2020 closing thoughts
IPOs, frameworks, and professional networking
Welcome new subscribers! This newsletter typically dives into one trend or company within technology that I’ve been digging into lately.
This episode is just a quick collection of 3 thoughts I've had over the course of the year. In large part, it's a reflection on my first full year in a new gig and some of the things that stood out to me.
1/ Snowflake and DoorDash — A Tale of Two VCs
A defining characteristic of venture capital is the long feedback cycles inherent to funding early-stage startups. While VC funds typically deploy initial investments over the course of 2-3 years, they are evaluated on their ability to return capital over a decade or so.
Take two of the biggest IPOs of this year — Snowflake and DoorDash. They were founded back in 2012 and 2013 respectively. There are intermediate signs of success like increases in valuation, but the difference between extraordinary outcomes and good ones takes time to discern. In fact, both Snowflake and DoorDash were valued around $12B by the private markets earlier this year, but today they have climbed to $100B and $65B.
This long time horizon makes decoding VC performance rather challenging. Why did the best firms win? What will drive performance in the future? "Invest in great companies" is the obvious answer, but its difficult to say much more with certainty given the dozens of variables at play and the low number of huge exits. Even this year's hot IPOs featured VC firms with starkly different approaches:
DoorDash / Sequoia — Sequoia led both the Series A, the Series C, and put in an estimated $217m across the company's lifespan. The conviction to invest early, but continue to deploy capital has given them nearly 20% of the $65B business. Is this proof that multi-stage funds are a compelling structure? Is this just evidence that Sequoia's brand allows them to win competitive deals?
Snowflake / SHV — Sutter Hill Ventures incubated the startup, giving themselves very high ownership and lots of influence in the business from the start. Contrary to conventional wisdom, they successfully transitioned out the CEO for a seasoned exec. Ultimately, their stake was worth $12.6B after the IPO pop, an incredible outcome and a very unique story. Is the incubation model a winning strategy? Is having a limited online presence an edge?
There's so many more examples of fund variation here from the past year —
Softbank's $100B fund and their strategy was less about price and more about providing capital into enormous winner-take-all markets. Jury is still out here, but I will certainly admit that it's a unique strategy and a pretty grand experiment.
Benchmark sticking to their strategy of a small partnership consisting of equal-rank General Partners. Obviously, they could expand their fund size and investment team, but they've maintained these principles across funds. It's worked out for them.
There are a ton of different approaches and you could probably find instances where any one of them worked out. In this type of environment, I think the real challenge is balancing a need for innovation with the power of a few consistent principles.
2/ Inflection Points & Durability
For all the mystique surrounding venture capital, I think the goal of any investor is straightforward: find good companies and support their journey.
As a junior person in VC, I spend much of my time finding and evaluating startups. Internally, it's a process of answering the same question over and over: should we invest in XYZ company? The holy trinity of evaluating early-stage startups is product-market-team. The product should address a pain point, the market should be sufficiently large, and the team should be committed and capable.
Such a framework is helpful in categorizing information, but I don't think it captures the thesis behind a startup. Maybe the most important elements of an investment (outside of team) that I try to understand are around **inflection points ****and durability.
Inflection points mark significant changes in a technology, behavior, or industry. Examples include widespread internet access, smartphone penetration, cloud infrastructure — all of which powered new businesses. Inflection points transform the growth of a business from linear to exponential. For further reading, @mhdempsey nails the what and why of inflection points here.
Durability refers to a business' ability to endure even as markets or competitors evolve. In fact, the best businesses have dynamics where their success compounds on itself either through sheer scale, data, relationships, etc. I view product-market fit as a milestone, but durability as inherent to the company's anatomy. One of my favorite pieces this year is from Tribe Capital on N-of-1 companies, which I think encapsulates this concept well.
I want to put these two investment criteria together: a business that captures one or more inflection points has the potential for hypergrowth and if it's a durable business, it can gain and retain an increasingly better position in the market.
I'd like to improve my ability to articulate these two points for interesting companies, both in my job and through my online posts. Feel free to hold me accountable!
3/ Networking is Making Friends for Adults
Building a network is a fairly new experience for younger VCs like myself since it's not as relevant in many other fields. Everyone has their own image of what networking is, but I think it's routinely characterized as transactional and opaque.
When I started this job, I fired up a personal CRM on Airtable (lol) and started reaching out to folks in similar positions. Some conversations went nowhere while others became friendships. And I think that's really all there is to it. Going into conversations with the goal of building a network is a level of formality that's not really helpful. At the end of the day, you want to help people you like not just because they've connected with you on LinkedIn.
While the lack of in-person meetings makes some of these connections feel less personal, I'm glad to have met more folks outside of the Bay Area. My extremely cold VC take is that it turns out that Twitter is a pretty good tool to passively connect with new people. I think the product lends itself well to networking making friends via replies, retweets. The goal of any network-building platform should be to establish areas of overlap and the best, organic way to do that is by having users create content. For that reason, LinkedIn serves as more of a resume than a networking tool. There's very limited content outside of professional accomplishments, so there's no material to establish new connections from. (I will note however that a fake Royal Caribbean account requested to connect, which was a win for me.)
In addition to Twitter, I've found made some good connections through Slack groups (VC-oriented) and Commonstock (public investing-oriented). Roadtrip is a pretty cool space for social music listening. Also, I still don't get Telegram, but someone did hack into my account and try to ransom me for Bitcoin so that's nice.
Anyway, I haven't quite cracked this nut of how to build a network, and particularly one that creates a competitive advantage as an investor, but I'm always happy to meet new people. Feel free to reach out on Twitter or reply back to this email with any thoughts or just to say hi!
Hope you're all safe, healthy, and ready for a much better new year.