Ride It to the Sky

The world’s richest man bought Twitter and started making changes. The “For You” tab was prioritized over the accounts users selected to follow. Blue checkmarks went on sale and no longer were a recognition of authenticity and notability. Users now need to pay to be seen. And then Elon Musk proclaimed users would be rate limited depending on how much money they coughed up.

This is a lot of change for the people who spent many years, in some instances well over a decade, building an audience on the service. The people who helped turn Twitter into the special place it always has been could no longer communicate with their followers to the degree they had in the past. A lot of users’ feeds turned into clickbait threads, conspiracy theories, and other various assortments of garbage. This type of rapid sea change is unprecedented in the modern internet era. Open platforms have crippled their developer ecosystems in the past (e.g. Facebook and Zynga, Twitter and their various third-party clients, and Reddit as of late), but in this instance the very nature of the service changed so dramatically on a dime for all of its users, not just its third-party developers.

Like a knight in shining armor, Meta launched Threads last week as the antidote to the Twitter calamity. The most important piece of Thread news thus far is this post by Adam Mosseri, the Head of Instagram and Threads:

The ability to own your own audience and move it with you to another service is a profoundly important ideal that is diametrically opposed to every incentive of the incumbent platforms. It’s both remarkable and encouraging to see Meta commit to this. It is also very much aligned with the ideals crypto believers have espoused: that applications should be built on open protocols with portability, composability, and transparency as defining characteristics. Fred Wilson wrote an excellent piece on the importance of this moment and how it can lead to a new, vibrant and open social media ecosystem.

For a long time people have thrown out hypothetical scenarios about what would happen if an important platform started to censor its users or changed so drastically that what was once a critical piece of digital communication infrastructure degraded or became obsolete. It could conceivably leave billions of people in the dark. Plenty of people have individually been de-platformed in the past, but the rapid changes at Twitter are the first time a global population (in the West) has simultaneously experienced such tangible change at a mass scale. The hypothetical is now real, and the aforementioned concept articulated by Mosseri is far and away what matters most for the future of social media. Let’s hope Threads sees this commitment through and a new precedent is created.

Entertaining offers from VCs to preempt your next round is almost always a waste of time and sometimes dangerous. On three separate occasions at GroupMe and Fundera, I let excellent VCs that were interested in our company conduct diligence when we weren’t actively fundraising. In every single instance we spent months getting excited that a top tier VC was going to make our lives easy by preempting our next round with a term sheet. And in every single instance they passed.

A preemptive financing is an extraordinarily compelling proposition for entrepreneurs: skip the formal and painstaking fundraising process and replace it with a painless gift from someone you like at a VC firm you admire. In the recent bull market when money was recklessly thrown around preemptive rounds happened aplenty. Capital allocators were incentivized to deploy their wares as quickly as possible and were increasingly diligence and valuation insensitive. That epoch is dead and now we are living in reality again, which means that it’s important for entrepreneurs to understand the motivations of a VC.

When a VC says they want to preempt your round, they are being savvy and doing their job. They are attempting to get a first look at your company and avoid competing to invest in a way that appeals to your sensibilities. It does not mean they are committed to investing. It simply means they will evaluate the company outside of your designated fundraising plan and then make an investment decision.

Frequently a lot of these processes kick off because an existing investor introduces you to one of their friends they say is a good VC and would be helpful for your company. It gets you excited because there’s social proof, you trust your existing investor, and you begin to hallucinate that there’s an easy fundraising path forward. There’s seldom an easy path.

Entrepreneurs need to be mindful of and for the most part avoid the “I want to preempt your next round!” trap for several reasons:

• When you talk to one venture firm, even if you think you’re embarking on some clandestine operation, the clock starts on your fundraise whether you like it or not. Word gets around – VCs talk. They go to dinners and banter and gossip through a variety of channels. Some will say they passed even if they never got a look in the first place. Some will say the passed after issuing a term sheet you rejected. You don’t want to be tainted goods, and if there’s a cycle of “we passed” stories out there it makes any subsequent fundraise all the more difficult.
• Fundraising mainly sucks for most entrepreneurs. It’s emotionally draining and almost always takes longer than you want. Engaging in a preemptive process has a real opportunity cost when it comes to focusing and executing on what matters most.
• The preempting investor has no incentive to move fast, especially in this market. If they think they’re getting an exclusive look at your company, most of the time they’ll take their sweet ass time.
• They will likely say No and that you should keep them updated on your progress. It will take weeks at a minimum, but likely months to get to this point. It’s the same probable ending that would happen during a more rigorous and standard go to market process.
• Competition is important. Unfortunately (and fortunately for some I suppose), a lot of VCs have a herd mentality and nothing speeds up a process and gets to Yes like competition and FOMO. A preemptive process strips you of control of the narrative and dynamics of a proper fundraise.

I’ve been burned by entertaining preemptive rounds on multiple occasions. It’s like touching the hot stove repeatedly.

There are some compelling reasons to entertain the preemptive round on occasion. You get to learn why people you like and respect will say No. This is a gift when you decide to run a real process so you can get ahead of the curve. Letting an inside investor (someone who is already on your cap table) that you like and already knows the status of the business is a great reason to consider it. Especially if the Partner is someone you deeply trust. This is the ideal scenario – it saves you time and you know you’re not working with a wildcard. Same could be said for a new investor that you have a long-standing, deep, and trusting relationship with. If these things are true, then it’s worth considering. Otherwise, in this market, be wary of someone trying to preempt your round.

Carrie (my wife) and I just finished binging season two of The Bear. The show is spectacular. It provides a unique and intense glimpse into the world of high-end hospitality. One of the really beautiful things it highlighted through the season was how much fellow chefs help each other. Different members of The Bear would shadow their counterparts at other restaurants and were greeted with open arms.

After we watched it Carrie asked me if I thought that chefs were actually that kind and supportive of one another in real life. I don’t know the answer, but I’m inclined to believe yes because I’ve seen similar dynamics amongst founders in the world of company building. Building things as an entrepreneur, regardless of your industry, is hard and lonely. What has continuously surprised me is how willing other founders and operators are to share their learnings and insights.

When we started Fundera I had this obsession with wanting to be able to visualize the mechanics of our business in a spreadsheet. I needed to know all of our levers and how every aspect of the funnel was performing across every relevant dimension. I didn’t know how to do this so I asked First Round if they had any suggestions. They connected me with Matt Salzberg who they said had this practice down to a science at Blue Apron. Similar to the chefs in The Bear, Matt welcomed me kindly. He hid nothing about how he managed and measured the progress of Blue Apron, and walked me through his daily/weekly dashboards line by line. He had a company to run but paid it forward and helped me learn – something that provided no immediate benefit to him or his business.

This type of support is commonplace. You just need to ask for it and occasionally know where to look for it. Another place it can be found is in CEO support groups. There are many different iterations of this, YPO being a common one. I did Venwise and met monthly with a group of fellow CEOs navigating similar problems to me. Everyone was open and honest. Nobody was peacocking. I’ve also participated in CEO Summits where the “I’m crushing it” veneers come down and everyone is vulnerable – both seeking and imparting wisdom.

Ecosystem support is a great enabler and accelerant for progress. Older generations help newer ones with wisdom and capital, and new generations inspire the older ones, pushing the boundaries of what’s imaginable with charmingly naive gusto. The Bear does an exceptional job capturing this phenomenon in hospitality and I loved it because it distinctly reminded me of what we have in the best of tech. It’s one of the things that motivates me to do and be better.

There are several different archetypes of tech entrepreneurs. I’ve noticed some of these traits in myself and many other people who have built companies. I have opinions about which archetypes have a higher likelihood of achieving success, but all of them seem to work. There are also a lot of entrepreneurs who have characteristics of multiple of these archetypes and live at their various intersections. I’ve attempted to group them into five categories (but I’m sure there are plenty more): the serial inventor, the opportunist, the problem obsessor, the industry expert, and the academic.

The Serial Inventor is clinically addicted to building things. For some ADD can be a hindrance. For the serial inventor it’s a superpower. This entrepreneur believes that everything they encounter in the world can be done better. This drives them absolutely insane to the point where they need to constantly be hacking away at these problems. There is no off button for their capacity to generate ideas and actualize them. This person is usually inspiring to be around. You may use the word Genius to describe them, and their ability to go broad is remarkable.

The Opportunist is someone who sees a hole in a market and goes for it. I’ve seen a lot of Associates at VC firms fit into this category. This is a person who evaluates and maps markets, knows all about TAM, studies industry trends, and when the timing is right and they develop the guts, they pounce. The Samwer Brothers from Rocket Internet are a quintessential example of this, studying companies that work in the US and bringing them to Europe. Non-industry specific venture studios also can be grouped into the archetype. I don’t use the word “Opportunist” pejoratively – entrepreneurship is all about seeing opportunity and chasing it.

The Problem Obsessor is the entrepreneur that is absolutely obsessed with a singular problem. Sometimes it’s hyper-specific like “why can’t we do reply all over SMS?” and other times it might be super broad like “too many people die of heart disease.” A lot of times this person is a generalist. They experience a problem firsthand and then they become fervently passionate about solving it. Sometimes they only want to solve it for themselves but their solution catches fire. I love this approach because it scratches a very personal itch.

The Industry Expert is the entrepreneur who has a very unique insight into how something should work in a relatively niche environment, but believes that insight/solution may be more broadly applicable with big-business viability. These are the people who may have been working in a corner of information security or specialized databases for many years and believe they can invent something novel and important in that space. We see this a lot in enterprise, but it can be applicable anywhere. They’re steeped in an industry, have a competitive advantage in the knowledge and network they’ve accumulated, and they’re ready to leave their mark.

The Academic is the entrepreneur who finally decides that their research, scientific knowledge or invention is ready for commercialization and they’re the one to do it. Sometimes it happens by accident. Sometimes a business person (maybe an Opportunist?) gives them the nudge. Sometimes they’re just ready to rock. They’re super technical and have world-class depth in an area, and translate that knowledge into something groundbreaking.

I’ve been a couple of these. GroupMe was a very personal problem. We wanted to build reply-all SMS for our friends so we could stay in touch before, during and after music festivals. Then we realized we were building a close-ties network and just built features that made our experiences with our groups more fun. If I am being honest with myself Fundera was more of an Opportunist approach. I was inspired by companies like Lending Club and Funding Circle in 2013 and innovations in lending, and believed there was a unique moment-in-time opportunity to create a dominant platform in the US for SMB lending. I tried to convince myself that it was all about “empowering entrepreneurs.” A piece of it definitely was. But truthfully I mainly just wanted to build a great business. It’s taken me a while to admit this to myself and be totally comfortable with it.

One of the things I’ve been grappling with is an entrepreneur’s “interest longevity.” Regardless of archetype, interest in a product / business / idea / industry likely doesn’t last forever. I don’t think I could have done GroupMe for a decade and still been as passionate about the problem, and my enthusiasm for the world of SMB lending meaningfully waned towards the end of my Fundera journey. If you talk to any Problem Obsessor, Opportunist or Generalist who has built a company, they will almost always declaratively say they’ll never build another company in that industry again. I do wonder if one archetype is inherently more obsessive for longer durations, and I have immense respect for and bewilderment of entrepreneurs who remain passionate about their singular company or space for decades. It’s a superpower that I’m glad I don’t have. Mixing it up is fun for me.

Another observation is that it’s really neat when entrepreneurs from different archetypes partner with one another to start companies, and when executives who resemble these archetypes join companies. The differences in respective characteristics and motivations feed off each other for the better and ultimately create a winning environment for success. Different archetypes bring different energy and raison d’etre to the table, and that makes everything more fun.

I’ve come to the conclusion that after their first or second exit, almost every entrepreneur goes through an identical existential crisis and thought process around what to do next with their life. I can confidently say this because I’m going through it right now and as part of my process I’ve talked to a lot of different entrepreneurs who have experienced something similar.

The process looks something like this:

-After having spent nearly a decade building companies, you finally have the opportunity to lift your head up and see the world at large. There are many different problems that need solving, and a lot of exciting things happening beyond the myopic thing you maniacally focused on for the past ten years. Also, holy shit! While you’ve been heads down it feels like the world has passed you by. Things have changed! It’s time to catch up.

-You begin your journey of reflection and start to recognize a couple different things:

• Wow, it would be really great and smart to have a lot more diversification in your portfolio instead of one giant egg. Is there a construct that enables you to do this?
• Maybe I should be somewhere between more thoughtful to super thoughtful about the idea I want to pursue next. That will probably produce a better outcome!
• Do I really want to commit another decade+ to one single thing again? Do I still have the energy to do this?

-You start to evaluate alternatives to being an entrepreneur. The most obvious one is VC. You’re cut out for the job because you’ve built companies. You also think it might be easier than building a company. You will probably work super hard because you care about being great, but you won’t suffer nearly the same stress. Also, you can make a lot of money. And if you’re not a shitty person, which you probably don’t think you are, you genuinely believe entrepreneurs will like and want to work with you. Maybe you become a VC, but you also want to know if there are other configurations that might work for you.

-Instead of abandoning building things, you come up with the amazing idea that every other entrepreneur has thought of before and decide that instead of building one company at a time you want to build 10 at a time! It’s time for a venture studio / incubator! I want to be just like Kevin Ryan and the people at Sutter Hill. If Atomic figured it out so can I! I don’t just have to put all my eggs in one basket, I can have many baskets simultaneously!

-Wait! Another alternative to this is just building a Hold Co. Have you seen IAC? Maybe we can buy companies and make them better in addition or as a substitute to just building companies. Have you heard of Tiny? Do you listen to podcasts featuring “business experts” who are building these Hold Cos? OMG have you heard of Constellation Software? Holy shit, LFG!!!!!

-Eh, that was a close call. I almost bought an HVAC company.

-Where do I start? Hunting for ideas feels really icky and disingenuous. When I used to build stuff I did it because I was passionate about the thing. I cared about solving a problem. I didn’t just map out markets and analyze companies and say, “There’s a gap there! It’s time to build!” I want to feel that fervor again. Why don’t I feel it? Am I too old? Did I lose my edge?

-I’ll just eat some psychedelics and then the answers will come to me. Ugh, no answers yet. Maybe I’ll eat some more!

-Okay, I know the Meaning of Life now but I still have no idea WTF to do with mine.

-Now what…

-I guess one day at a time and one foot in front of the other. I believe something will inevitably inescapably call to me and the momentum will snowball. Just need to optimize for luck and serendipity in the interim. Finally at peace. Let’s see where it goes…

-Step 3: Profit

And that, my friends, is the cliche, tried and tested journey that insane people embark upon when venturing once again into the unknown.