, there are the founders for whom a startup is a means to an end. For them, the journey is one of 4-Hour Work Weeks, automations and optimizations. The goal isn’t to build something big, so much as it is to finance a full life with the minimum work possible. At the other end of the spectrum are the devotees of hustle culture. For these founders, startups are all about sacrifices, doing Hard Things and never giving up. Their goal is nothing short of changing the world, and they believe that there are no shortcuts in such a pursuit.

As I’ve gotten older, I’ve come to believe that there’s a space in the middle. If your goal is to build a world-changing company, I am firmly of the belief that hard work is essential and there are no shortcuts. You simply can’t work remotely for 3 days a week, taking breaks whenever you feel like it to surf and expect to build a billion-dollar company. (You can absolutely finance a full life with such an approach, but this blog isn’t for those founders).

For the founders who are genuinely trying to change the world — the founders for whom the goal is to build a world-changing, multi-billion dollar company — I believe that it’s essential that you put yourself in the best position to run an epic, decade-long marathon. Because if you are ultimately successful, that’s what you will have done. But to survive that long, you need to treat yo’ self.

If you have no idea what I’m talking about, it’s a reference to an episode of Parks and Rec titled “Pawnee Rangers”. Two of the show’s main characters, Donna (Retta) and Tom (Aziz Ansari), embark on their annual “Treat Yo’ Self” shopping extravaganza, where they give themselves permission to buy and do whatever they want without feeling guilty.

The pair invites along a third character, Ben (Adam Scott), in the hope of cheering him up. As the episode progresses and Ben fails to relax, Donna and Tom realize that treating yourself might look different for Ben. They encourage him to find his own way to enjoy something without guilt, which leads to him purchasing a movie-quality Batman costume.

I’m not suggesting that you necessarily hold in everything and wait until one day a year to treat yo’ self (though that could certainly be fun). What I am suggesting is that allowing yourself the space to enjoy life during your entrepreneurial journey is not only is something you deserve, but it’s something that can make you a more successful entrepreneur.

For most people, starting a new company is an exercise in frugality. You start off bootstrapping, perhaps with a bit of money from family and friends along the way. And you have to make it last. Over time, this scarcity mindset can get deeply entrenched — particularly for first time founders — and it’s hard to undo.

As an example: shortly after we raised our Series A at Aster Data, travel picked up for many of us as we started to grow revenue and had to make frequent sales trips (this was long before selling over Zoom was a thing). Despite the fact that we had raised more than $5M, we frequently took brutally inconvenient flights with multiple layovers in order to save $10 or $20. It was only when we hired our first sales rep that he looked us in the eyes and asked, “what are you guys doing to yourselves???”

If you sit back and take a long view of the entrepreneurial journey, not only is it important that you stay focused and put in consistent, concerted effort. It’s also essential that you take care of yourself and line yourself up for long-term success. Through that lens, some things that might be considered unnecessary or “luxuries” not only can be justified, but can actually increase your chances of winning.

Here are some examples:

• For the home:

  • A good mattress / pillows

  • A comfy chair for working or reading

  • Blackout curtains for your bedroom

  • A good shower head (Seriously — how many of us lived with a crappy shower head and were frustrated every time we took a shower? You can get a really nice one for $50-100 and it takes about 3 minutes to install.)

  • High-quality knives/pots/pans if you cook a lot

• If you travel frequently:

  • High-quality luggage that is easy/efficient for packing

  • Noise-cancelling earphones for the plane

  • A credit card that gives you access to airport lounges

• Plus grooming, massages, clothing and more

This isn’t to say that you should suddenly go out and blow all of your money, but a few nice things can make a huge difference when you’re working 80+ hours a week on your startup.

So in between your startup hustle, treat yo’ self!

Why Do Solo Founders Make VCs Nervous?

One topic that gets startup founders riled up is the fact that many VCs won’t invest in solo founders. It’s frustrating to be asked over-and-over again about your cofounders when you’re a solo founder. After awhile, it can easily begin to feel like a lazy cop out. So why do solo founders make VCs nervous?

Before I get into that, a quick aside…

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Many of you have likely seen some version of the chart below from a 2018 study called Sole Survivors: Solo Ventures Versus Founding Teams:

This study is often pointed to as a repudiation of investors who are unwilling to back solo founders with some variation of the claim, “Solo founders are 2.6x more likely to succeed than founding teams!” But alas, that’s not what the study said.

In fact, this study wasn’t even about venture-backed startups. It was about kickstarter projects that were crowdfunded between 2009 and 2015. And that 2.6x number? It has nothing to do with success — it’s simply a measure of which companies were still alive when the study was done.

Speaking of companies, many of those “solo founder companies” referenced in the study were actually just single-person companies. Which isn’t to say that they aren’t to be commended, but defining success as a “single-person LLC that isn’t dead” isn’t what we typically think about when we’re talking about high-growth ventures.

So let’s focus on high-growth startups and dig into some of the concerns that potential investors have when it comes to solo founders.

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Just as it’s important during fundraising to get a VC to see past your resume, understanding the reasons why solo founders make VCs nervous can help you to present your company (and yourself) in a way that asuages those fears.

Here are 5 reasons why solo founders make VCs nervous:

1. Are you difficult to work with?

This is the low-hanging fruit of risks: are you a solo founder by choice, or because nobody wants to work with you?

“Hi Peter. What’s Happening? We need to talk about you being my cofounder.”

Like it or not, it’s a legitimate concern. You can mitigate this by assembling a strong team, but if it’s just you…why is it just you?

2. Do you have a sounding board?

Another major risk that solo founders face is that they often don’t have a sounding board in the same way that CEOs with cofounders do.

When you’re a solo founder, everyone else in the company works for you. That means they’re unlikely to give you the type of direct feedback that you would get from cofounders. On top of that, when feedback is given, many solo founders dismiss it for all manner of reasons.

Over the years, I’ve invested in many solo founders and almost every one struggled with this point. In some cases, I would argue that the lack of a trusted sounding board ultimately led to the failure of the company.

If you’ve got a proven track record, this isn’t as much of an issue. But if you’re a first-time founder, showing investors that you’ve assembled a trusted pit crew (not just an advisor slide with fancy names and logos), can go a long way in building confidence in your ability to survive the startup rollercoaster and not get caught up in your own tunnel vision.

3. Can you go fast enough?

When I pass on a strong solo founder, this is easily the #1 reason why.

It’s not that I don’t think you’re smart. It’s not that I don’t think your idea is a good one. It’s that I’m not convinced that you can go fast enough to win in a competitive market where other startups have 2, 3 or 4 equivalently awesome cofounders on day one.

I’ve written before about the fact that when I meet a promising Canadian startup, the #1 question in my head is always, “Can you beat my friends?” A nuance to that is that every single one of my friends who created a unicorn had cofounders. On day one of their company, they were a highly motivated, highly incentivized and highly aligned team.

Who are you handing off to?

Obviously, there’s a bit of selection bias here, but the velocity and trajectory of a startup with multiple cofounders is fundamentally different from one founded by a single, highly-experienced cofounder, unless you’re starting off with an extremely strong supporting cast.

I recently passed on a company with a very strong, experienced solo founder whose concept and early validation with impressive. Unfortunately, when we started talking through his roadmap for the next couple of years, it was a clear that the company’s velocity was already bottlenecked by the founder having to fill multiple strategic roles. And there was no clear path to unblocking him. As a result, I simply could not envision a version of the future where this founder wouldn’t lose out to the other companies I knew to be already in market with teams of 3 or 4 equivalently strong cofounders.

4. Do you have the right network / can you hire?

Another team-related risk of solo founders focuses on whether or not you can hire the right people.

A significant percentage of the companies I’ve met at Pre-Seed with solo founders have teams that consist of a strong solo founder, perhaps one senior-ish engineer, and a couple of junior devs. It makes sense, considering that the engineers are all likely looking for decent salaries and the company hasn’t yet raised meaningful capital.

The problem is, if you’re going to win in a competitive market, you need to have a competitive team. And that can’t just be cheap, junior devs. Who’s going to be your CTO? Your VPE? Your head of sales? Etc.

Can you recruit a top-tier leadership team?

You don’t have to have all of the answers, but if you can demonstrate a strong professional network and/or identify one or two key hires you intend to make after completing the round, it will go a long way to convincing potential investors that you’ve got the right connections.

5. What if you get hit by a bus?

This may sound facetious, but it reflects a legitimate risk: a company with a solo founder has a single point of failure from day one.

Absent a strong executive team, the company’s progress (or lack thereof) is directly pinned to your personal well-being. What happens when you get sick? What happens when you take a vacation (or, worse, what happens if you don’t)?

Back when I was at Aster Data, our CEO Mayank went back to India one year for holidays…and U.S. immigration didn’t let him back in. I won’t go into the details of how ridiculous this situation was (there’s a reason why immigration is America’s Achilles’ heel) but it goes without saying that it was less than ideal for a fast-growing startup.

It was more than 3 months before Mayank was allowed back into the US. And while it was certainly disruptive (this was back before Zoom or Slack or remote work), our team didn’t miss a beat. (I got really good at saying, “Hi, my name is Chris Neumann. Unfortunately, Mayank’s flight got delayed…”)

While this was obviously an unusual situation, it’s not at all uncommon for founders to unexpectedly need to take time off. That’s life. Demonstrating that you’re setting up redundancies within your company early on — including to mitigate founder burnout — is something to keep in the back of your mind when speaking with potential investors.

A Hard Tech Renaissance is Happening and Canada Risks Missing Out

Over the past two years, as the tech world emerged from the rubble of the ZIRP crash, an undercurrent of hard tech that has been quietly developing began to rapidly accelerate. And not just around AI. Today, we’re seeing renewed interest in hard tech on a number of fronts:

• Global conflicts shining a spotlight on defense tech

• A reversal of globalization driving interest in supply chain and energy technologies

• A new golden era of space accelerating research into communications, manufacturing and transportation technologies

• A growing focus on climate change accelerating research into climate and sustainability technologies

Last week, Y Combinator put a spotlight on this movement in its most recent request for startups, which Techcrunch noted had a significant emphasis on hard tech. At the same time, it seems like every VC who rushed to set up shop in Miami is now tripping over themselves trying to find office space in SoCal.

I left my wallet in El Segundo

Canada has a long, proud history in hard tech and there is no shortage of Canadian entrepreneurs working in these areas today. In fact, many individuals and organizations across the country recognized this shift early on and have worked over the past several years to build support for this country’s most ambitious hard tech founders. Prominent accelerator Creative Destruction Lab, for example, has programs dedicated to space tech, energy, mining, AI, climate, manufacturing, ocean tech and quantum computing (amongst others).

Yet despite all of this support, Canada still risks missing out on the hard tech renaissance for one key reason: a lack of early-stage capital for hard tech startups.

What is Hard Tech?

Let’s start by defining what “hard tech” is.

Hard tech (also known as deep tech) typically describes a category of startups whose product development involves solving significant scientific or engineering challenges.

We’re not talking about B2B SaaS here. We’re talking about technologies for which success is not a foregone conclusion. Technologies for which the underlying R&D is genuinely hard and, at the end of the day, might not actually work.

It’s worth noting that, contrary to popular belief, hard tech does not necessarily involve hardware. While many hardware-based startups fall into this category, a significant number of software-only companies do as well. In fact, it wasn’t long ago that almost all tech was considered “hard”.

When we were building Aster Data twenty years ago, the engineering challenges we had to solve were really really hard. No one had ever created distributed database software designed to run on commodity hardware before. What started with Mayank’s PhD thesis at Stanford (which itself was 5 years of hard work on his part), was followed by 6 months developing a prototype that could only execute 8 hard-coded SQL queries.

But that was enough to convince David Cheriton, Anand Rajaraman, Josh Kopelmen (of First Round Capital) and Ron Conway (of SV Angel) to invest.

After that, it was another year before we had a semi-functional beta version of the product (one that was held together by virtual duct tape and still couldn’t do database joins) and a year more before we had a dollar of revenue. Seriously…this stuff was hard!

But guess what? Early investors weren’t scared to invest in the company. In those days, the first round of funding was rarely enough to get to first revenue. It was par for the course.

Which leads me to suggest an alternate definition of “hard tech”:

Hard tech startups are companies for whom 2 or more rounds of funding are required to generate initial revenue.

Rather than defining hard tech in terms of the underlying technology or the subjective difficulty of the engineering challenges that need to be solved, we can think about these companies in terms of the amount of capitalization required to get to first revenue.

The corollary of this definition?

Hard tech startups not only require angel investors and Pre-Seed VCs who are willing to invest pre-revenue, but also Seed VCs and potentially even later VCs.

The Vanishing Hard Tech Investor

It used to be that most tech startups fit my definition of “hard tech” and most early-stage investors were fine with that. But over the past dozen or so years, things changed.

Today, there’s an entire generation of investors who grew up in the era of The Lean Startup and AWS and all of the other developments that made it seem like every startup should be able to hit a million users or $100K MRR or whatever other arbitrary metric investors deem appropriate within 18 - 24 months.

An entire generation of investors who believe that any company that doesn’t have traction within its first 18 - 24 months is not “VC-backable”.

Let’s be clear: this idea is utter nonsense.

The average life of a VC fund is more than 13 years, with many lasting 16 or more. So it’s simply not credible to claim that a startup which needs 3 or 4 years to get to initial revenue is not VC-backable or won’t exit within the time horizon required by a VC.

In reality, the claims that hard tech startups are not VC-backable is a red herring. What actually happened is that we’ve ended up with a generation of investors who have only ever had to worry about distribution risk. A generation of investors for whom technological success seemed a foregone conclusion: throw enough engineers at the problem and success is all but assured.

Think about that for a minute. There’s an entire generation of “tech investors” who have no idea how to underwrite technnology risk.

As a result, these investors avoid investing in anything that looks or smells like hard tech and retreat to the safety of B2B SaaS, with it’s prolific, easy-to-analyze and widely-available metrics. The “you can’t get fired for buying IBM” of tech investing.

What’s worse? Many of the OG VCs who made their names investing in hard tech are now riding off into the sunset. One of many examples is Foundry, who recently announced that their current fund will be their last.

When we were raising the initial round of funding for DataHero, we were very transparent with potential investors that we likely wouldn’t achieve initial revenue with our first round. We were building the world’s first cloud-native BI platform and that was going to be “hard”. When we walked through our likely development timeline with Foundry’s four partners (Ryan, Brad, Seth and Jason), they didn’t bat an eye at the possibility that we would need a second round of funding before generating any revenue. To the contrary, they led us through a detailed discussion of non-financial milestones that we could achieve to help them to gain confidence about making multiple pre-revenue investments.

Today, it’s hard to find investors like that. Instead, this is more common:

Who’s Going to Write the Next Check?

If VCs around the world are struggling to invest in hard tech, why is Canada in such a risky position? Let’s start with another anecdote:

Several years ago — when I was still living in San Francisco — I was a mentor for one of Canada’s hard tech accelerators. The program’s mentors included numerous Canadian angel investors and VCs, all of whom (presumably) had some interest in hard tech.

One of the companies in the program was a startup that was using hyperspectral imaging to improve the efficiency of mining (back before using hyperspectral imaging was considered cool). The founder had deep experience in the space: he spent years as a mining exec before going back to school specifically to earn a PhD to solve this problem. He was completing his PhD, launching the company, participating in the accelerator and lining up his initial pilots all at the same time.

Suffice to say, as a Bay Area investor, this was an absolute no brainer — despite the fact that the path to actual revenue was likely to be a lengthy one. I commited to make an angel investment in the company halfway through the program. But to my surprise and disappointment, not a single other mentor — angel investor or VC — invested in the company (despite the fact that the founder consistently received feedback that he was one of the best to have ever participated in the program).

The most common refrain I heard as to why other mentors weren’t interested in investing in the company had nothing to do with the founder, technology, or market but, rather, was some form of “I don’t know who is going to write the next check.”

I later came to realize that what this really meant was, “I don’t know who in Canada is going to write the next check.”

Shorly after the program completed, the next checks came:

While it might be easy to dismiss this anecdote based on geography (undoubtedly, some of the investors in the program were legitimately unable to invest in an Australia-based company), I’ve seen versions of this dynamic play out over-and-over again since returning to Canada. And it ties directly to the corollary I shared above:

Hard tech startups not only require angel investors and Pre-Seed VCs who are willing to invest pre-revenue, but also Seed VCs and potentially even later VCs.

In Canada, there are almost no Seed or Series A VCs that are willing to invest in companies pre-revenue. As a result, angel investors and Pre-Seed VCs whose investor networks are predominently in Canada are unlikely to invest in hard tech companies, as they have no line-of-sight to follow-on capital.

I’ve previously written about the fact that Canadian VCs need to get out of Canada. And this is one of the big reasons why.

If early-stage Canadian investors continue to make investment decisions that are influenced primarily by the the availability of downstream capital from other Canadian VCs, any advantage that Canada has in hard tech will soon be lost.

But if more early-stage investors spend time abroad (especially in Silicon Valley), they’ll be able to form a more complete picture of the demand for companies by downstream investors. And they’ll have more confidence investing in hard tech companies that they know will require multiple rounds of funding in order to generate initial revenue.

I’m going back to SF next week. Who’s in?

5 Ways to Improve an M&A Outcome

Lately, I’ve been having a lot of conversations with founders about mergers and aquisitions (M&A). Some founders are in hot sectors and fielding unsolicited offers from cash-rich incumbents. Others are nearing the end of their runway and looking for a “soft landing”.

Just like fundraising, getting acquired is something that most founders only do once (if ever). It’s hard to learn about the topic, as there are far fewer blog posts on how to navigate an acquisition process than there are on how to fundraise.

There is, however, Mergers & Acquisitions for Dummies 🤣

Having been through three acquisitions myself (and observed many more from the sidelines), I thought I’d share some tips.

Here are 5 ways to improve the outcome of an M&A process:

1. Have Plenty of Runway

This may seem obvious, but similar to fundraising, it’s essential that you have plenty of runway before you begin an M&A process. In some respects, it’s even more important. That’s because one of the basic stategies that corporate development professionals use when trying to acquire a company is to run out the clock. The less runway you have, the more desparate you become (and the cheaper you’re likely to be).

In fact, many corp dev teams are compensated based on how cheaply they’re able to acquire a target company.

Some acquirers are infamous for doing everything in their power to drive down the price of an acquisition, including driving startups to the edge of insolvency.

Actual footage of a VP of Corporate Development

As with any negotiation, one of the most powerful things you can do is to be in a position to walk away. So make sure you have at least 6 months of runway (or more) when you start a process. And if runway is an issue, make sure you’re fundraising in parallel to exploring potential acquisitions.

2. Get Advice from People Who Have Actually Been Through an Acquisition Process

As with many topics, most founders turn to their investors when seeking advice about navigating a potential acquisition. But guess what? The vast majority of investors have never actually been through an acquisition process.

Now, it’s true that many investors are expert negotiators (which makes sense, as it’s a core part of what we do). But M&A negotiations can be very different from fundraising negotiations. The best corp dev teams employ strategies that most VCs have never seen firsthand. So while investors are more than eager to suggest strategies for “maximizing outcome”, in my experience much of this advice is…well…basic.

Unless your investor has personally been through an acquisition or comes from a corporate development background (like Villi Iltchev at Two Sigma or Code Cubitt at Mistral), you should assume that your VCs will be giving you advice on how to play checkers while your corp dev opponents are playing chess.

When I went through my first acquisition process as a CEO and was trying to wrap my head around the (seemingly confusing and contradictory) actions being taken by the corp dev teams, my first calls were to my investors. They gave me plenty of sound and logical advice, but the most important thing they did was to make two key introductions:

1. To a portfolio founder who had been through 4 successful acquisitions

2. To a portfolio founder who had previously been in a corp dev role at a major tech company

All of a sudden, the advice I was getting went from simple parlor tricks to black magic.

So when your investors are done giving you the 101 on how an acquisition works, ask them to introduce you to the founders they know who've been through multiple acquisitions and any corp dev (or ex-corp dev) people in their network.

3. Figure Out the Real Motivation of the Acquirer

One of my favorite quotes on this topic is from Alexandra Greenhill, CEO and Founder of Careteam:

“The price you’re worth depends on what the buyer needs you for.”

When a potential acquirer shows interested in our company, founders naturally jump to conclusions about their motivations.

• “They’re excited about our technology!”

• “They’re trying to get into our market!”

• “They’ve had the same epiphany that I had about the future…!”

And so on. But frequently, a potential acquirer’s true motivations have little to do with our ego-driven assumptions.

Early in DataHero’s journey, we were approached by the corp dev team at Pinterest about a potential acquisition. We had received a lot of press when we came out of stealth and were fielding a considerable number of inbound calls from companies hoping to white label our product. The Pinterest team needed to develop analytics and reporting capabilities in advance of releasing their advertising offering, so naturally we presumed that they wanted to incorporate DataHero as the foundation for those capabilities.

It turned out that Pinterest only wanted to bootstrap an in-house analytics team and had zero interest in any of our IP. (And they subsequently floated an acquisition offer that was priced accordingly.)

There are a wide variety of motivations that drive acquisition interest. Many will value your company lower than what you might hope for. Some will value it much higher. Uncovering the true motivation can help drive your strategy and is key to improving your outcome. Common motivations include:

• Humans (individual contributors, key executives or entire teams)

• Tech / IP

• Revenue (this can be a direct revenue stream, access to a new market or customer segment, or a product the acquirer believes they can sell easily into their existing customers)

• Cash (believe it or not, many for-stock acquisitions happen because the company being acquired has a lot of cash in the bank)

• Press / Stock Price

4. Figure Out if there is a Forcing Function

Similar to the importance of unconvering the motivations driving a potential acquirer’s interst, it’s important to discover whether or not there’s a forcing function influencing the timing.

When Vancouver’s Picatic was in acquisition talks with Eventbrite, the founder sensed a level of urgency that he couldn’t figure out. He was trying to slow play the opportunity (in order to drum up competitive offers), but the Eventbrite team was pushing for a quick resolution.

Eventually, he uncovered that the urgency was tied to Eventbrite’s plans to go public — they needed to complete the acquisition in a matter of weeks. This one piece of information gave him considerable leverage with which to negotiate the acquisition of his company.

Understanding whether or not there’s an internal forcing function driving a potential acquirer’s timeline is another key way you can improve your outcome.

5. Always Take the Meeting

If someone in a corp dev role ever reaches out to you about a meeting — even if you’re not thinking about an acquisition — always, always, always say yes.

Take the meeting, but come prepared to say nothing.

This is the opposite advice I typically give when it comes to fielding inbound calls from potential investors. So why should you take corp dev meetings? Because you never know where they may lead.

Shortly after Aster Data came out of stealth in 2008, we were approached by Teradata’s head of corporate development about a meeting. We were an entirely inexperienced team and Teradata was our bogeyman — the company we saw as our #1 competitor. We were paranoid that they would try to suck each and every secret they could out of us, and were inclined to say no. But our investors insisted that we take the meeting.

“Take the meeting, and just listen.”

That meeting was the first time that Teradata attempted to acquire Aster Data.

Over the next several years, as the “Big Data” industry emerged and Teradata struggled to develop a competitive solution, we fielded multiple acquisition offers from them. Each approach was met with skepticism from our side. We were convinced that, should we ever enter a process, Teradata would extract all of the information they wanted during diligence, cancel the acquisition, and turn around and crush us with a well-funded competitive offering. (It was years later that we discovered just how inept their internal attempts to build a big data offering had been, and this was never a realistic scenario.)

In 2010, rumors were flying that Teradata’s main competitor, Netezza, was about to be acquired by IBM. That’s when they approached us with a much more serious offer. But we still didn’t trust their motivations. Sequoia’s Doug Leone — one of Aster Data’s board members — proposed a “test” to see how serious they really were: ask them to invest in our series C, with no information rights, no right-of-first-refusal and no access to proprietary information. If they were willing to do that, then we would know that they meant business.

Days after we completed our Series C, IBM’s acquisition of Netezza was publicly announced. Our own acquisition talks then began in earnest, and on Christmas Eve, 2010, we signed the LOI to be acquired by Teradata (thus kicking off the most painful, drawn-out diligence process I’ve ever experienced).

Beyond the opportunity for serendipty, the biggest reason to always take corp dev meetings is to open channels of communication. Should you ever need to spin up an acquisition process (or ramp up competitive offers), you’ll already have relationships with the people you need to speak with.

The Problem with Pivots

The word pivot is one of the most overused terms in startupland. Y Combinator’s Dalton Caldwell describes it as,

“…one of those terms that if I'm in a cafe and I hear someone talking about pivoting, I roll my eyes because it's one of those words that I associate with annoying startup people.”

That’s a divot, not a pivot

A true startup pivot is something quite specific: to pivot a company is to change the underlying market hypothesis to such a fundamental degree that it requires a reset of multiple parts of the business. A genuine pivot typically requires offloading the majority of users and/or customers, abandoning a significant portion of prior R&D work and laying off multiple people whose skill sets don’t match the needs of the new idea.

Successful pivots are venerated within the startup world. They represent the ultimate hero’s story. David vs Goliath. The “Hail Mary” throw with time running out to win the game.

But for every Slack, there are thousands of startups that tried to pivot but didn’t pull it off.

In many cases, those failures weren’t because the insight behind the pivot was wrong. Pivots often fail because the company simply didn’t have enough financial resources to execute the new market hypothesis. They ran out of money.

Or did they?

It turns out that in many cases, the road to a successful pivot is cut short by a critical mistake: the founders failed to fully reset the business.

A Cautionary Tale

Recently, we looked at investing in a company that we had been tracking for a number of years. We first met the founders when they were raising their Pre-Seed round. We loved the team but weren’t in love with their original idea. Ultimately, we passed.

The company successfully closed their round and went to work. When the founders reconnected with us to talk about their second round of funding, we learned that they had pivoted towards a new idea — one that we were far more excited about. Now, we were looking at a team that we loved working on a new concept that we could get behind.

The problems came when we started to dig deeper.

After raising their Pre-Seed round, the company spent a year pursuing their original idea before they decided to pivot in response to customer feedback. The new concept represented a pivot in the truest sense: they needed to sunset their original product, offload the majority of early customers and start nearly from scratch in terms of product development.

To their credit, the company did all of those things. But they missed a crucial step: they failed to reset their cost structure.

In the months after closing their Pre-Seed round, the company increased their burn rate as they pursued their original idea. They hired more people, started spending money on sales and marketing, and generally did the things one would expect founders to do as they built the foundation for a company.

But after a year — when it became clear that the original idea wouldn’t work and the founders decided to pivot — they didn’t reset any of their cost increases.

The company’s marketing spend, which went from zero to $20K/month, remained at $20K/month after the pivot. Their payroll, which had tripled over the course of the year, not only remained the same but continued to increase — the founders hired additional new employees after the pivot. An so on.

As a result, by the time we saw the company for the second time, there was a mismatch between their capital requirements and where they were in developing their new idea:

• The maturity of the “new” idea and the progress towards product-market fit were inline with a Pre-Seed company

• The burn rate / cost struture / capital requirements of the company were inline with a Seed stage company

In other words, they were looking to raise a “Seed stage”-sized round at a “Seed stage” valuation for an idea whose development had only progressed to the level of a Pre-Seed company.

Sadly, this is a situation we see far too often.

Anatomy of a Pivot

To better understand why this matters, let’s dig into the cost structure of a company that pivots.

Consider a hypothetical company that raised a $1.5M Pre-Seed round with the following cost structure (these are meant to be example numbers that make the math easy, so don’t overthink whether or not any given cost is too high or too low):

• At the time of their Pre-Seed raise, company X has a monthly burn of $25K ($20K for salaries and $5K for desks, software, etc.)

• Over the next 12 months, salaries increase to $60K/month, sales and marketing go from 0 to $20K/month and other operating expenses increase to $20K/month

Assuming minimal revenue, by the end of the first year the company is burning $100K/month. If we further assume that their expenses plateau at month 12, then company X’s $1.5M Pre-Seed round should last them somewhere in the range of 18-20 months:

Now, let’s assume that after one year, the company decides to pivot.

Let’s further assume that it’s going to take them about 18 months to figure out whether or not the pivot works. After that, they’ll need 6 months to raise their next round. Company X’s new timeline is:

• Month 1 - 12: Pursue initial idea

• Month 13 - 30: Pursue pivot

• Month 31 - 36: Fundraise (assuming the pivot was successful)

Let’s examine three scenarios in terms of how Company X manages its burn after deciding to pivot:

1. Company X maintains its burn after deciding to pivot

2. Company X resets its cost structure at the time of the pivot and maintains a low burn throughout the pivot

3. Company X resets its cost structure at the time of the pivot and slowly increases it as evidence mounts that the pivot is working

Scenario 1: Maintain Pre-Pivot Burn

Under this scenario, company X maintains a monthly burn of $100K through month 36:

In this case, the company will need at least $1.6M more in funding in order to pursue the pivot and have sufficient runway left to fundraise.

Scenario 2: Reset Cost Structure and Maintain Low Burn

Under this scenario, the founders agressively cut their cost structure at the moment of pivot. Let’s assume that they don’t completely reset it, but that they reduce salaries to $30K, eliminate sales and marketing entirely and cut operating expenses by half. This results in a starting point of $40K per month post-pivot:

In the most frugal of scenarios — wherein the company maintains this lower burn rate going forward — they can potentially make it all the way to the point where they know whether or not the pivot is going to work without any additional funding.

Scenario 3: Reset Cost Structure and Slowly Increase Burn

Under this scenario, the founders aggressively cut their cost structure at the moment of pivot and slowly increase their burn as they see signals that it’s working (for simplicity’s sake, let’s assume that they eventually get back to their pre-pivot burn of $100K/month):

In this case, the company can go for 13 or 14 months post-pivot without any additional capital. Moreover, they only require an additional million to make it to the full 36 months.

Is it Really That Easy?

There are obviously pros and cons to each of the above (overly-simplistic) scenarios. That said, you can probably figure out the underlying message in the above numbers:

• If you pivot but don’t reset your cost structure (or, worse, if you continue to increase burn), it’s unlikely that you’ll to have enough runway to see the pivot through. Moreover, the amount of money you will need to raise at your next round (and the corresponding valuation that you’ll want in order to not dilute yourselves too much) are likely to be too high for the amount of progress you’ve made with the new idea.

• If you pivot and aggressively reset your cost structure, you can potentially see the pivot through without any additional capital (or, alternatively, you put yourself in a position to only need a small, approachable amount of additional capital in order to fully prove out the pivot, depending on how careful you are increasing spending).

If resetting costs is such an obvious thing to do, why do so many founders maintain (or increase) burn rate after pivoting?

Because resetting your cost structure usually means laying people off. Good people. Hard working people. People who believed in your idea enough to join your crazy moonshot startup. People who’ve become friends.

It’s especially hard to lay people off when, deep down, you feel like they didn’t make any mistakes. When you close your eyes and know that mistakes were made by the founders.

So instead of taking the hard decisions and resetting costs, we rationalize and justify. We minimizing the impact of cost savings and overestimating our ability to “catch up”.

We’re not really saving that much money and we’ll have to hire a replacement in a few months anyways…

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At the end of the day, pivots can (and do) frequently succeed.

But in order put yourself in the best position to succeed, you must accept that a true pivot requires a full reset of the company. Including its cost structure.

You have undoubtedly learned some things along the way, and you might even have some bits-and-pieces that you can reuse, but in terms of the marathon towards product-market fit, you’re back at the starting line.

So make sure you set yourself up for success.

The Paradox of Time: Silicon Valley's Ultimate Riddle

Seven years ago, I created a course called Silicon Valley 101 to introduce founders from outside the Bay Area to the unique culture and etiquette of Silicon Valley. The program, which thousands of founders have taken to-date, helps break down some of the myths and misconceptions about how the world’s preeminent tech ecosystem operates.

One important aspect of the Valley’s culture that I always put extra focus on is how investors and founders think about time.

In my experience, time is the second most precious resource to founders and investors in Silicon Valley (after their personal networks). Spend a few days in the San Francisco Bay Area and you’ll immediately recognize that most people are trying to accomplish far more than they have time for. That fact alone isn’t particularly unique (after all, high-achieving individuals the world over take on more than they can chew). What is unique is that, on top of all of their other obligations, the majority of participants in the world’s largest startup ecosystem also want to pay it forward. But almost none of them have the time to.

The result is one of the foundational paradoxes of Silicon Valley: most people in places of power, influence and experience genuinely want to help up-and-coming founders, but their work and obligations leave little to no time for them to do so.

The founders who can solve this puzzle unlock an unfair advantage that can change the trajectory of their startup: access to Silicon Valley’s insiders. And the solution isn’t as complex as you might imagine.

You simply have to make it easy for them to say yes.

But how can you make it easy for someone to say yes to spending time with you, when they don’t have any to offer?

The solution involves 3 simple steps:

1. Grab their attention quickly

2. Signal that you understand how limited their time is

3. Earn the rest

Let’s look at a couple of examples:

Example #1: Cold Emails

As an investor, I receive hundreds of emails in my inbox every day. If I were to read every single email I receive, I literally wouldn’t have time to do anything else.

So I filter. Heavily. Not because I want to, but because I have to. I’m trying to extract the maximum value out of my inbox in the minimum amount of time. Which means I’m not even going to open an email if I don’t think there’s value in reading it. Sounds harsh? That’s how little time I have.

Here are some of the ways that I filter my inbox:

• If an email is from someone I know, I’ll almost certainly open it (which is why warm intros are so important)

• If a subject line references a Pre-Seed or Seed fundraise, I’ll almost certainly open it

• If something else in the subject line catches my attention, I’ll open it

You never get a second chance to make a first impression, which is why the subject line and the first sentence of a cold email are so crucial. If I don’t already know you, I’ll decide whether or not to open your email based on the subject line and the 50 or so characters that show up as a preview in my email client.

Here are some emails that I immediately opened:

• We met at [Event]

  • Awesome — I immediately have context and can place the conversation.

• Panache + [Startup] | Pre-Seed DevOps with $20K MRR

  • Perfect. A Pre-Seed startup in a sector that I focus on.

• Pitch Deck Feedback — “I am just about to kick off a fundraising process.  Although I have exited two times, in my other ventures I did not raise VC funds…”

  • Two-time exited founder. Asking for specific help. You’ve got my attention.

And here are some that went straight to trash:

• [Startup] - $2M in sales/$4.3M in active contracts – Series A

  • Great subject line, but I don’t invest at Series A (easy to find from basic research).

• [Startup] Video Presentation — “I’m excited to share with you a 5 minute video presentation…”

  • I don’t know who you are or what you do, so I’m not going to watch a 5 minute video in order to figure it out.

• INDUSTRIAL MANUFACTURER ACQUISITION OPPORTUNITY

  • The opportunity might be real, but the subject line screams SCAMMY.

Popping up a level, how I manage my inbox is a great example of the incremental nature of the third point above (“earn the rest”):

• Provided it doesn’t land in my spam folder, I’ll scan the subject line and preview sentence of your cold email no matter what (2-5 seconds)

• If your subject line is strong and/or you came through a warm introduction, I’ll open the email and read the first few sentences (10 seconds)

• If the first paragraph catches my attention, I’ll read the rest of the email (30 seconds)

• If the full email is strong/relevant/etc., I’ll take further action (click on your deck link, email you a response, etc.) (3-5 minutes)

And so on.

Example #2: In-Person Meetings

Let’s say someone agrees to meet you in-person. If this were a personal friend, you’d typically go through the back-and-forth exercise of trying to find a time that works for both of you, a location that’s midway between you (so as to be fair to both people), and so on.

But if you’re trying to get time from someone you’ve never met before, this completely reasonable interaction violates the second point (“signal that you understand how limited their time is”). Why? Because engaging them in a discussion of where you should meet causes them to have to spend time on scheduling. You’re imposing a tax on them before they’ve even met you!

What should you do instead?

The clearest signal you can possibly give someone that you respect their time is to tell them “I will come to you”.

That’s why, whenever I ask for a meeting with someone new, I’ll send an email along the lines of the following:

I’m happy to come to your office anytime that works for you (or feel free to suggest another location if it’s more convenient).

The signal in this message is unmistakable: I respect your time and am going to eliminate any overhead that is required for you to say yes.

As a counter-example, I recently had a founder reach out for advice on their business. After responding that I would be happy to chat, they replied:

Why don’t you come by my office in [location]?

In a social context, this would be a perfectly normal, if not generous offer (“Come to my place — I’m happy to host!”). But when asking for help in a business context, it’s the exact opposite (“Please spend time traveling to where I am in order to help me, and then spend more time traveling back.”).

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The more effectively you can grab someone’s attention and demonstrate to them that you respect their time, the more likely you are to get a positive response. So remember these three steps:

1. Grab their attention quickly

• A strong, effective email subject line

• An insightful response to a social media post

• A thoughtful question at a conference talk or AMA

2. Signal that you understand how limited their time is

• Clear, concise bullet points in a email (as opposed to 4-6 lengthy paragraphs)

• Asking for pitch deck feedback by sending an email with specific questions and a link to a Google Slides presentation they can drop comments into, vs. asking for a call to go through the deck live

• Asking for a 15-minute call instead of 30 minutes (or an hour!)

• Sending a question via a voice memo instead of scheduling a live call

• Sending specific questions in advance of a call vs. asking “to pick their brain”

3. Earn the rest

The Power of Discomfort

It is a strange thing, but things that are good to have and days that are good to spend are soon told about, and not much to listen to; while things that are uncomfortable, palpitating, and even gruesome, may make a good tale, and take a deal of telling anyways."

- The Hobbit

A few months ago, I was having lunch with a friend when he casually mentioned to me that he had started to train for a marathon. I hadn’t known him to be a runner, but plenty of people I know have “run a marathon” somewhere on their bucket list.

I asked if that was the case, to which he responded,

“No. In fact, I’ve never wanted to run a marathon.”

My friend had held senior roles in both startups and big tech companies, with increasing challenges at every step. After leaving his most recent role, he decided to take a well-deserved sabbatical.

During his time off, he reflected on experiences at Facebook, Salesforce and others, and realized that he had become comfortable. Complacent.

As my friend replayed in his mind the past decade of his career, he recognized that a key ingredient during his times of greatest success and personal satisfaction was that he was doing something to make himself uncomfortable. And that something wasn’t necessarily work-related.

Which brings us back to the marathon. When I asked him why he was running a marathon, his response was simply,

“Because it’s hard.”

In the few short weeks since he had started training, my friend was already perceiving an increased level of focus and clarity. Increased curiosity and motivation. Increased velocity and an increased sense of urgency in all aspects of his life.

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There’s no shortage of research into and posts about the power of discomfort. My friend, Marvin Liao often writes about it in his newsletter, The Hard Fork:

I’ve gone through most of my life subconsciously avoiding pain and suffering. Basically trying to avoid being inconvenienced and chasing comfort. Because that was what I thought I was supposed to do. But all my biggest leaps of knowledge, understanding and wealth came when I tackled and embraced challenges directly. Or usually indirectly as my curiosity and naivety took me in that direction.

This is why I always encourage and push for everyone to push themselves, physically and mentally. Chase the hard stuff that makes you feel pain. If you feel pain, it means you are growing. Develop a huge capacity for hard work. Be prepared to grind for a long period of time. It’s all about self-development. Becoming a higher level of yourself.

The concept is nothing new. Most people understand that athletes build muscle because their workouts cause microtears, which become stronger when they heal.

Yet many founders let themselves off the hook with the built-in excuse of “I’m working at a startup, so my life is by definition uncomfortable.” While that can certainly be true (especially early on), even startup founders quickly reach a level of comfort within the natural unpredictability of a startup.

The daily unpredictability itself becomes predictable.

Wise words from Pete the Cat’s Groovy Guide to Life

When I was a founder, I played a lot of sports. That was how I pushed myself outside of work. In the mornings, I would run along the Embarcadero. At night, I played on a mens soccer team in the winter and paddled outrigger in the summer. All of these things provided different challenges — both physical and mental — than those I faced in startupland.

Today, I have two young kids. It’s difficult to fit in both workouts and family time. I’ve learned enough about myself to know that I need physical challenges to operate at my best, so for the past few years, I’ve exercised early in the morning or late at night:

This seems like a pretty intense start to the day, right? It seems like it would be pretty uncomfortable. But as I reflected on my lunch conversation, I had to admit that this was no longer my regular morning routine.

It was my “sometimes” morning routine.

Rather than pushing myself, I was avoiding pain and discomfort. If I was tired in the morning, I would sleep in and skip my workout. I was probably doing that 1-2 times each week. And it wasn’t like I was making up for it at night (either by exercising or trying to go to bed earlier). All too often, I was staying up late wasting time doom scrolling.

I was becoming comfortable. Complacent.

Pushing myself to the limit

That night, after the kids went to bed, I got on our exercise bike (which I hadn’t touched in…I don’t know how many months) and did my first two-a-day in years.

It wasn’t anything mind-blowing, but it sure was uncomfortable. And it felt great.

The next morning, even though I was tired, I got up and did my workout. And that night, I got back on the Peloton.

It’s been three months since that lunch.

The only morning workouts I’ve missed were due to meetings or family time (there was zero chance I could convince the kids to wait until I got in a workout to open Christmas presents). And I consistently ride the Peloton 3-4 nights each week.

Like my friend, I feel an increased focus and clarity at work. Increased curiosity and motivation. Increased velocity and an increased sense of urgency in all aspects of my life.

Oh, and I lost 15 lbs. Not bad, eh?

So as you start thinking about what you want to accomplish 2024, ask yourself this: what am I doing right now that makes me uncomfortable?

See you on the bike!

This Critical Lesson in MySpace's Failure is Still Relevant Today

Many articles have been written about the rise-and-fall of MySpace, the LA-based social network that in its heyday was the most popular website in the world. I had a front row seat to the experience — MySpace was Aster Data’s flagship customer and I was responsible for the relationship. For nearly two years, I flew back-and-forth between San Francisco and LA every week to be onsite with our largest customer as we brought the world’s first 100TB commercial data warehouse into production.

When we first started working with MySpace in 2006, the company had just eclipsed Yahoo! to become the most visited website on the internet (nearly 5% of all US internet visits were to MySpace), “The Facebook” was a fledgling startup that had only recently opened up access beyond U.S. university students, and Twitter was but a few months old.

Peak internet in 2006

At the time, MySpace easily had one of the top technical teams in the world. Everyone I met there was unquestionably an A+ player and the conversations we had on topics ranging from infrastructure to data analysis to user privacy were lightyears ahead of nearly anything else I’d encountered in Silicon Valley.

At the time, MySpace was growing at an insane pace and needed to expand. They needed more engineers, more designers and more data analysts (the term “data scientist” hadn’t yet hit the mainstream). There was just one hitch: the founders had made it their mission to build LA’s first massive tech company and insisted that all employees be based there.

But LA’s startup scene was still in its infancy. There wasn’t enough experienced, homegrown talent to satisfy MySpace’s needs. And candidates in the Bay Area had zero interest in moving south (the NorCal / SoCal rivalry was in full swing in those days, and the prevailing viewpoint in Silicon Valley was that a move to LA meant abandoning tech relevancy).

That’s when MySpace’s leadership made a fatal mistake: instead of keeping the bar high and expanding northwards to Silicon Valley (which other leading startups at that time were doing), the company doubled-down on its “LA-only” mantra. As a result, in less than two years, MySpace went from hiring only the best-of-the-best to bringing onboard people who previously wouldn’t have made it past the first interview.

When competition with Facebook heated up, MySpace simply didn’t have the talent to compete. The company ultimately relented and opened a San Francisco office in late-2007, but by that point it was too late. And we all know what happened after that.

For startups based outside of the Bay Area, the lesson from MySpace’s failure isn’t that every tech company needs to relocate to Silicon Valley. Or even that every tech company needs to open a Silicon Valley office. Rather, founders need to be honest and objective about whether or not the talent pool in their local market meets their needs:

1. In what areas is the local talent pool strong and in what areas is it lacking?

2. Is the local talent pool large enough to satisfy the needs of the company as it grows?

3. Does the local talent pool have experience building high-growth, globally-competitive companies?

Canada, for example, has strong engineering and product talent, but relatively little sales and marketing talent (and almost no experienced executive-level talent). Most Central and Eastern Europe countries have exceptional engineering talent, but limited product talent. And so on.

Similarly, a country like Canada has a large enough engineering talent pool to support thousands of high-growth companies, while the smaller size of Scotland’s talent pool objectively requires companies to look south to England (or to Europe) once they reach a certain level of scale.

And the vast majority of countries not named the United States have virtually no talent who have actually seen the full journey of a globally impactful tech company from inception to exit (and, no, being part of the “founding team of Uber Canada” or the “country manager for Facebook” does not qualify — you joined a stable, well-funded company with thousands of employees, plenty of process, a big, fat salary, and a lot of wind at its back).

The problem is, many founders are either unwilling or unable to look for talent outside of their home market. And even when they are, peer pressure from local investors, politicians and the media to “build a home grown success” often makes it more challenging.

But at some point, every fast-growing tech company based outside of Silicon Valley will be faced with the same question: do we hire an inexperienced, unqualified person locally for this role and hope they grow into it, or do we keep the bar high and go to where the talent is.

When that time comes, just remember that you’re competing against my friends.

5 New Habits for the New Year

What’s the point of celebrating the new year if you aren’t going to make a bunch of resolutions that you immediately break?

On second thought, how about we try to do better than that for 2024?

Here are 5 new habits that every founder can begin this week to start the new year off strong:

1. Send Your First Investor Update of the Year This Weekend

I hate investor updates.

At least, I hated writing them when I was a founder. But sending them on a regular basis was one of the most important habits I developed as a CEO. It helped my investors stay abreast of what was happening through the ebbs and flows of my startup journey. And, it’s one of the reasons why Foundry Group had the conviction to double-down on their investment when we hadn’t quite hit our metrics.

In an environment like today’s, when many startups will need to look for additional funding from inside investors, sending regular updates is crucial. Keeping your investors up-to-date won’t guarantee they’ll invest again, but not sending regular updates almost certainly ensures that they won’t.

So send your first investor update this weekend. Even if you think it sucks. Even if it’s missing pieces. Just hit send.

Then do it again in 2 weeks.

And again 2 weeks after that.

2. Ask Your Investors if They Still ❤️ You

When times are good and term sheets are flowing, founders don’t think a lot about whether or not their investors will follow-on in the future.  But in times like these, it’s essential that founders know where they stand. Yet most don’t have a clue.

Start off 2024 by having “the talk” and asking each and every investor on your cap table, “Do You Still ❤️ Me?”.

Then do it again in 3 months.

And at the start of every quarter after that.

Combine quarterly investor check-ins with weekly investor updates and you’ll be in a much stronger position come fundraising time.

3. Calibrate Your 2024 Goals

Most founders start each year off by revisiting their KPIs from the past year and setting their goals for the new year. But not many founders calibrate those goals externally.

Make sure that you’re setting the right goals for the year by getting feedback from those around you:

• Send your 2024 objectives to each investor on your cap table with an explanation of why you set those goals and a simple question: “Do you think these are the correct objectives for this year? Why or why not?”

• Then, send them to your advisors and founder friends (your pit crew) to see what they think.

If you’re planning to fundraise at any time in 2024 or 2025, take it one step further: reach out to 3-5 investors whom you would like to lead your next round, share the deck from your most recent round and your objectives for 2024 with a simple ask: “If we hit these objectives, would it be enough for you to take a meeting regarding our <Seed, Series A, etc.> at the end of the year?” Every investor I know would gladly take 5 minutes to give you that kind of feedback (read this post to understand why).

Then do it again in 3 months.

And at the start of every quarter after that.

4. Get Up and Move

While the pandemic massively accelerated the adoption of remote work, it left us with one major “advancement” that is detrimental to our collective health: video calls.

The fidelity of Zoom and its ilk have unquestionably improved the effectiveness of our calls (by allowing us to see and interpret facial expressions). At the same time, they’ve left most of us sitting for far more hours each day than we used to.

So change things up for 2024:

• Replace as many of your recurring Zoom calls as you can with phone calls (e.g. weekly 1x1 calls with coworkers, investors, etc. — all those folks who already know what you look like)

• Then, get up and move!

One of my fitness hacks going back 15+ years is to take all of my phone calls in a room where I can stand up and walk in a circle. It might sound silly, but I can easily get 10,000+ steps a day by simply pacing while I’m on the phone.

5. Replace One Meal Per Week with Something Healthier

Many people start off the new year with a one-time reset, like having no alcohol for the month of January. But long-term improvements come from long-term adjustments.

That’s not to say you shouldn’t do “dry January”. But take whatever you’re already planning to do and add one small, sustainable tweak. Small, changes can lead to big improvements. So make one:

• If you normally eat fast food at lunch, pick one day a week and order a salad. Every week on that same day.

• If you typically eat a lot of carbs in the morning, pick one day a week and have a carb-free breakfast (eggs, yogurt, etc.).

• If you eat a lot of meat, pick one day a week and order a vegetarian dish.

• If you always order fries, pick one day a week and order a side salad.

• If you normally drink regular soda, swap out diet soda one day a week.

• If you typically have a beer after work, pick one day a week and have something non-alcoholic.

And so on. You can even do it as a team to support each other and make it fun.

The point isn’t to overhaul your entire diet, it’s to make one tiny, sustainable, change. (Just don’t be surprised when that small change expands to encapsulate your whole week).

(And if you’re looking for some healthier options, keep an eye on my new weekly food blog 😉.)

Things I Think I Think - Q4 2023

Last week brought to a close what was certainly one of the most challenging years for startups and venture capital in recent memory. It was an absolute roller coaster that saw the excitement and promise of generative AI and LLMs, the uncertainty of SVB’s collapse (remember that?) and funding challenges for companies of all stages.

We haven’t yet reached the end of the bumpy roads but, as we enter 2024, I believe there’s significant reason for optimism.

So in the spirit of sports columnist Peter King, here are 5 Things I Think I Think - Q4 2023 Edition:

1. We’re (Hopefully) Coming in for a Soft Landing

At the Panache Ventures AGM in November, my partner Prashant Matta shared with our LPs our belief that the U.S. economy would manage to pull off a soft landing. On December 13, the U.S. Federal Reserve left interest rates unchanged and signalled that, with inflation falling faster than expected, the need to leverage interest rate increases as the primary policy lever had reached an end.

"That's us thinking we've done enough," said Federal Reserve Chairman Jerome Powell, adding that rate increases were "not the base case anymore."

While I don’t expect that interest rates will fall significantly in 2024, the signal that we’ve reached “the top” provides the stability and predictability necessary for capital markets to finally start to open back up. Expect that to start with an increase in IPO announcements and flow back through growth and later-stage venture capital.

Q1 will likely still prove challenging for companies trying to raise later-stage rounds, but by Q2 I expect that we’ll begin to see regular announcements of Series B and C funding (albeit at much lower valuations that in 2020-21). Once that happens, the subset of early-stage VCs who have been sitting on their hands for the past year should come back to the table, leading to a healthy level of activity across all stages heading into the second half of 2024.

Dan Primack of Axios Pro Rata recently noted that,

“One of the first things I learned as a young deals reporter was that private markets always follow public markets, although the lag length varies. If everything holds to form, private market activity should accelerate in the coming months; particularly if the Fed cuts rates, thus loosening both lender and LP wallets.”

In his annual new year’s post, Fred Wilson of USV shared that,

“Optimistic capital markets are necessary but not sufficient for a healthy innovation economy. We also need innovation. The good news is we have a lot of that and more is coming in 2024. I have never seen an environment with more innovation in the forty years I have been in the tech sector. It is breathtaking to see.”

So why did I title this section “…(Hopefully)…”? There are two significant wildcards at play that could derail a soft landing: increased geopolitical conflict (namely, an expansion of the current conflicts in Ukraine and the Middle East, or — heaven forbid — a new conflict with China) and this year’s U.S. presidential election. Assuming that the level of geopolitical conflict remains relatively contained, I would expect a strong (but not mind-blowing) Q1 in the Canadian private markets, followed by a notable uptick in Q2 as we head into the summer.

2. Canadian Founders Have Come to Terms with the Market

In my Q3 thoughts, I observed that we were still seeing Canadian founders attempting to fundraise with unrealistic expectations about valuation (in particular, valuation expectations that were higher than what the market was supporting in Silicon Valley and more reflective of 2021-22 market conditions). As of the end of Q4, Canadian founders have broadly come to terms with the new normal.

In the final weeks of 2023, we met with a number of strong founding teams looking for Pre-Seed and Seed valuations that are very much in-line with the deals that are getting done in the U.S. and other markets. Some were first-time founders. Many were repeat founders. Notably, every startup we met with that was looking for an extension or bridge round was aiming for a valuation reflective of the current market (rather than using an inflated 2021-22 valuation as their starting point). That’s a great sign for the new year.

Valuation convergence in Silicon Valley broadly occurred in Q3 2023. Historically, Canada has lagged Silicon Valley by 1-2 quarters when it came to adjusting to market changes. The fact that we saw valuation convergence take place in Q4 — only one quarter later than Silicon Valley — is a big deal (and one that very much speaks to the maturing of Canada’s startup ecosystem).

Similar to optimistic capital markets, valuation alignment between founders and investors is a necessary but not sufficient condition for deals to get done. That said, with so much innovation happening in areas like AI, energy, climate and infrastructure, achieving convergence sets up the conditions for a strong first half of 2024.

3. The Great Shutdown has Begun

Last quarter, I predicted that we would see a lot of startups close their doors in Q4. While the end of 2023 didn’t produce a tsunami of showdowns, we definitely saw the beginning of a prolonged period of startup closures.

Around the world, there are thousands upon thousands of startups who raised their last round of funding during the ZIRP heyday of 2020-2021 but failed to achieve product-market fit. Their founders have done everything within their power to extend their runways as market conditions changed, but the majority of them (as is true with all entrepreneurial endeavors) will ultimately have to shut down. What we saw in Q4 was the first wave of founders reaching this conclusion.

While some founders publicly shared their final chapters, many more have quietly shut down

In “normal” times, many founders who reach the end of their runway are able to manufacture soft landings for their companies (typically technology/asset sales or acqui-hires). But these are not normal times. With the onslaught of AI over the past 18 months, many startups shutting down find themselves with IP that is obsolete and of minimal interest to potential acquirers. Similarly, the hiring market is by far the most favorable for employers that it’s been in more than a decade. Outside of a handful of specialized industries, there simply isn’t any demand for acqui-hires. (The only asset that remains unquestionably in-demand is cash, so we are seeing acquisitions of companies that still have significant balance sheets yet have chosen to pursue an exit long before their runway runs out.)

Overall, I expect that we’ll see relatively few acquisitions over the coming year and the vast majority of startups will be forced to unceremoniously shut their doors. This will undoubtedly include a number of large, formerly high-flying companies, which will provide plenty of fodder for the media. (Cue the inevitable freak out by Canadian media and politicians pointing fingers about the sky falling on the Canadian tech sector).

Each and every one of these shutdowns will be a difficult event for founders, employees and investors. But in the long run, reaching this long-overdue chapter will prove beneficial to the Canadian tech ecosystem (particularly at a time when AI and other technology sectors are beginning to take off). Unlike in previous cycles, when most startups simply couldn’t afford to hire experienced employees, this time around there will be tens of thousands of ambitious, hard-working people rejoining the workforce with a massive amount of startup experience to bring to the table. That’s a good thing.

4. The Calm Before the AI Storm

The drop in AI hype that started in Q3 continued into Q4, as the public became increasingly less enthralled by all things AI. The Open AI fiasco — complete with VCs unashamedly tripping over themselves to publicly curry favor with various players — certainly didn’t help things. But behind the scenes, the AI storm is brewing.

The level of activity, excitement and creativity happening right now in the Bay Area’s AI community is unlike anything I’ve seen in nearly two decades. We’re past the wave of naivety that comes with the initial introduction of a new technology (during which too many startups and investors incorrectly presume that incumbents won’t adopt it themselves), have converged on an initial AI platform “stack”, and are entering the application phase of AI.

That’s not to say that the foundational landscape of AI is set. Quite the contrary: OpenAI’s self-inflicted misadventures provided a significant opening for competitors, as it shined a giant spotlight on the platform risk faced by companies building upon its APIs. Mistral AI, in particular, is taking full advantage of OpenAI’s miscues.

Just don’t expect a wave of AI-first companies to make noise in the first half of 2024.

Building high-value applications — even ones based on AI — takes time. Regardless of the underlying technology, it takes time to talk to users/customers, time to iterate on the go-to-market hypothesis and time to get to product-market fit. It also takes time to navigate complex procurement cycles and regulatory requirements. Right now, there are numerous companies (including a number in Panache’s portfolio 😉) that are quietly building AI-first applications and iterating in closed beta. Many of these won’t see the light of day until late-2024 or even 2025.

But they’re coming.

5. A Tale of Two Startups

The startup landscape in 2024 will broadly consist of two groups of founders (and, by extension, two groups of employees) who have vastly different lived experiences.

Startups that were founded during or prior to the ZIRP heyday of 2020-2021 likely started off fast, with capital easy to come by. They were founded with the tailwinds of an enthusiastic market behind them, only to run head-first into a wall of uncertainty. For companies that manage to survive The Great Shutdown™ but have not yet attained product-market fit, the new year sadly won’t offer a much-needed respite. Instead, they’ll graduate to the next phase of a grueling marathon that not only includes finding product-market fit, but also demands that they hold together an exhausted team that will undoubtedly be inundated by job offers from hot, new startups (which don’t shoulder the same baggage).

For startups founded during or after 2022, capital was never easy to come by (with the exception of certain AI startups). These teams have had to be frugal from the start. The best of this cohort enter 2024 with strong, cohesive teams, a deep focus on customers, product-market fit, and — wait for it — revenue. Not to mention simple, stable balance sheets. As private capital begins to unlock, some of these companies will add rocket fuel to their very strong foundations, leading to a level of acceleration that we haven’t seen since 2010-2011. Many more will question whether traditional VC funding is right for them at all…

But I’ll leave that topic for another day.

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Chris Neumann's Top 10 Posts of 2023

When I launched chrisneumann.com, I committed to publishing a new post and accompanying newsletter every Wednesday. No repeats. No missed weeks. No excuses.

I also promised my wife that I wouldn’t do any work between Christmas and New Years (except in the case of a portfolio company emergency).

So here is my annual unapologetic cop-out: Chris Neumann’s Top 10 Posts of 2023 (in reverse order…so there’s a bit of drama):

#10

#9

#8

#7

#6

#5

#4

#3

#2

#1

Thanks for reading!

If you enjoyed these posts, sign up for my weekly newsletter below. 👇

See you in 2024! 🥳 🎉 🥂

All the Small Things

🎵 All the small things
True care, truth brings 🎵

OG startup advisors Blink-182 once waxed poetic about the importance of doing “all the small things.”

As with many things in life, the little things can have far more of an impact on your success when fundraising than you might expect. Many investors loudly proclaim that they don’t care what your pitch deck looks like, what you did before, or how you get introduced to them, but the reality is that first impressions matter.

Here are four small things that could cost you a new investor, plus one that could help you land one:

1. Spelling/Grammatical Mistakes

This one is a no brainer. There is absolutely, unequivocally no excuse to have spelling mistakes in your business communications today.

While this might seem unfair (particularly for founders for whom English is not their first language), there are so many tools available to ensure that your communications are free from mistakes that it’s just not defensible anymore.

This isn’t to say you can’t make a typo here or forget a comma there. But if you’re regularly sending emails, pitch decks or other materials filled with spelling or grammatical mistakes, it’s like going out in public without looking in the mirror.

2. A Gmail Address Instead of a Company Email Address

This one might seem trivial, but if your company is 6 months old and has a public website, why are you emailing me from your free Gmail account?

As an investor, I’m looking at your potential to be the CEO of a multi-billion dollar company. I need to know that you’re operating like a CEO today, not like someone who’s got a cute side project. So unless we were introduced using personal email addresses (which is actually a good thing), using a Gmail account to communicate with potential investors raises unnecessary questions, like:

• Do you email potential users/customers from your Gmail address?

• Or, worse, is this an indication that you haven’t been emailing any potential users/customers?

• Does this imply that you’re not maintaining boundaries around company R&D, IP, etc.?

(Google and Microsoft both have lead generation tie-ups with major web hosting companies, so you can almost certainly get a couple of free email accounts if you’re trying to stay ultra cheap.)

3. Misaligned Headers / Different Fonts in Your Pitch Deck

I do not believe or support the idea that founders need to pay a designer to work on their pitch deck. However, I strongly believe that the attention-to-detail reflected in your pitch deck is an indicator of your attention-to-detail in other aspects of your business. For example:

• Are headers in the same position on each slide?

• Do you have the same fonts / font sizes / colors on each slide?

• Do the numbers in your metrics match across slides?

• Are the page numbers correct?

If you’re trying to raise money with a deck that doesn’t have basic cleanliness and hygiene taken care of, how am I to believe that your product or company will be any better? Moreover, how am I to believe that you’ll set the appropriate examples for your company as a founder?

A number of years ago, Dave Kellogg wrote a blog post titled Not in my Kitchen: Leaders as Norm-Setters. I wholeheartedly agree with Dave’s perspective that founders are the ultimate norm-setters for the companies they create. If my first impression from you is that attention-to-detail is not a priority, then I have no reason to believe that it will suddenly become one.

And in my experience, a lack of attention-to-detail is not a recipe for success.

4. Being Late to Zoom Meetings

I was raised in the church of “Early is on time. On time is late. Late is unacceptable.”

While I’ve certainly softened this stance since having kids, I absolutely take note when a founder I’m meeting with is late to a Zoom call. Notwithstanding technical issues (which, let’s be honest, happen all the time), showing up on time to fundraising meetings is incredibly important. Including when you’ve scheduled back-to-back meetings.

While it might seem like the right move to go over time with an engaged VC, many founders misinterpret an investor’s interest in the topic as interest in funding your company. So you might be giving too much time to an investor who’s just mining you for information, while leaving the one legitimately interested in investing hanging out to dry.

Paradoxically, insisting on keeping a meeting to time and cutting it off (“I’ve got a hard stop at 4:25 so that I can prep for my next call.”) is the real power move.

5. “Thank You” Notes

Many of you aren’t old enough to remember when sending someone a hand-written “thank you” note was common courtesy, but it used to be a thing. While that tradition has all but faded away, it can help you stick out from the fundraising crowd, while helping you to maintain control over your process.

Now, I’m not suggesting that you actually mail out hand-written “thank you” notes. Rather, at the end of each day, take 10 minutes to send a follow-up email to every investor you spoke with that day. Your emails should include:

• A genuine “thank you” for the conversation, ideally with a personalized reference to something you discussed on the call (“thank you for X,” rather than just “thank you”)

• A summary of key takeaways

• A recap/reminder of agreed next steps

I would guess that fewer than 1% of founders I meet with send me a follow-up email after our call, but the ones who do absolutely go up a notch in my mind.

"What if Google Builds It?" is No Longer a Bullshit Question

For as long as I can remember, VCs have been faithfully asking founders variations of the question, “What if <incumbent> builds it?”

And for as long as I can remember, it’s been mocked by founders and investors alike as one of the laziest questions a VC could ask.

In some cases — typically when trying to figure out “is this a feature or a product?” — asking a founder about potential competition from incumbents can lead to an enlightening discussion. But more often than not, there are far better ways to explore the competitive landscape. Deep down, asking a founder “what if Google (or Facebook, or Amazon, or Oracle, or…) builds it?” has always been a lazy question.

Until now.

The advent of LLMs, alongside feature-rich offerings from OpenAI and others, has led to a rush of development around AI. Countless products are being built by small teams uncovering use cases that can be solved using AI.

Historically, the development of new, vertical-specific applications would take many months (or years) and teams of 10 or more. This simple fact is why the question “what if <incumbent> builds it?” was generally a lazy one: it presumed that the incumbent would allocate a considerable amount of time and resources to an experiment.

(The fact that one of the most impactful business books of all time focuses on why incumbents can’t do this should have been enough to eliminate this question from the average investor’s lexicon, but I digress…)

Here’s the thing: the calculus for AI is different.

If a team of 2-3 founders can create a full-fledged application in a matter of weeks, an incumbent can absolutely do the same. The cost is lower, the risk is lower, and incumbents around the world are actively doing it.

As a case-in-point, over the past year, countless startups raised funding and came to market with services that used generative AI to create backgrounds and images for e-commerce sites. The idea made sense: instead of spending a huge amount of time and money to stage photographs of every product you sell, take photos of the items in a showroom and let AI do the rest.

Then Amazon did this.

In one fell swoop, this entire category of startups was rendered moot. And this isn’t an outlier.

In his Q2 earnings call, Amazon CEO Andy Jassy stated that,

“Every single one” of Amazon’s businesses has “multiple generative AI initiatives going right now,”

While Amazon itself is an outlier when it comes to e-commerce businesses, it isn’t when it comes to tech incumbents. Every incumbent around the world is actively exploring how and where they can incorporate generative AI into their businesses.

Founders need to understand that and appreciate that it is no longer lazy for investors to ask about incumbents in this way. In fact, it’s their duty to. Given the sheer breadth of advancements in generative AI, it is reasonable and rationale to presume that every incumbent in every industry has people exploring what is possible with these new technologies. Some of what they develop will be exceptional. Some of it will have the stain of an old guy desperate to re-live his glory days. A lot of it will be “good enough” for their customers.

Don’t ever forget that this man once scored four touchdowns in a single game

As a founder, you can no longer scoff when an investor asks, “what if <incumbent> builds it?”

More than ever, you need to provide a compelling answer as to why, even if the incumbent does try to build something similar, your version will win. You need to lay out the case as to why customers will pay to use your product over the maybe-not-as-good-but-free offerings that incumbents will inevitably roll out.

Will inevitably roll out.

“What if Google builds it?” is no longer a bullshit question. It's a reflection of the changing competitive landscape. If you're building something compelling, then it shouldn't scare you. But if you can’t (or won’t) credibly answer it, then you may very well be building a feature.

Canadian Founders Need to Go to SF. Now.

Last week, Panache Ventures hosted four early-stage California VCs in Vancouver for a panel on startups, fundraising, and the opportunities and challenges for companies based outside of Silicon Valley.

Five VCs walk into a comedy club…

The investors in our first California Dreamin’ event were specifically chosen for two reasons:

1. All of them are based in California

2. None of them are originally from California

As such, they each came with a particular life experience that was free of the “born and raised” Kool-aid that many VCs who grew up in the Bay Area embody. Despite coming from different places with different backgrounds, each of them had the same message:

The world’s best founders go to Silicon Valley.

To be clear, the VC panelists weren’t necessarily advocating for founders to move their companies to San Francisco. Rather, they were noting that the best, most ambitious founders in the world regularly travel there to learn, hire, benchmark and access capital. That’s never been more apparent than today.

Right now, San Francisco is on fire (and for once, it’s not the the kind in a forest that’s caused by an inept public utility).

Sept. 9, 2020 is a day San Franciscans won’t soon forget

The level of activity, excitement and creativity happening right now in the Bay Area’s tech community is unlike anything I’ve seen in nearly two decades. There are literally dozens of events happening each night, many of them related to AI.

There are more AI events on a random Tuesday night in SF then in a full week across all of Canada

Under normal circumstances, I’m the first person to tell founders not to waste time at conferences, meetups, and social events that aren’t directly related to their business. But what’s happening in the Bay Area right now is different. It’s special.

What’s happening right now represents a convergence of excitement and creativity around a new technological wave (AI) and a long-awaited resurgence of a struggling yet world-leading city. I’ve been to SF four times in the past two months and the momentum is vicerally building week-over-week.

I believe that this is a unique moment in time for both San Francisco and tech in general. And it’s one that likely won’t last long.

A big part of the reason is that we’re so early in the current AI cycle. Alex Kolicich of 8VC recently wrote:

I genuinely believe that the impact of this new generation of models will be revolutionary over the next decade. It will transform how every industry operates….I believe the majority of the capital invested today will be lost, similar to what happened in the .com era. However, I expect there will be a select group of companies that endure and build the future.

I generally agree with this perspective. We’re very much in a period of experimentation built upon a rapidly evolving technological base (a fact made all the more clear with the recent OpenAI drama). A lot of the technology and companies being built today won’t survive. But what will endure are the communities being created in and around all of the activity taking place in Silicon Valley. And that’s not some wishy-washy nonsense. It’s happened before.

So if you’re a Canadian founder, get on a plane and go to the Bay Area. Go for a week. Go for a month. Go for whatever period of time you can. Land on the ground and go to as many events and meetups as possible. You don’t need to know anyone beforehand to make it happen. You just need to have the willingness to dive in.

They might not have reliable WiFi, but at least they get you there

Want help getting started? The SF IRL newsletter lists many of the in-person events going on in-and-around San Francisco.

One of our Associates, Sarah Willson, joined me in SF a few weeks ago. Armed only with this newsletter (and a lot of hustle), she went to 7 events in two days and made dozens of meaningful connections with founders and investors.

I can’t promise you’ll learn anything specific. I won’t promise that it will help you get to product-market fit or secure your next investor. But I can absolutely guarantee that if you spend time in San Francisco right now, you’ll come away with enthusiasm injected into your veins, more connections with founders and investors in Silicon Valley than you’ve likely ever had, and an understanding of the insane velocity of iteration that’s happening right now in the Bay Area.

And if your goal is to win the world, that’s exactly what you need.

How to Get a VC to See Past Your Resume

As a 3x founder turned Pre-Seed VC, one of the things that I find the most frustrating about certain early-stage investors is their inability to see past what a founder has done before. You know the ones I’m talking about: the VCs who, upon meeting a founding team, immediately focus on all of the things that aren’t on their resume:

• They never did sales before

• They haven’t managed a team before

• They don’t have any business experience

• They’ve never released a production product

And so on.

These investors expect every t to be crossed and every i to be dotted from a team perspective, no matter how early the company is. It’s as though they presume that founders aren’t capable of growing and learning.

Here’s the thing: they’re not entirely wrong.

In order for a startup to go from zero to hero, it needs to develop all manner of capabilities. One framework that effectively captures the areas of responsibility necessary to build a successful company is the trio of “hipster, hacker, and hustler”:

• The Hipster: who’s going to make it cool? (who’s going to make sure you’re building the the right product for the market?)

  • Market research

  • Product management

  • Marketing

  • Customer success

• The Hacker: who’s going to build the product?

  • Engineering

• The Hustler: who’s going to make money and keep the lights on?

  • Sales

  • Operations

  • Finance

  • HR

While not all investors use this specific terminology, ultimately these are the core capabilities they’re worried about when evaluating a founding team. The more effectively you can demonstrate that someone on the founding team can credibly own each one of these areas — either now or in the future — the more likely you are to secure an investment.

So how do you convince an investor that your founding team is capable of excelling in areas where you have no obviously relevant experience?

You show them what’s possible.

Who’s Going to Do It?

First and foremost, it’s important to convince potential investors that there is at least one person on the founding team who is genuinely inclined to own each of these areas. If you’re a team of engineers and everyone avoids eye contact when the topic of sales comes up, that’s a problem.

“Although we all come from technical backgrounds, our experience and interests naturally lead to complementary areas of responsibility…”

In many startups, the CEO is the person who came up with the original idea and/or has the most direct experience with the problem you’re solving. That person may-or-may-not be naturally inclined towards sales, fundraising, etc., but the end of the day, they signed up for the job. It’s essential that the CEO comes across every bit as excited about market research and solving customer pain points as they are building the product if you hope to get investors across the line.

What Relevant Experience Do You Have?

Second, try to demonstrate that the owner of each of these areas has some level of applicable experience, even if it’s not direct. That could be in the form of coursework at school, membership in extracurricular activities, leadership positions in non-profits. It can also be implied by virtue of the startup’s early progress:

“While Monique and Ryan were focused on building the initial MVP, I met with 10 - 15 potential customers each week in order to understand more about their pain points, buying processes and willingness to pay for a solution.”

What’s the Plan to Grow?

Finally, show potential investors that you have a plan for supplementing your existing capabilities and filling any obvious holes through hiring, advisors or even mentorship:

Our goal is to grow from $5K MRR today to $50K MRR in 12 months. We know that in order to achieve that, we need to expand our current capabilities. Here’s how we plan to do that:

- Hiring a junior marketer who will work directly with X to focus on testing user acquisition channels

- Meeting weekly with our [advisor / mentor / angel investor with relevant experience] to review what’s working / not working in terms of customer conversion so that we can more effectively iterate on our GTM

- I’m is a member of a peer group of PLG startup CEOs that meet monthly and have an active WhatsApp group where we share strategies and learnings. We’ve already overcome X, Y and Z challenges with their help.

The Startup FAQ

In general, it’s going to be difficult to cover all of these topics during an initial 20-30 minute meeting. Having a “Startup FAQ” that you send potential investors after your first call is a great way to preempt these types of concerns. As part of your fundraising preparation, ask your advisors/angel investors/founder friends to share the top questions/objections they would have about your company. Some will be incorporated into slides in your deck. Others, like those covered above, might make more sense in a written document you share after the meeting.

Some VCs will never be able to see past your resume. But the more effectively you can paint a picture of what’s possible with your team, the better you position yourselves for success.

Anatomy of a VC AGM

November is AGM season for many VCs. It’s the time of year when venture capital firms all over the world hold their “Annual General Meetings.” But what is a VC AGM and what do VCs tell their investors behind closed doors?

An annual general meeting is a meeting held once each year for all of the investors in a company. In the case of VC firms, those investors are referred to as “limited partners” (LPs). The AGM is an opportunity for all of the VC’s LPs — irrespective of the size of their investment — to hear from the firm’s leadership and ask questions of the partners. AGMs are historically held in-person, though online/hybrid meetings have become commonplace post-Covid. In the case of Panache Ventures, we hold our AGM in-person each year in Montreal (where our firm is based) but also stream it online for LPs who aren’t able to join us live.

VC AGMs typically consist of three sections:

1. An LPAC-only component (the “LPAC Meeting”)

2. A component open to all of the LPs in the firm

3. A component open to both LPs in the firm and select invited guests

The LPAC Meeting(s)

Most VC funds have an advisory committee comprised of representatives from the largest LPs in the fund, called the “Limited Partner Advisory Committee” (or LPAC). In many respects, the LPAC serves a governance roll similar to that provided by a typical company’s board. For firms that operate multiple funds, like Panache Ventures, there is one LPAC per fund. Each LPAC is responsible for representing the interests of all of the LPs in the particular fund that they’re advising.

The partners of the firm meet regularly with each of their LPACs — typically once per quarter — to provide an update on the firm’s operations, seek feedback and advice on new strategies and discuss sensitive matters. In addition, certain actions require approval from the LPAC, such as investing more than a threshold amount into a single company. The LPAC meeting that is held alongside the AGM often has a “year in review” component to it, in addition to the standard agenda items.

The LP Meeting

The “main event” at a VC’s AGM is a closed-door meeting for investors in one or more of the firm’s funds. The LP meeting generally includes the following topics:

• Financial and performance updates on each fund that the VC operates

• Spotlights on the best performing companies in each fund (the companies that are likely to have the biggest impact on the fund’s overall performance)

• Non-public updates on portfolio companies that have successfully raised new funding rounds

• Detailed introductions to some of the companies that the VC invested in during the year

• Macroeconomic updates (what is the VC’s perspective on macroeconomic trends)

• Lessons from the previous year / predictions for the coming year

• Operational updates (team updates, infrastructure, etc.)

• Updates on firm strategy and future funds

• Open Q&A with the firm’s partners

A typical LP meeting will range from 1 - 3 hours, depending on how many funds the firm operates.

The “Public” Meeting

After the LP meeting ends, many VCs hold an event that is “open to the public” (i.e. key ecosystem partners and potential future LPs are invited to join current LPs). This third section is the opportunity for the firm to show off some of its portfolio companies and market the firm to a broader audience of investors.

The public meeting typically focuses on showcasing the best founders in the portfolio. In some cases, individual founders give talks or fireside chats with one of the firm’s partners. In other cases, a firm might present panels of founders and/or subject matter experts. At Panache’s AGM, we typically invite groups of founders from sectors that we’re particularly excited about to discuss their companies and the state of their industry.

Discussing the future of AI with the founders of Kicker, HumanFirst and Reworkd

Many VCs also invite high-profile “headline speakers” to give keynote talks in order to show off the influence of the firm. In contrast, some VCs philosophically prefer to stick to their portfolio.

After that, there’s almost always a post-AGM networking event for the VC’s employees, LPs, portfolio founders and invited guests to mix and mingle.

Make It Easy for Customers to Pay You

Last week, I wrote about the importance of removing friction for early adopters in order to make it easy for customers to love you.

This week, I’m going to touch on another seemingly obvious, but often overlooked capability that startups need to develop: making it easy for customers to pay you.

Let’s start with an anecdote:

The One About a Microwave

A few weeks ago, I needed to buy a new microwave. Our old one had developed some *ahem* extra features, notably that opening the door would short out the entire kitchen.

Normally, I’m the guy who spends a couple of hours sifting through online reviews and then orders something delivered to the house. In this case, the various manufacturers’ websites didn’t make it easy to get all of the information I needed to make a purchase decision, so I headed to the local appliance store. My goal: to buy and bring home a new microwave.

But things didn’t go as planned. By the time the day was done, I had visited 5 different stores and ended the day without a microwave.

Here’s what happened:

Store #1

I walked into the first store just after it opened and was greeted by a friendly sales rep. I told him that I needed to replace a built-in microwave and shared the pertinent specs. After a few minutes, he showed me a floor model that they were getting rid of on clearance that had everything I needed. Perfect!

Except for one thing: he couldn’t provide me with a delivery date. The store’s policy was to not deliver floor models until they had a new replacement model to sell, so as to not leave a “hole” in their display. And the sales rep had no idea when they would be getting a new microwave model in.

So he could not provide me with a delivery date (or even an estimate), even if I bought it.

Store #2

Confused and disappointed, I left the first store and headed to a “big box” electronics retailer, confident that I could procure a microwave there. As I walked around looking at the various models, I kept waiting to be greeted by a sales rep.

And then I started looking for a sales rep.

Alas, there was no sales rep in the appliance department that morning.

Store #3

Next, I travelled to a well-known home improvement store. In the appliance department, I saw a couple of sales reps busy helping other customers, so I wandered the aisles to get acquainted with their selection. After narrowing things down, I made eye contact with one of the reps and patiently waited while he finished up with another couple’s refrigerator order.

My two kids were accompanying me on this adventure. While we waited our turn a few aisles away, they were happily playing with each other, goofing off and giggling.

After about 10 minutes, the sales rep I was waiting on looked up at me from across the room and loudly proclaimed, “Can you get your kids to stop screaming? I’m trying to help a customer here.”

Store #4

By this point, it was approaching noon and my “early riser” advantage was long gone. The fourth store (a combination furniture and appliance store) had a reasonable selection of microwaves, including several potential matches. Unfortunately, there were at least a dozen other customers in the appliance department and only a single sales rep on staff.

Conscious that I had exhausted all of the good will I could muster out of my kids (who, for real, were incredibly patient through all of this), I waved the white flag and we headed for lunch.

But I wasn’t quite ready to give up. I managed to bribe them with some dessert in exchange for accompanying me to one more store…

Store #5

The fifth and final store of the day was another dedicated appliance store. I walked in and was immediately greeted by a friendly sales rep. He took one look at my two kids and escorted them to a table covered in coloring books and crayons. He then asked if there was something specific I was looking for.

I told him about my need to replace a built-in microwave, shared the pertinent specs and held my breath.

He responded by asking a couple of qualifying questions (which matched the particular questions that had caused me to embark on this journey to begin with) and then replied, “Let’s start with what’s available in inventory and go from there.”

5 minutes later, I had chosen one of the microwaves that they had in stock. 10 minutes later, I was out the door (albeit without the microwave, which I would have to pickup the next day at their warehouse — but it was still a success in my mind).

Less than 20 minutes start-to-finish.

Lessons for Startups

While it might be easy to dismiss my adventures in microwave shopping as a relic of old school brick-and-mortar retail, the reality is that both offline and online businesses often struggle to close what should be the easiest sales.

In today’s world, a significant percentage of prospects have thoroughly researched products and competition before ever engaging with a company. They know what they want and are ready to buy…if you make it easy for them.

In these cases, the sales are yours to lose.

And there are plenty of ways to lose them:

• A SaaS website that only has “Contact Us” on the pricing page or “Book a Demo” as the call to action, instead of a way to sign up (or at least start a buying process)

• SDRs who aren’t trained to identify buying signals and unnecessarily stick to their scripts

• Overly complicated pricing tiers that introduce confusion and ambiguity into the buying process

• Founders who pitch the future state of the product instead of focusing on what is available today (and in doing so, miss out on the fact that the current state is potentially as exciting to the prospect as the future state is to you)

Even in the earliest days of a startup, if you’re building something of genuine value, there are likely customers who are ready (and eager) to buy. Learning how to identify buying signals and simplifying your buying process in order to make it easy for those customers to pay you is essential to capturing as much early value as you can.

Because if someone needs a microwave today, they’re going to keep searching until they find one.