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Protocol Pipeline: No, the party (round) isn't over
Hello and welcome to Pipeline. Congratulations on surviving another week at home! I'm excited for my new weekend tradition of switching to my off-the-clock Zoom background. Anyway, on with business. This week: Competition for Clubhouse, the three letters still driving CEOs nuts, and what's happening in party rounds, according to three founders with more than 250 investors between them.
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- And, just like that, it feels like we're back in bubble times. A startup with only a few thousand users that hasn't publicly launched was valued by Andreessen Horowitz at $100 million — nary a month after Marc Andreessen's screed to build more meaningful things. Other investors were actually willing to pay even more, according to Forbes. Of course, it's Clubhouse. I've heard firms like Greylock, Spark and Initialized Capital were all vying for the deal with the belief that it's a fundamental shift in social, but ultimately A16Z won thanks to an assist from Kevin Hart — a bit of a coup, considering Clubhouse cofounder Paul Davison was an EIR at Benchmark. As Coatue's Matt Mazzeo put it, "Fomo is a helluva drug."
- "People literally call him the Donald Trump of Silicon Valley": After the implosion of Social Capital, Chamath Palihapitiya is back (to the chagrin of many).
- The Silicon Valley vs. anywhere else debate is back. "Every generation thinks they invented sex and leaving California," tweeted Flywheel Venture's Trevor Loy. But there's a new factor this time beyond unbearable home prices: a newfound acceptance of tech companies having employees work from home forever. "I think people are thinking about leaving SF more than people sitting in Austin and Denver are thinking about moving to the Bay Area," one VC told me.
- "I attribute everything that has gone wrong to coronavirus," Quibi's founder Jeffrey Katzenberg told The New York Times. "Everything." Quibi's launch has been … well, dismal And now it's trying to add basic features like social sharing and TV casting, having missed the mark at launch. Quibi and Magic Leap's layoffs and funding rumors have sparked another question among VCs: Does mo' money mean mo' problems?
- Webvan's founder is back … with another Webvan?
Biz on Biz
Calling all party people
For years, traditional investors decried party rounds with lots of investors, believing they were bad for companies and only useful for name-dropping. Amid the coronavirus pandemic, those whispers have returned.
- "Try getting five people to commit to a $2 million check right now," one institutional investor told me, predicting the end of the party round.
- The argument I've heard from more-traditional investors: founders will turn to deep-pocketed firms as CEOs come to value cash reserves and a board at their back during hard times.
But a reliance on bigger investors doesn't match what Helena Price Hambrecht, co-founder of DTC alcohol startup Haus, is seeing.
- "The era is done where you can blindly rely on venture capital and one investor to carry you," she said. "People probably relied too much on their investors having skin in the game for follow-on rounds."
- Her company raised its first million from 50 investors before launch, as no traditional VC funds wanted to touch her online aperitif business. She ended up raising $4.5 million from over 100 investors as the seed round, all from people who deeply believed in her business. She plans on raising a series A next — likely a priced round from a more institutional VC — but to her, the goal posts for raising have moved.
- "The best thing you can do is not expect venture capital from anyone ever, and truly focus on building a sound business. Because that, to me, is going to be the new signal in venture capital."
In reality, there's risk on both sides: Party round startups could find it harder to raise from a large number of people during a downturn — but they could also raise more quickly.
- "Some people are tapped, some people's financial situations have changed," said Andrea Barrica, the founder of O.school, a sexual wellness platform that raised over $2 million from 30 different angels. "There's always a risk of who's going to re-up," she said. Still, O.school has still gotten follow-on checks amid coronavirus, she added.
- But it's taking some institutional investors longer to do deals amid the pandemic, at a moment when cash really is king, Barrica said. Party rounds, on the other hand, can sometimes come together more quickly. "My experience with angels is that it takes one phone call, and that has remained true during COVID, too."
So savvy founders are starting to do hybrid party rounds, combining two to four traditional VCs with a giant group of angels, said Hunter Walk, a partner at Homebrew who also invested (both personally and through his fund) in Haus.
- These party rounds are about more than big names. "We're seeing a shift to more and more rounds where the participating investors large and small give a shit and can help out, compared to just placing roulette chips on the table and are only good for social signals," Walk said.
And the hybrid approach can have huge benefits, Rahul Vohra, the founder of Superhuman, told me. He has over 120 investors in the company, which includes a bunch of angels but also A16Z.
- He's tapped his angels in the past to ask for help — for instance, when Google was about to make a change to Chrome that would've inadvertently broken Superhuman. After sending out a blast email, one of his backers just happened to be standing next to Alphabet CEO Sundar Pichai at a party right then and mentioned Vohra's problem. "Our board members, they know Sundar, but they're not, like, standing next to him at a party," Vohra said.
- But at the same time he gets board oversight from A16Z, which can provide ethical counsel over thorny issues like PPP loans. He didn't have that for his first company, Rapportive, and thinks that was a loss: "As a CEO, I underperformed compared to what my potential was because I didn't have board meetings or the high level of strategic conversation."
The key to all this may be a broader recognition in the funding community that party rounds are, you know … OK.
- "It doesn't need to be perceived as lesser than just because some institutional investors aren't ready to move on your deal or, because of COVID, aren't literally able to move fast enough to be viable for you as a company," Barrica said.
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- How do you get your first 1,000 users? Investor Lenny Rachitsky collected the firsthand accounts of how companies from Netflix to Lyft to Spotify to Product Hunt got their consumer apps off the ground.
- Venture capital needs a complete reset — and that means funding transformative ideas that matter, not just another copycat Uber-for-X, says Obvious Ventures Gabe Kleinman.
- How do venture fund returns correlate to the public market? Menlo Ventures partner Steve Sloane found a counterintuitive answer.
- After the gig economy comes the passion economy. Former Andreessen Horowitz partner Li Jin breaks down how tapping into a worker's unique skills and talents can disrupt industries.
- Will 2020 be the year VCs go back to basics? Founder Collective investor Parul Singh says the theme for this year is all about revenue efficiency.
Need to Know
- PPP, the three letters everyone is still talking about: Another update to the small-business loan guidelines had startups reeling (again). Finally some good news, though, as the Treasury basically said it will treat companies that received loans of less than $2 million as acting in good faith. But some startups are still returning the cash and resorting to layoffs: "After much discussion, we were required to return the PPP loan earmarked to help cover payroll," Zeus Living's CEO wrote as it laid off half its remaining staff. (No word on who exactly "required" Zeus to do so.)
- Uber and Grubhub are courting, but a potential deal could invite regulatory scrutiny — or a potential competitive bid. (My pet theory is Amazon, if it follows the footsteps of its Deliveroo deal). And still, investor appetite in delivery isn't satisfied, with Slice raising another $43 million this week.
- And there's more M&A: Facebook swooped up Giphy for $400 million. Apple acquired NextVR, reportedly for around $100 million, less than it had raised from venture capitalists. AppLovin bought Machine Zone. And Forge snapped up rival SharesPost in a $160 million deal.
- Not all the tourist VC money is gone. The Chainsmokers are the latest musician-investor crossover, and they're raising $50 million for their debut fund, according to Bloomberg.
- From Protocol: When Essential announced it was killing Newton, a longtime superfan decided he'd rather buy it than watch it die (again). Protocol's David Pierce has the story inside the life, death, rebirth, failure and resurrection of a beloved email app.
- On this day in VC history: Bessemer turned a $5 million bet on Shopify into $500 million when it went public in 2015. Not bad! Until Shopify became Canada's most valuable company, which means that bet could have been worth $22 billion today, Forbes reports.
- And your weekend reading: He saved the internet. Then was arrested by the FBI. Wired has the confessions of famed hacker Marcus Hutchins.
Five Questions for...
Shasta Ventures' Nikhil Basu Trivedi
What's one of your new quarantine habits?
I've been writing every day to be able to share weekly essays for my newsletter, Next Big Thing. I've struggled to make a habit of writing over the years, but the shelter-in-place has given me the opportunity to make it a morning ritual, and I'm loving it.
Who is a person in tech you've never met but would love to have dinner with?
Tobi Lutke, Shopify's founder/CEO. I've listened to several podcast interviews of his, and his product/business/strategy mind, as well as his empathy, have really impressed me. We also both grew up in Europe and moved to North America in the same year (2002), so we would have at least one thing in common to discuss over dinner.
What's your favorite part of a startup's pitch?
The first 5 minutes. If the first 5 minutes are special — because of the founder's story, or the mission, or the quick product demo, or the simple but powerful framing of the opportunity — I can sense you're onto something, and I'll be leaning in for the rest of the pitch.
What was your first check?
The first investment I worked on was ClassDojo, when we led the series A in 2013. The first investment I led and joined the board of was The Farmer's Dog, when we led the series A in 2017. The investment thesis for both was similar: mission-driven founders, early signs of consumer love and product-market fit, and opportunity to build a big business with decades-long customer relationships. The founders of both companies have become close friends, and it's been special to have seen their journeys from the front-row seats.
What's one app you use all the time that most people haven't heard of?
I just started using Grain to take notes during my Zoom calls, and wow, I'm blown away. Your notes get time-stamped to the video and you can highlight and share video clips from the call. It's magic, and suddenly Zooms feel more productive than regular calls or in-person meetings (where obviously the conversation can't be recorded!). Not an investor, just a fan.
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