Danger of Optimising for Valuation | The problem with large VC funds | Startups stay a high risk business at later stages | New Definition for Unicorns - Micah Rosenbloom, Founder Collective

 Welcome to a new episode of the Unicorn Bakery. My name is Fabian Tausch and today we're looking at the recipe for success of Founder Collective. The Founder Collective invested in companies like Uber, BuzzFeed, Venmo, TradeTask, Periscope and many many more. Therefore today's guest is Micah Rosenblum, managing partner of the Founder Collective. Micah built and sold several companies before he became a venture capitalist and we will talk about picking startups a bit in the super early stage. Why you shouldn't celebrate valuations too much as a founder and I think most importantly a topic that nobody really talks about. What happens when you're not the perfect VC case but you took on money from investors. So what happens if you have millions in the bank from investors but you're not the perfect unicorn story and you're for a VC fund maybe the mediocre outcome but you're still a great company. I would love to pick that topic in a few seconds. So as I'm very sure that it's interesting for lots of founders out there let's dive right into it. Micah welcome to the Unicorn Bakery. Thank you Fabian. It's a pleasure to be here and these are topics I love to talk about and if I can pay it forward as much as possible. I was an entrepreneur virtually right out of college before the blogosphere and before a lot of content existed and so we had to figure it out on our own and I think there's just so much opportunity now to get up the learning curve so much quicker. So if I can be a part of that it's my privilege and honor to do that. Thanks for being here. I would start with a question that I always like to ask VCs because it's very helpful for founders. How do you think about picking founders and startups in the early stage? What is important to you? Yeah and even I just want to back up for a second and say we think a lot about language and so because we think language dictates behavior and so we actually don't use the word picking very much and we actually don't love the word unicorn. No disrespect. I love the name Unicorn Bakery by the way. It's a show name. It's great. The reason we don't use the word picking is we really feel like we're partnering with our founders. It's not merely a transaction like buying a share of Tesla but literally could be a decade or more of a relationship. So the picking yes that's part of the process but it's a very small part of an overall multi-variable equation over a long period of time that involves a lot of people. So you know to the question of how we think about it you know we are in some ways like glorified sales reps. We you know our business has a sales kind of front end to it which means we see thousands and thousands of opportunities every year. We actually put everything anything we get inbound goes into a CRM which we've created an air table. We've got a team of about seven people including myself that we know that down but we look at everything and then now that some of that stuff comes about a third comes from other investors about 25 percent comes from other entrepreneurs in the portfolio. Some of them come from accelerators. Some of them come in cold. Some of them come in you know discussions with university students who are in fact WHOOP which my partner Eric led came from a university accelerator at Harvard. Will was an undergrad student there. So they come from all different places and then we winnow it down and usually make roughly 15 investments per year. So just to give you a sense and so a lot of what we're doing day to day is you know marketing doing things like this talking to whether it's students or other entrepreneurs or organizations tweeting blogging talking to our portfolio and reminding them that you know we are always looking for the next great entrepreneur. The process for winning it down so we you know we'll take about a couple hundred meetings every year so we'll end up investing in just shy of one percent of the things we meet on. So just to give you a sense it is quite a lean funnel as you get down the process. I do think a lot of the way we think about it is less about what is the business content. Everybody gets so especially we're all ex-founders. One of the unique things about Founder Collective is we've all built companies but funny enough we care less about what company you're building and much more about who it is why they're building it why they're uniquely suited to build that company what was the inspiration to do it much like what was the inspiration for you to build this podcast why is there such great founder business fit and we really zero in on that and you know over the course of several meetings do some diligence. I like to meet people face to face. I like to also go you know have a coffee or or or a drink to get to know what is motivating these founders and and that's really the process and some go very quickly some go more slowly. I would say in the last couple years those processes went too quickly now they're back to somewhat more of a normal pace maybe still a little too quickly but but that's the gist of it and I'll let you kind of direct me from there but hopefully that's helpful. You said that now we're a bit more back to normal. I also talked to founders and they were like yeah I'm not sure if I should raise right now for example when they're bootstrapping or anything they're like yeah but because multiples are not back in like 2020 2021 manner so why should I raise right now it doesn't doesn't really make sense and then my valuation isn't that high and then not sure if that makes sense and when we met in New York you were like yeah founders are celebrating valuations too much and I would love to hear what your thoughts are on this. Yeah you know the cult of the valuation and the cult of how much you raised and marketing that uh I think was a real negative in the industry over the last couple years I think this almost like you know I raised this much you raised this much and and you know it sort of became this war of um fundraising and and fundraising you know is really gas in the tank it's not I don't believe it's something that necessarily should be celebrated um revenue you know people were talking more about how much how much fundraising they did and at what valuation versus how fast they were growing or what their revenue was and I think it created a whole bunch of misaligned incentives I think a lot of founders attracted other employees because of the valuations um the value the employees weren't asking the right questions they weren't asking about the fundamentals they were like we just that company just raised 50 million dollars from Andreessen and it was like well okay but but let's unpack whether we you know we think this is a good place to you know to to start a career to build a career so I think it created this spiral of fundraising that focused on the wrong things for for both founders and employees you know I at the risk of sounding like the old man back in my day but it was kind of like salaries nobody talked about it you didn't talk about how much you raised that was kind of your private you know you know those were internal things that the the senior folks in the team would would worry about and um and I think that was healthier I think we stayed a lot less focused on our competitors and how much they raised and and I think stayed out of the war of fundraising because you know I look back at some of our best companies and they were not the most funded company in the category they were not the ones that trumpeted the highest valuations you know we really focus on multiples and we really focus on founder outcomes frankly high valuations don't always correlate to great founder outcomes and I think people forgot that a little bit or were almost jaded by the PR and by the blogosphere that like and and I think the term unicorn and I hate to pick on it given the name of the podcast but I think the name unicorn sort of um corrupted a little bit of the um the point of building a venture-backed startup venture-backed startups are you know uniquely fast accelerating companies the the outcomes can vary from you know 50 million dollars to billions of dollars but it's all a function of how much money went in how many founders how dilutive how many investors um you know we were fortunate um you and I have talked about the company I started you know we we raised probably sub 10 million dollars we sold our company for 95 million and you know by today's standards that may not seem like a big exit number but by a multiples basis in terms of the dollars in it was quite good so some of it is sort of relearning or re-establishing what the goal is and and remembering and then I'll let you jump in with the question but remembering the VC's incentive varies quite a bit and is often different than the entrepreneur's incentive they're not completely aligned it is not necessarily true that um the VC may be playing the billion or bust game they really want you to be five billion to greater to move the needle on their fund that may not be the best outcome for you as a founder and so I think entrepreneurs have to kind of think through that alignment and not all investors have the same risk profile so I think we should go back to the basics and understand is it doesn't make sense to raise venture money who should we raise venture money to from how much should we raise and not just the bigger the number the better I think that was a big mistake over the last you know five to to 10 years I would love to say that I um totally understand what you're saying with the older days like the honest truth is that I'm like just experienced uh with the hype cycle from 2016-17 onward so therefore but about picking the name Unicorn Bakery for example I picked it because a lot of founders aspire to build a unicorn and I would love to get the attention and then also help building solid companies and it doesn't always have to be a unicorn because maybe not every like at first not every company can become a unicorn not every founder should try to build a unicorn some should also just a bootstrap or build smaller businesses and healthy businesses and not that unicorns are not healthy but you know what I mean and um it's it's it's playing the attention game a bit so therefore I'm totally with you that I think it's hard that everybody is only talking about valuations and then multiples like yeah we have like a 30 to a 60x on our revenues as our valuation you're like okay that's cool but how long do you have a runway oh you're not even you don't even have the chance to grow into that until the next round how do you want to play that game so there's so many things that are issues especially for the founders who started in the last let's say two three maybe four years because they automatically when you got the seed you got the series a pretty much um with the preempted round here and not because of the numbers but just because of oh you got an investment from x or y and that's why everything is now laid out and here's uh for example tiger coming and saying hey take our money um so yeah um I I really like the discussion here and no I was just going to propose a new uh we could create it here a new a new definition for unicorn I I don't think valuation should be the criteria I think um remember a billion dollars it's it's a round number but it's a very arbitrary number like it could have been 750 it could have been a billion five it could have been three but it's an arbitrary number it's just a round number I think a unicorn is any company that grows let's say 3x three years or more 3x year on year for three years to me that's a unicorn any company that can grow quickly at any stage consistently for some period of time that's a unicorn most companies can't do that the plumbing company can't do that well maybe some can the you know the the restaurant very few can but but if you can in any context you're a unicorn you don't have to be worth a billion dollars I think if you can grow unusually quickly and and that's what venture capital is about those very few unicorns doesn't matter valuation that grow unusually fast and warrant extra capital to invest way ahead of their fundamentals and so I I think unicorn is actually a great word I just think it's been bastardized a bit everybody's just uh trying to get the status of yeah we now have this and that valuation so I think the question that we that I need to ask from a founder's perspective is what happens if I weigh my valuation too much what happens if I overshoot my valuation and therefore how like how should I think about valuation instead yeah I think there's a lot of I mean I don't know how long you have I could probably go on all day about the dangers of high valuations I'll give you like very quick anecdotes I've been in calls with founders when valuation went way up and founders said to me I hear my employees talking about what kind of car they're going to buy the houses they're going to buy and I'm really worried and I said you know you should be because they're cashing a check they don't yet have you've intellectually or psychologically convinced your company they're all holders of shares in a billion dollar company but the truth is they're not nobody would buy those shares at the moment yes one investor came in and bought private but preferred shares at that price but they can't go buy a house they can't go buy a car with those shares so you've got to communicate that to them or you're going to have very disappointed founder very disappointed employees if you don't live up to the valuation you can imagine the pressure that puts on the founder to live up to that and to the employees and the disappointment if it doesn't happen people will leave very quickly and that a lot of that a lot of that happened I also recall uh an experience one of my partners was saying we had a company whose valuation very successful company very exciting and a great founder who was disappointed that the valuation was between 900 million and a billion and not at a billion and you know I remember our discussion saying what's the difference you created something from zero to 950 million who cares if it's not a billion like it's sort of the wrong discussion and so I think it just leads to a lot of bad behavior and um it's you know I think this is where um you know sorry as a sidebar I always think about Warren Buffett you know outside of uh in Omaha Nebraska you know in the middle of the United States outside of the echo chamber of the Bay Area I imagine Berlin has some of this echo chamber now as well certainly New York Boston LA San Francisco um where everybody's talking about it so you get caught up in it and there's actually value to getting the heck away from that and and saying you know what I'm just gonna put my head down and I'm gonna go in the bunker and I do think that's why people like Warren Buffett as crazy as it seems not being in New York City as a as a investor was probably the best thing that ever happened to him because he could think objectively and and when something looked crazy and even though you know we're humans we're very easily um we we we can be very convinced and manipulated to believe something very easily but when you're not in that echo chamber it's just a little easier to kind of say boy those guys are smoking some crazy stuff over there paying a billion dollars for the company that's doing a million in revenue or five million revenue or zero in revenue and so um I think objectivity I'm not sure if I'm answering your question well but I think can you maintain objectivity intellectual objectivity intellectual honesty as a founder as an investor um I think that's really hard but I do think that's that's really important I'm totally with you I don't like the term realistic because it's like also overused for things where people are not realistic but um try to be like a bit more radical on like okay what would I if I would be on the other side what would be a bit more fair is also the wrong word but what would be appropriate to to pay as a price for for the valuation because of course you're not diluting as much if you're in a later stage and the valuation is higher but there are so many risks that are coming with too high of a valuation the one is your you will have a lot of issues raising the next round if you're not growing fast enough um if you're not efficient enough if your numbers are not perfect the later you are the more perfect your numbers have to be and if you cannot grow into that then there might not be a tomorrow or with such bad conditions and hard terms that will dilute you that much afterwards that the um the the the average out of the two rounds is way worse than if you took a lower valuation so there's so many reasons that you also can talk to other founders about and figure out quite quickly why it makes sense to at least approach it with an open mindset and not like very forced on like yeah I have to have this valuation um just stressing it because I still meet a lot of founders who are a bit too much into oh I want to have x valuation otherwise I don't raise uh or don't want to raise or it doesn't feel right or I'm worth more probably you're not but um just a small rant and a small monologue on my my perspective on valuations it's very true and it you know it's the the valuation correlates to how much capital is being raised those things usually go hand in hand and as the funds got bigger the valuations got higher and the dollars in got more and the real problem actually is less of the valuation that that's part of the problem is we've been talking about the real problem is um too much capital you know it's a funny thing you know you would think um that more money is better that you can grow faster you can do more you can hire more people but the opposite is really true because think about the big companies you know we were talking about the time I spent in Germany and I sold the company to 3m 3m had a big facility there and all over the globe I forget 60,000 people uh fortune 100 company by definition the scale of companies like that the government is the the biggest example you just get less efficient on a per person basis on a per employee basis like the biggest company the bigger the organization the less efficient it is just by definition and so why would you as a startup what a startup has the special thing a startup has is it moves really quickly it's highly efficient it's small and nimble you know it's like that little crack army that can get a lot done with limited resources the minute you start stuffing it with resources it actually becomes much more like the big companies you're trying to disrupt so it's actually it may seem counterintuitive it's actually it's actually better to have less capital I'm not saying no capital but it is better to have one marketer instead of 10 marketers in many cases until you reach a certain scale where you need 10 marketers but what happens is these companies raise a lot of money early and it's a slippery slope you know the one marketer needs a second marketer the second marketer needs a you know the sales rep needs in a BDR the BDR needs an AE the AE needs a sales ops person the sales ops person needs an analyst and all of a sudden you have this army this massive group of people and that's why you see a lot of layoffs now because these organizations just got to you know to to spend too much money on on staff and so it creates all these bad habits that you would think founders would try to avoid in the early days what what's special about a startup is quick communication you know people who are really inspired to build a great company not in it for money necessarily but really in it for the mission obviously for the money long term but like to to create a company and so I think the the core problem is raising too much too early spending too much and thinking money will solve your problems I've just never seen that to be the case I I I've seen the companies with a million or two million out of the gate actually have an easier time than companies that raise five seems counterintuitive but the companies that have a million or two they got to figure it out they got to get to product market fit on a million or two the companies with five in some ways feel a little bit less pressure they may start to scale only to later figure out they didn't have product market fit because they had so much resource it they sort of lulled themselves into believing that they could um you know grow their way into product market fit or spend their way into product market fit it just doesn't work that way and so um and if you look at any great organization you don't need to starve the organization but you know there was an old saying in venture more companies die of you know overfeeding than starvation and uh and I think it's I think it's really true and I think it's true of you know the last few years of of companies and and hopefully many of them figured that out quickly enough to correct it but we'll certainly see over the next year or two I'm totally with you I think one of the questions that arises is on the one hand what if I raised too much money already and have now to or have a too high of a valuation I think that's one part of it but at the same part what if I'm not growing as fast as I wanted to after my last round and I might become a solid company but not the perfect venture case how do I behave how what because my VCs and investors might be like yeah that's nice but sorry we're looking for something else like a bit more like dropping the potato even if you'd hope that the VCs don't do it but you know what I mean that they also love to focus on the best performing ventures so how should founders like what is the honest conversation that founders have to have with themselves or their co-founders and their investors when they realize that it won't be the billion dollar company that they are building and not from the unicorn state but also maybe a billion dollar in revenues which would be amazing but therefore I think the question of what happens if all the dream that I sold myself and sold to investors and sold to employees of I want to build this huge and perfect company that I or not perfect but the huge company that I can IPO at Nasdaq at one point doesn't come true yeah and by the way you know I think investors who have done this we're coming into our for me it's about my 11th year as an investor and I spent about uh equal amount of time as a founder we've seen a lot of different permutations of this for example there are a number of companies that let's say over a 10-year period bumped along grew maybe had some really tough years and became 20 million dollar revenue businesses over 10 years 40 million dollar businesses 10 million dollar businesses and a lot of the VCs along the way gave up and you know in some cases we have seen founders say I want to buy out my investors I'm going to create a deal structure where they get two times three times their money back paid out over some period of time or some portion of EBITDA you don't see that a lot and a lot of investors the big investors kind of walk away and don't care I think the more aligned investors say let's create a structure so you know if this isn't going to be the 10x return that we had all hoped but it's a great business for you you're the founder let's figure out a way to make that happen and by the way I can think of companies off the top where you know lo and behold these are really going to be valuable these founders are going to have life-changing outcomes but it took longer it's not going to be the massive outcome for some of the funds that got involved so we have seen founders buy out their investors and go on to what some people call lifestyle companies I think they're much better than that but let's call them non-unicorn exciting companies and I think so that's one thing I think another I think there are and there will be on the other extreme of this a number of companies that just need to shut down and that the venture math and the the product market just isn't there the you know perhaps 10 million was burned there's still a few million in the bank but it's a not a good use of time for the founders any longer and if they don't have the spark rather than try to burn the last three to figure it out just give the money back and we're seeing that too we've seen some founders in fact the founder that I'm close to in Berlin said to me you know we're gonna we're gonna give the money back so by the way I don't you know some investors will say yeah just just figure it you know I don't care it's not it's less about the actual amount of money and it's about when the founders know they're spending good time after bad after bad it's good for everybody to just move on and whether it's 20 percent of the capital left left or 80 or 10 let's let's move on and let's let's work on the next thing and that's generally my attitude you know we're seeing other permutations as well like recapitalizations recaps so what happens there well maybe the maybe there is actually intrinsic value I've seen this with a lot of categories like e-commerce where the market is really turned against these types of companies but they have real revenue they just were priced at software multiples or multiples of five years ago and now you can't you can't get out from under that and if the founders are still motivated and there's real revenue in the business and real progress sometimes the thing to do and usually it's against our interest as as investors because if if there's a recap and we we don't encourage this but sometimes it is the the only outcome to keep the company going you reprice and the early investors like us mostly people like us you know have to either come back in or we're heavily diluted but it gives the founders an opportunity to kind of start over from a baseline that makes more sense and has more upside for them and everybody else so look all these things are hard everybody wants to just go up and to the right and everybody but the market's repriced and so you know one has to be realistic and you know we're seeing all these flavors for a long time none of this happened there were no recaps there were nobody went out of business nobody bought out their founder their investors you know it was just raised it was a to b c to a to b to c and um you know and it was all a given you know um if i'm cynical about it it was you know the game was not about building value it was just getting to the next round from the investors it was just getting a markup for the founders it was just raising more of a higher valuation and the fundamentals be damned and i think now and that's a very cynical view but i think there was some of that quite a bit of that going on i think now people have realized okay the music is stopping and so you know it's back to building value and if you don't there isn't going to be another round i think a lot of um people also saw the venture ecosystem as a possibility to for example hype up their company do some secondaries and then also have like a financial baseline that they made for themselves and then they could look what comes out of it this is a very harsh perspective but sometimes i i'm not sure if the founders actually really ever cared about the topic they're tackling so um that's not true for a lot of founders but some of them and um at the same time i think back to what you said the one of the biggest questions is how do i decide if i shut down if i have to like try to shift the gear up a bit to also still make it happen and to grind it out and or also understand okay either shutting down or switching gears to go faster both are not the cases to do um i want to build a sustainable company and figure out with together with my investors what is the best way to do that um so how would you assess such a situation yeah i mean i i think um you know some of the companies that are we're seeing you know flat rate so so in the in the last few years it was growth at all costs the only thing that mattered was growth forget how much you burn now i think there's you know you you you've got to be much more sensible with your burn rate so a lot of companies are flat revenue is flat but costs have gone way down and burn has gone way down and runway has gone way up i think the number one objective is to make the money you have in the bank last ideally to break even i think if you can get to break even you're the master of your own fate and then you can decide later do you need to raise more capital or are you never going to raise again whatever so we strongly encourage our companies to try to get to break even and not focus so much on getting to the next round and so i encourage a lot of our companies to um you know cut or um find ways to reduce their burn to you know get to break even because i think so so so i think that's the main way that you know companies can uh can sort of then decide how they want to go from there and i think some investors um are disappointed when companies are flat revenue for the next couple years even though um you know they're either generating EBITDA or generating less burn my view is um you know that that's sort of correcting uh for some of the mistakes of the past or at least um getting us to a point where uh you know we we are less dependent on the capital markets and so i think that's the main way to do it i mean there are other things you can do um along the way you know some companies are merging with other private companies and uh you know or or obviously will just sell themselves um you know obviously there was the aqua hire which happened a lot more in the gogo times um i think that's less common but i do think m&a you know just as a quick comment because i was thinking about this yesterday with some situations we have everyone everyone says to me you know when things are great we don't want to sell the company and when things are bad and literally they say if we hit a wall we'll sell the company and it's actually quite the opposite so one of the challenges of this market has been a lot of companies do want to sell now but they can't but they could have two years ago and you know unfortunately the vcs and we're guilty of this too but i think i'm always the one that says before every round let's consider m&a and everyone's like are you crazy we're growing like it's like that's exactly why we should consider m&a because you're growing like crazy but i do think um as a venture-backed startup m&a should always be not in the front of your mind but in the back your mind you are in the business of exits ultimately everybody knows that doesn't mean you build just for the flip but um and i think a lot of a lot of uh the thinking during the go-go days was you never sell and now a lot of companies want to sell and they're like how come no one wants to buy and it's like well you know because you're not growing anymore or or because you know they're looking at the valuation and they don't think they can pay what you want to get so anyway that was a bit of a tangent but i i think it's um a good reminder for founders to so much of this is timing and and you do have to be thoughtful about you know do you have massive tail you're not always going to have tailwinds you're not always going to have headwinds either when you have those tailwinds you got to take advantage of them and when you have headwinds you got to reassess and do things like you know reduce costs and um get to break even if you can so i think too many people kind of forget that either it's always you know they think it's always going to be rosy and and and you know sort of at least be prepared for these tough times i think i would love to quickly switch perspectives because from a vc perspective um you said a lot of investors are not happy with flat revenue and stuff like that also it feels a bit like a bit counterintuitive why this would be helpful for a better outcome if companies have flat flat revenue but you mentioned it slightly and i i want to to pull it out and explain a bit what you mentioned is you then have to that means keeping the revenue at the same level even if there were mistakes before even when the organization was not set up correctly yet or had room for improvement so the fundamentals will be put together better hopefully if not then it might be in could be a concern but but you're building a more solid base to then at some point maybe accelerate um again or becoming profitable or at least not burn that much anymore so there are so many parts that are that feel counterintuitive at first because we haven't talked about them for five years or eight years because we didn't have to that are so important to hear and to state that founders can think about them and internalize and figure out what is best for their own situation right now and not only think about their investors of course they you still have to be in a partnership but think about okay what's best for our company right now and just because your investor says hey please 2x next year which is more of a 2020 2021 um sentence that that people might have or statements that people might have said but um think about okay what do i think is actually um relevant right now and um how can i ensure that we survive the next two three four years because we all forgot startups are a very very high risk environment and even if you're in a series a or series b you're definitely not too big to fail so there are so many companies that will get issues right now stage companies you know you're fragile at every stage and that's something that we forgot because it felt like everybody was like in god mode every startup for the last five six seven years because it just went on and on and on and then a lot of founders exited companies which was perfect timing for a lot of them but also um yeah now under the hood the problems arise for the growth stage companies as well so you have to as a founder you sometimes have a very good feeling for what can be the next step for the company and hopefully you have people that you want and feel comfortable discussing this with so just highlighting and and putting together what you said and putting it into or setting it into perspective a bit yeah i i think that's very well said and i think that you know it's a silly example but you know to your point about companies are fragile we forgot that a little bit and and the fundamentals like you know i think about the peloton story partially because i like my peloton and i know that i think they have a studio in germany as well in the uk but you know during the covid they were growing like crazy people like me were needed to work out and we bought the bike and you know the stock went like this the revenue went like this and they acquired a company and then uh and then and then and then they overbuilt completely and the stock crashed the ceo resigned you know they pushed ceo out founder ceo that was a public company so things are fragile at every stage and you can make you know i i'm sure they had all good intentions they were growing crazy they needed capacity they invested in capacity and then boom the market just fell out from under them so you're you're fragile at at all these stages and i i think that um i think you have to sort of remember that you know it is a uh it truly is a marathon um not a not a sprint and i think it's um you know from from the vc perspective you know i'd say the other thing that sort of happened in this period is that you had a lot of vcs you know you made this comment earlier that you've only seen this bull market because that that's kind of the period in which you've kind of watched this industry you know grow and i think a lot of vcs also have only seen this market and so i think the advice they were giving was to focus on top line and growth and not worry about the rest and i think you know it's funny like i to be on the other side of this i don't feel like i'm so old only you know 46 years old but i but i've seen a few of these cycles now and i've lived through them the financial crisis i was selling you know dental technology stuff that we had innovated uh you know i was very much lived through the dot-com crash and so you know i always felt like top line and growth were two interesting data with obviously two very important data points but what about burn rate what about runway and what about and i think this is actually the metric that a lot of investors are now looking at which is how much capital did it take to get to a certain point because i think investors are now going back to extrapolating based on that and saying look you know micah's company got to two million ar on a million or two million in investment that's pretty good but you know that company took 10 million to get to two million in investment so yes it's two million dollar company maybe they're you know starting to hit their stride but that's an awful lot of money to get there and so yeah and sometimes you know there's a reason why it took that much you know certainly when i was building hardware and software it was expensive to build it so there's a lot of reasons why not all companies take different amounts of capital hardware is different than software clean tech whatever but i would say in general i think investors are now starting to say how much how much capital went in to get here um and it's kind of why we've started to advise our seed companies to raise really quite a bit less or at least you know let's say two or less because i think they're much more likely to get a second check than if they raise four to five i just think the bar is going to be so much higher and it's going to be potentially unreasonably high whereas i think if you raise two and you can get to product market fit some early customers somebody's going to take a bet on the next round on that and i think there's a psychological threshold somewhere two to three where it's like that's that's small enough that we don't expect you to be a two millionaire r and uh you know i and and it sequences the the money to the to the milestones much better so anyhow that that's you know happy to see that i think investors are you know but but getting back to the point about you know there was really a generation of investors who just never saw this period and now they're having to learn quickly and i think the last thing i'd say about this i think some founders feel burned or a bit of whiplash they feel like my board was telling me to grow grow grow spend spend spend nobody cared about burn rate or or there was always another check that would come and now all of a sudden they're saying what the hell you're burning too much and you know i think these founders are justified in saying dude you know last month you told me this now you're telling me you know like and i feel for these founders especially young founders who you know of course they're going to listen to their investors like of you know of course they're going to um get advice and um sort of uh look to their investors and how to spend their capital at a high level so i really feel like in some ways the the founders um got a raw deal in some ways over this sort of change in in market you know in macro i think there's another issue that we will see and i'm not sure how much you will be able to comment on it because you have a lot of co-investors and you want to be nice to them but one thing that i see as an issue and observe it from the outside there are too many too large funds there are so many funds that build to fund sizes where they have to have one two three unicorns or um companies worth like five billion or even 10 billion and they're talking about yeah but we only have like we we don't only need to um hit one or two decker corns and you're like yeah but how many decker corns have you seen in the last years that are actually like after 10 years at that or 12 years at that point and how likely is it that you will hit two or three of them so there are so many delusional um vcs and investors now and that doesn't only count for the investors that only saw the hype cycle this also counts for investors that saw other mark market sentiments before but forgot about them and we're like yeah but now we have the opportunity to raise a billion dollar fund so we will do that and i would say optimize a bit more for management fees than for actual return and outcome i know that's a bit harsh it doesn't um doesn't hold true and valid for all of the funds that's more to put it a bit um to to say it a bit um in a harsh harsh tone um but a bit clickbaity but so yeah i'm i'm interested how this will turn out yeah i i think um you know uh i remember actually back when we had raised money from crv charles river ventures uh you know for my startup brontes um and actually at the time uh the market had gone through a correction as well and uh ted dindra smith who was a legendary investor who was on our board he actually gave decided to give back some of the capital from the fundraise as a fund because he felt he had gotten too big that they decided they had raised too big of a fund you almost never hear about that and i i can't i don't remember the last time since then i've heard a fund try to get smaller um i think founders funded right um maybe founder yeah i think you're right i think that they halved i think the fund size so there there are a few and you always have to ask did they do it deliberately or did they do it because they couldn't raise founders fund probably they're deliberately they they could raise i i think um it's it's a really important point i think you know i was having this conversation the other day with um some folks that the aum business uh is a real good business if you're a bank if you're jp morgan or hsbc or you know um one of the big banks or if you're fidelity or vanguard asset management makes a lot of sense because you're not on the hook for performance you're really a marketplace or a service um and you're getting a small yield a tiny yield on a volume right so you're selling index funds or checking accounts or look you're you're you're in the volume business so by definition the the greater your asset base the more revenue you make that's that's sort of true and not totally true in venture and by the way before i get to venture private equity is kind of that way in the sense that um while private equity i think has very much optimized for fees blackstone kkr the whole bit of them but you there are massive companies that can be taken private there are these are established businesses that uh billion so there's an opportunity to put a lot of capital to work in the startup world by definition these things are startups they're small so there's only so much capital you can put to work and there's only as you point out a very few of them are going to get to the scale of the trade desk the ubers the teslas the you know the etc and so i think there was and i think you're pointing this out a little bit of a miss mis-learning of of or uh trying to use the uh examples of of asset managers like mutual funds and hedge funds and private equity to venture and i don't think it actually is the same i actually think there's a reason venture was always a cottage industry i uh it was a cottage industry because by definition it was small there there was only so many startups there's and that that number has grown a lot and i think the um i think a lot of the things that were done by these bigger funds like andreason in some ways have been very good for the industry and i think the industry was too much of a cottage industry i think it was a bit of an old boys club 20 years ago and before that so i think some of this has been good but i think it went too far and as you point out it became more about looking like a you know uh an asset manager and less about being a venture capital firm and i think i think people are rethinking that now a little bit it's tough because as you also point as you also said you know when when you get so much in fees it's hard to turn that off just like the companies we were talking about earlier who spend so much on the marketers and the engineers and they grow and they hire a lot of people so did these firms you know i think it was sequoia just announced they're letting go of i think it was 20 percent or some percentage of their talent their talent team so they're doing the same thing that the companies are doing because they're realizing like you know well the talent market has changed but also you know it may not be it may not look exactly like these other industries where just aggregating capital is the name of the game and i think much like the startups got a little bamboozled by valuations and dollars in so did these funds because at the end of the day i think our job is to build great companies and deliver multiples or irr for our investors and frankly i'm a big investor in my own fund so i that's what i care about gathering assets under management is not the name of the game and actually may make it harder for me you know the simple math is it's easier for me to return uh an 85 million dollar it's easier for me to get a 3x or 5x on 85 than it is 500 i mean it's just just easier math so um i i think we we went through a explosion of assets under management um the last thing i'll say is that you know some of it is uh i don't think it's an issue of blame but i do think you know this starts from even the lps because the lps wanted to allocate more money to venture capital and it's hard for them to write five and ten million dollar checks they write that to us because we're a small fund but you know if you're a massive pension fund in you know europe or in the us or you're a major university that has a huge endowment you know you want to put 100 million to work you might want to put 200 million to work or 50 million to work and so of course you're gonna write a big check and you know the the vcs were just building the product the lps asked for and and i think now again that's on what raveling a little bit and people are realizing okay well to write 100 million dollar check and get 1.2x um that's not i might as well go in the public markets but by the way i might as well put it in treasuries you know the fed just raised rates again so like a lot of better alternatives but um but i but i think a lot of the same um if we were to distill it down a lot of the same habits and trends that were happening at the startup level were also happening at the venture level like everybody was kind of you know a little bit drunk at the party i would say because you said vcs were building the product that lps wanted but it's a bit like a startup that scales too early because most of these funds don't have the i would i just take the example of product market fit because it's as you mentioned it's easier to put 85 million to work than putting 500 million to work and um there's only so much return you can make and it's super super hard to to replicate on the one hand it's super hard to replicate it so holding yourself accountable to do it for a second fund is one thing and then for a second fund that is five times the size it's even harder so yeah i'm i'm not sure if uh or maybe of course we can we can um say okay throughout the hype cycle there are so many more startups there therefore there are so many more good startups and you can the total amount of returns that are possible to make increased as well but um yeah so it's super hard to see and and or i'm very interested in seeing how it turns out because i think it's it's a risk as well for the whole ecosystem because it at least bears the possibility of imploding a bit from the vc side from the founder side because they're not happy with what their outcome will be after a few years and from the employee side that they say hey they were we invested so much from our from our perspective too we um relied on stock options and we were sold on a dream um here and nothing turned out so i'm i'm interested in how much impact all these decisions will have yeah i think it's it's it's uh it's really tough on the entrepreneur you were talking a lot about earlier in this podcast the entrepreneurs that are building good you know the middle 60 percent the middle 70 percent the companies that you know found product market fit are growing bit by bit maybe 50 a year maybe 100 a year or not growing but but dramatically reducing burn starting to generate ebitda but aren't the venture which aren't returning material amounts to the large fund and so those those um investors are kind of walking away they're not disappointed they're saying the penny isn't so shiny anymore and that stinks because you know that entrepreneur who's building some real value um and and should feel quite good about and may end up you know building a life-changing business for themselves feels like they you know disappointed and uh and failed and and i think that's not the case and i think in some cases it will actually create failures that didn't have to be it will be a self-fulfilling prophecy because they were set up to be you know it's i have teenagers so i think about this it's a little bit like you know all the parents saying did the kid get into harvard or stanford and then you know the kid that didn't get go there but still goes to a good school feels like they didn't you know didn't accomplish what the parents wanted and you know it's so ridiculous because there are many great schools not everyone has to go to those top schools not everyone comes we all know the reality of it and yet there was such pressure to be that top one or two percent and i think you know it's almost as if that's all the investors cared about they only cared about the top you know five and ten percent and i and i i hope i hope that's not the case i hope some of these you know i will say though the the good news is the good investors who've been around i think like us even at bigger funds are spending time with the companies in the middle they they don't give up they join the boards they they um they're on the calls you know i i see it from sequoia i see it from a lot of the the good seed funds i see it from you know a lot of the partners we know in the industry they they don't give up and and even if the outcome is not necessarily um doesn't you know it doesn't look like it's going to be the fund returner that they're okay with that and the reason they're okay with that is two things this is how i think about it and we think about as a fund one is this is where a reputation is made it's easy you know uber wasn't calling us for feedback every week one once uber grew quickly they they they were on the mission obviously they had their challenges but like they that that's the easy case and the companies that fail quickly and ultimately you know that that also in some ways is easy that you know fixes itself the stuff in the middle is where you know the founders need us where they they need the advice they need to figure out how to you know get from step one to step two and i think that we spend more time on those founders and if you said well but that's not the most efficient use of time you should spend your most most your time on the top 10 a little bit of time in the middle and nothing on the bottom i don't i don't think that's what venture invest good venture investors should be doing i don't think they should be managing their time to value of the fund and i thankfully i haven't seen a lot of the investor behavior where and the other reason why i think that's important not to do it that way is you never know some of our biggest companies had moments that look like they were going to fail and everybody could have given up and and that's you know trade desk is a perfect example we needed to bridge them capital you know it's now uh i don't know 30 billion dollar public company and it was higher at one point but um you know thank god my partner eric you know leaned in uh c geek also a really valuable company for us uh that does uh you know ticketing primary and secondary ticketing covet happened who would have thought this company which was on the ipo path nobody would be going to music shows or games or you know football soccer baseball all that stuff theater uh and so we had to help put together a interim round could have given up could have said i don't know when the hell games are going to come back but i'm not going to worry about that but you know things turn around and just because everything's fragile the opposite is also true which is trajectories can change very quickly fortunes can change very quickly tailwinds can happen you know i remember visiting moderna but when they were getting started thinking like these guys i don't understand the science and then covet hits and you know they have the perfect one of the perfect you know uh paradigms for delivering a vaccine so it's just a reminder that you know you don't want to give up you what today's top 10 may not be the top 10 and if i look back at our at our decade plus of experience it's shocking and i think any investor who's been doing this around the same time or longer than me will say it's amazing how things moved in terms of value over time it was not predictable at all it's amazing to hear and i think these are good thoughts that everybody could every founder but also every investor can think about right now because i think we turned it from a very like hands-on like how do i think about my own company what do i do with it to a philosophy session on what we both see at the moment happening and then more of your experience on how to get along with that and um how to what to think about so um i i really enjoyed it and i'm super thankful that you came on the show and on the podcast so um micah i will definitely link to your linkedin profile and show notes to founder collective of course as well and from my side i have to say thank you i'm looking forward to see what's what's happening on your side throughout the next years and i would be happy to hand over a last time for the closing words of this podcast episode i think despite the storm clouds and the doom and gloom i would just say that i think these are the best times to start a company i think now that all the hype and noise is kind of over i think you can go in your bunker and build real product and test and have you know test customers and and not feel like oh man i you know if i don't grow month over month starting tomorrow i'm doomed i think i think this is the perfect time to build real value and i think we're going to see some amazing companies not to mention ai and all the other trends that are going on but technology is just becoming more and more important bigger part of our economy there's a lot of tailwinds yeah there's a lot of macro stuff but the macro doesn't matter that much for startups the micro is really what's important so i'd encourage founders not to be discouraged quite the opposite i'd rather build now than two or three years ago so i think this is a great time i encourage you and i think and for investors too i think we're going to have a really exciting vintage over the next couple years thank you michael