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The inside story of the venture capital and startup world by Tomio Geron.
February 20, 2021
Correction: An earlier version of this story misstated Josh Wolfe's first name. This story was updated on Feb. 22, 2021.
Hello and welcome to Pipeline. This week: why startups can't innovate once they're acquired, publishing LP letters, and Stripe at $100 billion is a steal for some.
- Tips in a snowstorm: The situation in Texas is tragic and shocking. But one Austin CEO who was snowed in got some angel investing tips from Andreessen Horowitz's Andrew Chen.
- Bar lowered: Seed startups that raised a lot of cash used to have a higher bar to get a Series A deal, but with VC cash flowing in, VCs don't care anymore, Semil Shah says.
- All in the family? Pear Ventures' Pejman Nozad's son needed cash for his new audio startup. So he raised funding from Nozad's competitors. And you thought getting in on your deals was tough!
- Getting rid of preferred stock: Liquidation preferences don't help fund returns, so we should get rid of preferred stock and VCs should just buy common stock. But 409A valuations are a roadblock, Villi Iltchev says.
The Big Story
How to do startup innovation inside a big company
How do companies that acquire startups keep them innovating and prevent acquired employees from leaving, or, worse, "resting and vesting" like Nelson "Big Head" Bighetti in "Silicon Valley"?
It goes back to the acquisition. Selling a startup is a complex and difficult decision for any startup founder. There are many considerations, from the state of the company and its future prospects and competitive landscape, to the price and terms and purchasing entity, to the outcome for investors, employees and the founders themselves.
One factor causing founders to take the leap and sell is often the thinking that: "We can keep things the same after the acquisition." This is the biggest fallacy. Noam Bardin, founder of Waze, wrote about the ways things changed once Waze was acquired by Google. Here are just a few points that jumped out at me:
- Company/product/employee alignment: In a startup, if a product does well, everyone does well. In a big company, the company doing well is more important than the individual product. "Being promoted has more impact on the individual's economic success than the product growth. The decision [of] which product to work on stems from the odds of getting promoted, and thus we began onboarding people with the wrong state of mind — seeing Waze as a stepping stone and not as a calling."
- Hiring/firing: In a startup, if someone no longer fits, you fire them. In a big corporation, you promote sideways (or up). "I learned the hard way that if another manager is recommending a great employee to hire, that they are probably trying to get rid of the employee since they cannot fire them."
- Distractions: Big companies have to worry about important things that startups don't, and many of them are prone to having meetings. All these things slow startups down. Bardin notes: "We start companies to build products that serve people, not to sit in meetings with lawyers."
- Scrappiness/entitlement: Startups need to be willing to run through a wall, founders will say. But at a big company, why run through a wall when you can get a free massage? "We had lunch in the cafeteria, and while on line, a Googler ahead of us was overheard saying, 'What? Sushi again???' which became our inside joke around entitlement. But several months later, we had been co-opted as well, and it was Waze employees complaining about the food."
- And risk: At a big company, you can't take the big risks that a startup needs to, notes Hunter Walk.
So where did Bardin go wrong? He shouldn't have tried to change things at Google, he says. But it's hard for founders to just focus on leaving a company.
- "I am confident that the Waze acquisition was a success. The problem was me — believing I can keep the start-up magic within a corporation, in spite of all the evidence showing [the] opposite. Had I not set out to fight the nature of the beast, I could have focused on building for leaving rather than building for the users."
- Having once worked at a company that helped startups get acquired, I can tell you that most founders believe that they will be the one unique founder who can change things at the big company. After all, they're incentivized to think that and they've already done the impossible by building their startup up to that point. But as Bardin notes, this rarely happens.
- Hunter Walk, who worked at YouTube, which was acquired by Google, agrees. "There is no such thing as a startup inside a big company. There's various leash lengths to your freedom, but you're no longer a startup. You get a bunch of things in return and, for many people, it can be a wonderful outcome, but you're no longer a startup."
So because many founders will for many good reasons still continue to sell their startups, what can founders and acquirers do to mitigate all these problems? This is critical to keep the startup innovating and growing within the larger company — and to keep the team together. Because once the team starts to come apart, the product becomes just another product in a big company, and growth can slow, and innovation can fall off.
- Keep the companies as separate as possible. This is key to keeping the culture, drive and innovation at the startup, reducing distractions from the big company — and to keeping the team together. This can even mean a separate physical location. "This model of independence was not very popular in 2013 but very quickly became the model for tech acquisitions of branded products" Bardin writes. "Instagram, Whatsapp, Nest, Waze — we were all granted autonomy and retained most of our team. In all these cases, the founders stayed for quite a while."
- This includes keeping separate administration, processes or even IT. I've heard some people say you should even keep separate email addresses (a big ask at some companies).
- This is all hard to do, but it keeps founders and their teams at the company longer and prevents them from leaving sooner or even worse, staying at a company that they can't stand just because of the "golden handcuffs."
A MESSAGE FROM SLACK
You have to find the right solution that meets both your internal and external collaboration needs.
That's why competitive businesses today are turning to Slack, the channel-based messaging platform, to close communication gaps with partners and customers in the age of remote work.
- Publish your LP letters: Besides Chamath Palihapitiya, I haven't seen many VC firms publish LP letters. Hey VCs, show off your deep thoughts! You can even brag if you want. Josh Wolfe published Lux's letter, which delves into the pandemic, GameStop and technology. "We were proven wrong" when markets bounced back quickly last year, he writes. "We were even more pleased to be proven wrong about the vaccine." In describing the innovation that has happened and will come, he writes: "Technological surprise does not come linearly" — history doesn't, either, I'd add — "instead it comes punctuated by novel and often seemingly spontaneous combinations of old."
- Nerding out on order flow: If you're like me and you were nerding out on the WallStreetBets/Robinhood/GameStop fiasco, here's everything you ever wanted to know about Payment for Order Flow — and then some — from Andreessen Horowitz's Alex Rampell and Scott Kupor.
- Intel Capital's Anthony Lin said the firm invested $735 million last year, including 35 new deals and 45 follow-ons. About 24% of its deals were with diverse founders.
Need to Know
- Stripe is looking to raise more funding at more than $100 billion. I'd quibble with this article and note that secondary trading is very different from primary. Still, it's not totally surprising if you've been watching the company. It would make Stripe the second-most valuable startup after only ByteDance, and the most valuable private fintech company, with Nubank, Paytm, Checkout.com and Chime rounding out the highest-valued fintech startups, per CB Insights.
- Meanwhile, Coinbase, which is preparing to go public via a direct listing, is seeing its shares trade at a valuation of $77 billion on the Nasdaq secondary market.
- Which startups let you sell your stock? Here is a list, curated by The Cap Table.
- Morrison & Foerster launched its Black Venture Accelerator, a pro bono legal program for Black entrepreneurs.
- Because it's the weekend and you really need a $800 Balenciaga sweater: Sneaker sites StockX and GOAT say they are very different. From auction dynamics to Air Jordans.
- From Protocol: You must read this piece about ByteDance's censors. "We would openly talk from time to time about how our work aided censorship. But we all felt that there was nothing we could do."
- Protocol | Fintech: Why startup bank Current built its own core banking tech. If you haven't signed up for Protocol | Fintech newsletter yet, smash the link! You didn't know every startup is now a fintech company?
- This week in VC history: Apropos of the Waze/Google discussion above, in 2014 Facebook agreed to acquire WhatsApp for about $19 billion in cash and stock. It was a monster exit for Sequoia, which solely invested in some WhatsApp rounds. Meanwhile, WhatsApp pledged that it would remain autonomous and that nothing would change — we know how that turned out.
- Your weekend reading: The labor movement that has sprung up among Amazon employees during the pandemic.
Five Questions With...
Ann Bordetsky, NEA
Ann Bordetsky is a partner at New Enterprise Associates, which raised $3.6 billion for its latest fund in 2020. She was COO at Rival, a live event startup that was acquired by Live Nation in 2020, and she also held roles at Uber, Twitter, Wheelz and Better Place. She focuses on investments in consumer and enterprise, especially in the future of work, commerce and platforms.
What is top of mind at your Monday partner meeting?
Founders. Founders. Founders. It's a hyperactive time and there are many great teams and companies out there. As a former operator, it's super interesting to see the velocity on the other side of the table and the torrent of opportunities at all stages. When we get together as a team, our conversations are really all about the entrepreneurs: How do we best support the companies already in the NEA family? Who do we partner with next?
What's one way you changed working in 2020 that you plan to keep going forward?
Looms! Lots of Looms. Instead of replying with long emails, texts or (gasp!) scheduling more Zooms, I now send Loom videos to communicate. Things like pitch feedback, UX/product feedback and even founder coaching on specific issues. It's a great way to connect on a human level and removes friction in quickly conveying information. People love it, so that's one habit I'm planning to keep even when we do crawl out of COVID mode.
What problem do you want to see a startup solve?
Career pathing and workforce onramps for the next generation so that any 16- to 25-year-old has the right information, tools, support and educational onramps to jumpstart their career and earning potential. What if you could actually discover and experience different careers and jobs through immersive content and expert insights? Today, talent markets are notoriously disconnected from education, and career mobility is too dependent on elite pedigree and hidden insights. There's a massive opportunity for entrepreneurs to make career pathing accessible and consumer friendly for the next generation.
What company or startup sector is the most underrated right now?
The independent knowledge worker economy. It's a hidden gem and a massive category. Recently, the innovation spotlight has been on gig economy workers (Uber, DoorDash, Instacart) and the influencer/creator economy (Patreon, Substack) but we tend to overlook the 55 million-plus independent knowledge workers in the U.S. (e.g., freelancers, consultants, etc.).
Pre-pandemic, 53% of Gen Z was already freelancing. High-skilled, independent work is on the rise, and their needs are different than those of SMBs, yet this category is still underserved in terms of modern marketing and business management tools. I'm excited to see more founders tackle the solopreneurship-in-a-box opportunity.
What's the biggest problem in venture, and what needs to be done to solve it?
Embracing diversity as an ongoing mission in our daily lives rather than a form of crisis response. With the #MeToo movement and more recently with #BLM, we see a lot of headline-grabbing initiatives, but as an operator I know it is the work in the day-to-day and the commitment through time that moves the needle. Each of us individually has to go that extra mile to open doors, break down barriers, connect talent with opportunity and ask the tough questions (even if no one knows about it on Twitter). I try to think of this as a daily habit, just like when I was building teams and organizations as an operator. Founders are in the driver's seat of how their companies get built, but as investors we get a front-row seat and an opportunity to lead by example.
Correction: An earlier version of this story misstated Josh Wolfe's first name. This story was updated on Feb. 22, 2021.