This Week in Startups - ANGEL: Brad Feld on investing through 3 economic cycles, CEO/investor dynamics, and more | E1660

Episode Date: January 18, 2023

(0:00) Jason Kicks off the show (2:49) Brad Feld, Co-founder of Foundry, talks about starting out in investing (13:30) LinkedIn Jobs - Post your first job for free at https://linkedin.com/angel  (14:56) Brad’s thesis for whom he’ll get in the “trenches” with (20:48) MasterClass - Get 15% off an annual membership at https://masterclass.com/startups (22:22) Fighting to the end + Investing through the dot-com bubble (38:13) Microsoft for Startups Founders Hub - Apply in 5 minutes, no funding required, sign up at http://aka.ms/thisweekinstartups (39:43) Surviving the GFC (44:23) Brad’s perspective on the investor/CEO dynamic + being a leader in a down market (1:00:02) Reflecting on the speculative asset bubble (1:16:44) Looking forward into 2023 FOLLOW Brad: https://linktr.ee/bfeld FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood

All right, everybody, welcome to season seven of Angel. Last season, we talked to first-time fund managers, right? That was our opportunity to have a really diverse set of interesting founders who are just starting their careers as fund managers, right? What a great idea for a series, right? And that was season six. You can go see that at this week in startups.com slash angel. This season, season seven, we went in the opposite direction.

We're only going to interview fund managers who have, witnessed and invested through three cycles. Let that sink in. That means they started their investing career during the dot-com bubble and they saw that bust. Then they went into 2000. They saw the Great Recession. And of course, they invested through this latest cycle and this boom bus period, which is, you know, 14 years. Now, a bit of a disclaimer here. There are not many folks who last through three decades in three venture cycles. It just, they don't exist. They're unicorns themselves. and we have to go find them very hard. If you have ideas for people who've invested in Whole Three Cycles,

please email producers at this week in Startups.com because we're having a hard time finding them. But today's was an easy choice. Brad Feld of the Foundry Group. I have been friends with him for three decades as well. I met him during the dot-com boom bus cycle. And he gives his personal thesis for who he's willing to work with in the trenches

during these up and down periods. This is one of those episodes, that you're going to want to download, you want to save it, maybe listen to it every year, maybe listen to it twice. If it's on 3x speed or 2x speed, go ahead and slow it down, get a notebook out, get chat GPT out, take some notes on this one because you're going to learn a ton whether you're a founder or a capital allocator. I bring you Bradfeld.

Angel is brought to you by LinkedIn Jobs. A business is only as strong as its people, and every hire matters. Post your first job for free at LinkedIn.com. Angel. Masterclass. Learn from the world's best minds. Anytime, anywhere, and at your own pace. Get 15% off an annual membership to Masterclass at masterclass.com slash startups.

And the Microsoft for Startups Founders Hub helps all founders build a better startup at a lower cost from day one. Open to anyone with an idea, you'll get up to 150,000. $1,000 in Azure credits, technical advisory, access to mentors and experts, free dev tools, and so much more. There is no funding requirement, and it only takes minutes to join. Sign up today at aka.m.s. This week in startups. All right, everybody. This is an incredibly exciting moment for me.

One of my mentors, one of the first people I ever met in the technology industry is with us today. his name is Bradfeld. You know who he is because he is a three-cycle investor. He was there before the dot-com bust, and he invested through the dot-com era when the internet was nascent, and then through the Web 2.0 era and then into this era. But he's not only invested in tons of companies, supported countless founders.

He's written books and provided education to generation after generation of capital allocators, a life of service and just a great friend. If you look up Mench in the Silicon Valley manual, you're going to find him right there, along with his friend, Jerry Colonna. And those were two of the Menches I met earlier in my career who relentlessly supported me. And so it is a delight, Brad, to have you back on the program. Thanks for taking the time.

I know you're busy. Jason, I'm going to cut that segment, and I'm going to send it to my mom, and it'll make her super happy. You know, she should be very proud because, you know, when you're coming up in the industry and you're a nobody. And let's face it, when we all are in the industry, by definition, we're a nobody. When I was a nobody, before I had the platforms I have, the resources I have, you always took the time with this awkward little kid from Brooklyn and you and Jerry to explain to me how the world worked. And I just look at you guys like big brothers and incredible mentors. And I'm just delighted you're here. What are you spending your time on these days?

you know, you've been doing this now for three decades, correct? Yeah, it has been almost 30 years, which kind of makes not much sense to me. I made my first investment when I'm 28. When I was 28, I'm 57. Oh, wow. So that is kind of nutty. Like 30 years is a hard chunk of time to really process, at least for me. It is.

I think it is for all of us. You know, like they say, when you're raising kids where you have a career, you know, the days are long, the years are short, and the decades are just even hard to fathom. Yeah, they go by really fast. They do, they do. Let's go back 30 years to that first investment. Take me to that moment when you decided, I want to place this bet on this founder and what that was like for you to do, to be a capital allocator, to decide, I'm going to take this

person who has a dream, they want to change the world, and they need the resources to do it. And I'm going to write that check. This was back when there was a checkwriting business, not just a wiring business. What was that moment like for you? My very first angel investment was in the fall of 1994, November of 94. It was in a company called NetGenesis that had four founders, two of whom run companies that were investors in today through our current funds, one of whom I've done eight companies with since that period of time.

So interesting dynamics of the long arc. And the way that came about was I stole my first company in November 1993. And I sold it to a public company. I knew nothing about buying or selling companies. I knew nothing about investing. I'd never invested. I'd never raised capital. My first company was self-funded.

We had 10 shares of stock. We sold them for a dollar. My partner got three. I got six and my dad got one. And when we sold the company, we still had 10 shares of stock. And fortunately, they were worth more than a dollar when we sold it. I worked for that public company for a year and a half. And for the first six months, I was very active.

They bought a bunch of companies. So my company was the six or seventh that they'd acquired in this very sort of rapid one or two a month kind of acquisition streak that they were on. and about six months in, after I'd already started to do some other stuff with the co-founders of the company who were the co-chairman, a guy named Len Fasler and Jerry Pock, they bought a company that was four times bigger than my company.

And my company had doubled in size in that nine months since they bought us. So, you know, grew very, very quickly for a variety of reasons. We then bought a much bigger company. And the day after that deal closed, I handed the guy who was a CEO of that company, The Keys. and I basically said, you know, he wanted to run the division that my company was part of.

And I said, my company is now part of your company. You're the division. And I shifted to a staff job. By then I was doing a lot of the M&A work with Lenin Jerry. I was the technical guy on the deal team. So I was learning about doing acquisitions by just watching them do acquisitions and, you know, doing very specific stuff that they'd want me to do on the sort of evaluation on the tech side. and at the same time, I was starting to think about starting new companies again. I've been nine months in. I'm kind of, I don't have anybody reporting to me anymore. I was enjoying what I was doing, but I was kind of thinking about what I wanted to do next. And as part of it, I decided to just start investing some of the money I made from selling that first company.

And it was before the end of, it's before summer. So it must have been in the springtime. Late spring, I met some guys that introduced me to. the World Wide Web, the four founders in that Genesis. So I went to, I went to MIT, they all went to MIT. So I ended up in this place called the student center, the second floor of the student center, which today is probably not anything like it was then. But then it was kind of like one of the hangout places if you wanted to have a public,

use a public computer. And they showed me what was essentially a very early version of Mosaic with an application that had been created at MIT called Freshman Fish Rap, which was kind of a newspapery thing. very, I mean, it was but it was like you saw it and you're like, huh, this is a totally different thing than what my first company had been doing, which is, you know, PC-based business applications. And over the summer, we worked together and in the fall we ended up making this first investment. And from that point forward, I made about an investment a month for the next three years. So I made about 40 investments between that period of time in the end of 1996, $25,000, $50,000 at a time. they kind of fell into one of three categories. One category was one where I was essentially leading a seed round and then pulling together a quarter million, half a million dollars from, you know, my dad and some friends and other people and Len and Jerry and, you know,

some other entrepreneurs that I knew. Then second category was I was writing a check into a company that somebody else was pulling together a syndicate like that for at the very, we say seed. I guess now people would say pre-seed, but it was a first check. and then the third category was just some random stuff. But that was how it started. Like it wasn't planned. I knew nothing.

And I just sort of learned by doing. This is extraordinary when you think about it. This is a time when the number of angel investors that existed in the world, whether or Silicon Valley, and certainly I think you were probably in Boston or York at the time. You could count them on one hand. There were only a couple of people who would be crazy enough to write, I'm guessing you were writing 10 to 20,

to 50K checks into these companies? 25,000, sometimes 50,000. And yeah, it was a very sparse thing. There were not a lot of angel investors. It was hard to raise that money. I was investing not just in Boston, but I was in Boston and New York. I had a network there.

I had a big network in Seattle because my first company had done a lot with Microsoft. So I knew a lot of people in Seattle, so I'd go there regularly. The Bay Area, L.A. I had a bunch of friends in L.A. that were entrepreneurs. So I ended up doing some investments there. I grew up in Dallas, so I did a couple of investments in Dallas.

So I was kind of all over the country. And one of the sort of interesting things was Angel investing then, people might write one or two checks a year. Right. Right. They're very selective, like, you know, pick the company, make sure they get it right, and sort of the idea that, you know, this was the one that they were going to make the angel investment. And it was all this sort of, you know, hand wringing around doing the investment. And I was, you know, one a month. and I was deciding it after the first or second meeting.

And I was really basing my decision to invest on a combination of the people. Like, did I want to be partners with these people? And I thought about it as partners because that's what my first business had been. Right. I was partners with my partner Dave. Right. And I just thought of it as, okay, now, even though I'm going to be a small owner, I'm going to be working with them and helping them.

And the other was what the product was. Did I have any affinity for the product? I didn't have to use the product, but I had to give a shit about it. Right. And that was really, I don't think I described it that way at the beginning, but that was how I started to describe what was interesting to me. And when I look back on that and some of the people and the relationships that I developed in that time period, and then, you know, you mentioned Jerry. I met Jerry through Net Genesis. And, you know, the way that unfolded was sort of classic is Net Genesis was one of the very first Internet companies. It actually had a couple of products grew pretty quickly. I mean, when I say grew, like, you know, half a million or a million dollars of revenue, but it had real revenue. Yeah. But it had three separate products that were totally different. And they got to a point where they had to decide what they were going to do and focus on one product instead of all three products.

And so we essentially- Classic entrepreneur's dilemma, drowning an opportunity. That's right. And, you know, there was competitors for all three. And so we were fighting on three fronts with limited resources. And we decided to sell two of the three products. One of the products was what was then we called

a threaded discussion group manager. So it was basically a discussion board, a BBS on the web. Right. And it was all written in Pearl and it was a CGI script. And it was really, you know, yuck, but it was something, right?

And this stuff just didn't exist. And we sold it to a company that Jerry was thinking about funding with Fred Wilson called E-Share. And the guy named Jim Tito ran E-Share. You might remember Jim from a million years ago. He was from Stony Brook, I think.

I lived in Long Island somewhere. And NetGenesis sold that thread to eShare. Jerry and Fred funded it. And I joined the board with Jerry and often went. So that's how we first met each other. If you're a small business owner or you'll manage hiring at your company, you know that success in 2023. It's totally dependent on the team members you surround yourself with.

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Terms and conditions do apply. Yeah, it's incredible. And this original thesis, hey, do I have an affinity for the product? And are these people who I, when things get rough, would want to be partners with? I would want to be in the trenches with. Do you still carry that with you today? that initial concept. Very much.

And it's, I think, hard fought for me personally over a long arc because in the different incarnations of different investing activity I've had from angel investing and then getting connected up with the softbank gang, when nobody knew who soft bank was, and then ultimately starting a fund with soft bank and some of the people, and then that fund evolving into Mobius, and then that sort of blowing up in the internet bubble, like going through those iterations, the selection process and the decision process of whether to invest got very complicated, right? When it's just you and you're the angel and it's your money and you don't have a investment committee, you don't have other people you have to talk to and you don't have a process

and hey, you do whatever you want to do. When all of a sudden it's a fund, as the fund gets bigger, the number of people get bigger, the process gets heavier, the bureaucracy gets embedded in it, your ability to figure out how to game things so that you get what you want within the larger firm is a natural thing that happens in any organization, right? So especially, yeah, or bureaucracy or, you know, some people know how to get what they want. Some people don't or, you know, if things are working, then everybody wants to support you. And if things aren't working, then the pressure is different. All of those things start to play out.

And, you know, larger and larger teams try to create systems so that those things make good decisions, not bad decisions. My own conclusion was the vast majority of that was random. It didn't actually improve the quality of the decision making. It's not clear that it made the decision making any better or any worse. And where I got to over time was the same starting point, was really this fundamental notion. And I added one more thing to it over time, but this fundamental notion of, do I want to be partners with these entrepreneurs? And by the way, do they want to be partners with me?

So for me, it became bidirectional. There's definitely been plenty of people I wanted to work with. because, you know, I like them. I like the company, but they wanted to work with somebody else for whatever reason. The person gave them a higher evaluation, talked a better game, whatever. That was fine. If they didn't want to be partners with me as much as I wanted to be partners with them, totally cool.

I wasn't interested in the dynamic where we weren't entering the relationship at the beginning that way for exactly the reason you made. Like, when everything's good, it's no problem. When everything's all f***ed up, that's when it's, you know, that's when it matters. And if you don't want to be in there working together from the, start, it's really hard to navigate your way through those situations. The second was this affinity, like I really got to that place. I've invested in so many companies that I ultimately really didn't care about the thing they were doing. And when everything was going fine, it was fine. But when

things got difficult, and every single company that's been successful that I've been an investor and has had at least one near-death experience. Yeah. And, you know, multiple in many cases. nobody gets out unscard. Oh, I mean, and when I say near death, I'm not, you know, I'm not being historic about it. Like, you know, you wake up in the morning, you're like, holy shit, like this whole thing might fall apart. And it's probably not going to, it's probably not going to fall out tomorrow. But, you know, like this is a, this is existential. Right.

And it could be something the company did to itself. It could be the financing environment. It could be exogenous. It could be a competitor. It could be a fundamental shift in something that was happening in terms of technology. It could be a sequence of bad decisions. Oh yeah, right? Just like an airplane, right?

Like you make some small decision and all of a sudden, you know, the wings are just tilted a little bit off. Then you make another bad decision. Now they're a little bit off. And then the speed and the pitch, like a series of bad decisions can all of a sudden become cataclysmic. That's right. And before you even know it, like you didn't see it.

And then it happens. So that affinity for the thing the company was doing became important to me. And then the last was a phrase I've used for probably the last 15 years, which is, obsession and the healthy version of it. And there's unhealthy obsession. And I think, you know, it's sort of in our culture, not just the disease of obsessive compulsive disorder, but also just how when people become obsessed with something, but in a non-constructive way or even a destructive way, oftentimes to themselves. But there's a healthy aspect of it. And the way I describe it to people is to answer the question, were you put on planet Earth to work on this problem? If you weren't, then it's impossible to be obsessed about the thing. Interestingly, in entrepreneurship, and for many, many years, not used as much anymore, which I kind of like that it's died away a little bit. But the word passionate was the one that was used.

You have to be passionate about what you're doing. And the problem is an extrovert can be passionate about a rock. Right. This is the most amazing. These things I stick in my ear because you told me to make the podcast sound better. This is the most... It's just earphones. Like, they're fine.

You know, okay, whatever. Right. But, you know, the extrovert can just get you so believing that these are transformational earpods. Yes. And that's different than obsessed. Right.

And so those are... That entrepreneur could then just like a butterfly fly over to the next thing they're obsessed with. Now they're obsessed with the microphone. Now they're obsessed with something else. Oh, sorry. They're passionate about something else. Right.

But the obsessed means I'm not going to leave this. I'm not leaving this problem until it solves. I got to get this right. And, you know, I might fail because that is part of entrepreneurship. I accept the reality that I could fail. But I'm going to work on this as hard as I know how to work on this thing. If you have people on your team, you don't delegate. You just don't always tell them what to do.

You empower them to do their jobs. There's a certain level of autonomy that each person in your organization should have. that's when you really do well. If you have to constantly wait for the leader's approval for everything you do, that's horrible. All right, that was the voice of Mike Shoshesky. Yes, Coach K, the winningest coach in NCAA history. He's a five-time champion, you know that,

and one of the greatest coaches ever in any sport. In this point here, about delegating and empowering your team. It's spot on in my experience. You can't scale yourself as the CEO, the founder, of your company or the coach. You need to have an offensive coach, a defensive coach, conditioning, diet, and you need those people to know what the outcome is. Well, how do you learn these incredible lessons? Very simple. If you're a business leader, go ahead and listen to Coach Kay's Masterclass. It just came out. They've also got other business leaders, you know,

like Bob Eager or some really thoughtful people, like hostage and negotiated Chris Voss. I love his stuff. Masterclass, as you know, is the best way for you to learn from world-class instructors and paying for an unlimited masterclass subscription is a total no-brainer. We just have this awesome insight from Coach K in 25 seconds. Imagine how much you're going to learn in 10 minutes, maybe two hours, right? Go check out Masterclass today and get unlimited access to every single class. That's right. As a Twist listener, you get 15% off your annual membership, masterclass.com slash startups for 15% off. Once again, masterclass.com slash startups for 15% off. When you started failing, when the investments, those 40 investments,

you know, you're in your late 20s, you've had great success. But 40, you didn't hit 40 out of 40, even in the dot-com era, I'm sure. And they start dying and you're watching them go away or beg you for more money or they need a bridge. How did that psychologically affect you? Because there's a generation now of investors who started their funds in the last five years who are now going to go through this. And they're watching all the markdowns from this incredibly silly boom that we went through in 2020, 2021. And we're going to go back from all three of these cycles in this episode. But you start to fast forward. Okay, now these people are going to to start going through those losses. How did you deal with that psychological terror or sadness?

I don't know how it impacted you. For me, it becomes incredible frustration and self-loathing. Like, why couldn't we do this? What did we do wrong? We should have worked harder. I should have called the founder more often. How did how was that first experience in your 20s? Yeah. So I had three flavors of it because of when the internet bubble, you know, know, sort of peaked and then when it burst. And the timing for me was those angel investments happened between 94 and 96. So the timing there was excellent because by the time the internet bubble burst, those companies were either successful and exited or they had already failed because they never got off the ground. Remember, I was making angel investments. And there were a few exceptions,

probably the most notable exception if we want to talk about at some point was a company called Harmonics that kind of navigated its way through all that stuff. It was a fifth angel investment that I made. So very early in the cycle. But of those 40, let's say three of the 40, and I invested roughly the same amount of money in all of them. Right. Again, $25,000 was the typical check. Sometimes it was 50.

Three of the 40 individually returned more than 100 times my money. So if the other 37 had been zeros, I still had a very good. return, right, against the amount that I did. Of the remaining ones, about half of them failed completely, which is zeros. And then the other half were somewhere between, probably split between I got up to my money back to I got a couple of times my money. Not noticeable. Yeah, I mean, again, against the ones that were the big, right, the big outcomes. So you learned the power law for the first time. I did. Although, interestingly, with the power law, too, like, there was this whole thing about one of your companies is going to be the one. And I sort of didn't buy into that from the

beginning. I got into the idea that you want a big enough portfolio, but you should have more than one that has that kind of outsized outcome. Yes. Right. You know, having one is kind of, is price of admission if you have a portfolio, but, you know, two, three, four, that's when you start to really see the return of it. Yes. And then interestingly, there's a lot of people that dismiss all this stuff, sort of that's, you know, get your money back to a couple times your money. I always viewed that as worth doing the work for a variety of reasons.

One of them being, it fills in your basis. And so you basically get your initial investment back. And so then your return is magnified on top of that. That was piece of it. The other piece is just something I learned from working with mostly LENFAC. who was that guy that bought my first company, which is you just, you just fight to the end. Like, you know, even if you're not going to get money back, you just fight to the end. You try your best.

You try to figure out a thing that's good for the customers. It's good for the people involved, the employees. It's good for the founders. It's good for anybody around the thing. Yeah, if the thing ends up being worth nothing from an economic perspective, you still could have impacted and accomplished things. And I'll just give one example. I had a friend that ran a company for 17 years.

I was an investor for about a decade. And in the end, the company was worth zero. I think at the peak, I don't remember what his valuation was at the peak, but it was not hundreds of millions of dollars, but it was, you know, $50, $100 million, something like that. And when the company ended up shutting down, he wound it down at some point. You know, whenever confronted with the idea it was a failure, his response would be, you know, this was a financial failure. We employed over a thousand people.

We wrote software at a time when nobody was writing this type of software for call centers. It really had an impact on how call centers worked. We were involved in the innovation of a couple of things. Again, not financially successful, but it really, a lot of people learned a lot from it. They developed great relationships. We had, I think they had 100 babies born of, you know, people that worked for the company or the period of time. So he reframed his own view of what failure was to segment financial failure.

from like the life experience. And that was powerful for me. That was sort of later in my own arc, but it was powerful because it was a reflection of a lot of the sort of fight to the end. Like you just want to try your hardest. And even if they carry you off the field and whatever cliche you want to use, you still feel like you tried your best. Yeah. And that, you know, that doing the best job you can is a reward into itself. And you don't have regrets.

But even still, sometimes I'm just like that. Like, oh, some of them had so much promise. Oh, no, no. Failure still sucks. I'm not suggesting that it's okay. So back to the context. So by 19, I had started working with SoftBank in 1996. In 1997, a group of us raised a fund that SoftBank was the sponsor of. And it took us about a year to raise that fund.

We then invested that fund in 97-98. That fund ended up doing really well. was about a 3x net fund pretty quickly. We then raised a larger fund, $600 million in 99, and we deployed that fund in less than 12 months. Wow. And then we raised an even larger fund, a billion and a half dollar fund in 2000,

and then the bubble crashed. Wow. So how much of the $2,000 fund with that billion and a half was still not deployed post-burst? We probably blew up two to $300 million of it just stupid shit at the beginning. So fortunately, I mean, we had a big hole to dig out of, but fortunately we still had plenty

of, you know, capital to invest. But the timing matters because even investing in 2000, and maybe it was more than that, maybe it was 400 million. By the time you get to 2002, there's stuff to invest in. Yeah. But it's a challenging environment. And it's an environment, even though, even with the challenges where there's a lot of people who are very uncomfortable making new investments.

Like you're having a hard time deciding what to do. Because all the stuff that you put all this money into, are you throwing good money after bad in existing portfolios? You've seen all these things just completely implode. So you're a little bit nervous about making the next investment. So there's all kinds of dynamics. Psychology, yeah. Yeah.

Let's say on the psychology, right? If you go back to that piece of it, the things that were happening for me then, remember I said I had three threads. One thread was I still had a bunch of these angel investments that I was helping people with and navigate their way through. And in this period of time, there were some that were massive successes. An example of one was critical path, which I was an angel investor.

And I think their peak market cap was $5 billion. And ultimately it was zero. But I exited that way before, you know, it exploded. But at that time, by the way, $5 billion was not like $5 billion today. No, $5.8 was an enormous. Like top, you know, top five or 10 companies in terms of valuation. that in that cohort. Because valuations when you invested were typically one, two, three million. That's right. That's right. And, you know, a big exit, you know, a quarter of a billion to

billion dollar exit was a really large exit. Once you got above a billion dollars, it was an extraordinary exit. And if you got above 10 billion, it was really extraordinary. Unprecedented, yeah. And even though I had exited and sold my stock, I was still friends with the founders. And I was still friends with some people on the team. So I'd still have interactions with them. And, you know, you'd have this sort of feeling of what was going on. So that was the angel piece. The SoftBank Mobius piece was a complete cluster. And just dealing with that was incredible.

And on top of it, I had co-founded several companies in this time frame. One of them, which was a company called Interoliant, that went public. We started at 96 with Len, the guy that bought my first company. It went public in 99. and it was a $3 billion market cap in 2000, and it was bankrupt in 2002. And I was co-chairman of that company with Len. If you go back to the Net Genesis story,

Raj Bargava, who was the founder of Net Genesis, CEO, and the guy I said, I've done eight companies with somebody, it's with Raj. He was another co-founder of Inter-Liant. So in the midst of trying to deal with this complete mess that was what we were doing at SoftBank and Mobius and SoftBank were the, not SoftBank, the big organization, but the fund we had, we just changed the name from SoftBank Venture Capital to Mobius at some point.

But it was the same fund, the same people. Dealing with just a mess that was that, and then also the pressure of being a co-founder and co-chair of a company that was imploding. I think we did, you know, three or four layoffs. We at the peak had about 2,000 people, you know, and at the end probably had a couple of we bought a bunch of companies, and we had to then sell off companies. We were trying to just survive. And if you go to the emotional part of that, in 2000, the work was incredibly intense

through this whole period, right? On the 97, 98, 99, it's just nuts. And, you know, I was investing everywhere. The amount of opportunities, the amount of meetings, the evaluations going up, the IPOs. It was incredibly intense. You're working 80, 90 hours a week. And the work is in person. So there's this enormous amount of flying back.

and forth across the country. Right. People forget that. On the road all the time, staying out late, all the time, getting up early. I mean, it was a lot. Then you get into this phase in 2000 where from about the springtime when NASDAQ peaked, which I would say is pretty similar to the moment in time, if you put an overlay with where we are in this cycle, to November of 21. Yes.

So middle of November, I remember it was around Thanksgiving break was when it felt like things had peaked and we're starting to come off the peak. I would say it took till the end of 2000 before people were accepting that it wasn't just going to be a temporal shift. So you had a six or nine month period where the public markets came down a lot, but everybody's like, hey, venture capital has tons of money and all these companies are well funded. and, you know, it's going to be fine. Denial phase of the crash. Right. And so there was like a good solid nine months of that. And then the next 12 months for me, so 2001 for me, was just brutal.

And it was brutal because I was involved in too many companies and on too many boards. So I was probably on 25 boards at that point. Wow. Which was an absurd number to be on. But the result was, in addition to having this daily oppression of, everything was up somewhere. And it eventually generated a frame of reference for me, which is that as a VC, even in good times,

in a company, a CEO has these waves. Things are going well, then things are messed up, then things are going well, things are messed up. You always have lots of issues, but you have sort of longer arc of good versus bad. As a VC, every day there's something new that's f***ed up somewhere. And the severity of it varies a lot. And I think the pressure on the CEO is much more intense than the VC.

But it's this continual thing. And so in some ways you get at some level used to it. You get used to constantly somewhere in your world there's a problem that you've got to deal with. Yes. When everything goes from lots of green lights to a couple of yellows and then every now and then a blinking red or every day a new blinking red that you can kind of go put energy against to the whole board is now blinking red. and that was 2001. And it lasted 12 months for me because I had so much. I don't think people really started dealing with reality of how bad things were until

about the middle of 2001. That tracks with my exact experience at that time. And then the unwinding started and it really didn't finish until 2004. And so you had this thing where the phase that we're still, that we're in today from my frame of reference is still there's a lot of, you know, anytime somebody says, hey, there's tons of venture on the sidelines. Dry powder. Dry powder. Like, yeah, except for now, instead of investing all that money in 12 months, VCs are going to invest it in three years or four years. Yes. The LPs who were getting tons of money back so they had to deploy the money back to VCs are all of a sudden going to not have

any money coming back to them. So they're going to deploy a lot less. So there's going to be a lot less new money coming in. And so like all of those things play out in in very lumpy ways. Right. They don't all, it doesn't all happen sort of in this predictable pattern. Yeah. And the power of human denial is extraordinary. Yes. You know, and and in, in the case of entrepreneurs, optimism has to reign supreme. Like, you have to believe that it's going to work. But if you aren't approaching the problem with a clear head emotionally, approaching the context with a clear head emotionally, and really frankly, just dealing with reality, whatever it is that your company is facing or as an investor you're facing,

then, you know, it just makes things worse. And I think we're in a liminal state where there's a lot of deferring reality. You know, there's, and there's lots of, there's, There's lots of behaviors that are easy behaviors that come from quick prognostications of either investors or entrepreneurs or people that have been through it in the past. And my own deep view, and this is what I learned from just having so many things crumble at the same time, there isn't an answer. There's not like a single, you need to do this or you need to do that or here's the trick. It's very specific to the company, the market segment, the team, the investors around the table

and what their pressures are and what their resources are. And, you know, is it a company that's being run by the founding CEO? Is it a company being run by somebody who was a hired CEO? Is it somebody who. It's all situational. Yeah. So varied from company to company. And when you're in the midst of the beginning of the cycle falling apart,

I think everything sort of eners back to normal, like the easy, shallow, first reaction kind of things versus going deeper and saying, what do I really need to do to set myself up as a as a company or what does you know as as the leaders of this company to set ourselves up so that we have in front of us whatever the world is the ability to navigate through for the indefinite future all right everybody i want to take a moment to thank our friends at microsoft today we have lahini r natchelum with us she's a senior director of platform and growth at microsoft and she actually created the microsoft for startups founders how welcome to the show thanks jason thanks for having me so tell us a little bit about the

Founders Hub. Why did you create it? Yeah. So we built Founders Hub based on the feedback from hundreds of founders. We spoke to founders at all stages of their journey, so ones that were just starting out with an idea, to those that had actually built successful companies, just to better understand what their challenges and pain points were as they were building their businesses. And we found three challenges that kind of rang true regardless of where they were in their journey. The first one was that founders need access to coaching and advice to get to that next milestone. The next is that they need to accelerate the time it takes to actually build an MVP or their second product or their next set of features. And of course, founders need capital

to actually keep them afloat as they continue to build their companies. And so Microsoft for Startups Founders Hub is a digital platform built to help founders with these challenges. Thanks so much, Lahini. If you would like to check it out, go to the Microsoft for Startups Founders Hub and they have no fundraising requirements. Open to anybody. If you're a founder, they want to support you. It takes five minutes to apply and startups can get up to six figures of benefits instantly. Sign up for the Microsoft for Startups Founders Hub today at AKA.m.s slash this week in startups. It's exactly, I think you've stated it. My question for you is you're at that switchboard, right? Now you got the 25 boards. You're the Maka. You got the money. You place the bets.

how does that, how does your brain process what is triage like a mass unit? You know, you're on Omaha Beach now and you got founders and it's not just one a week or two a week. Now you got 20 a week calling and everything's falling apart. How do you maintain your composure and clear thinking? Because I'm not asking for a friend. I'm literally going through it right now. Yeah. Every week, Brad, I am dealing with founders who have,

accepted some portion of reality. And I'm trying to counsel them. Hey, you know, you had 200 people in this company. Your last three rounds were raised because people offered you money. Now you're not going to get that fourth offer is not coming. And if it does come, it's going to be a miracle and it's going to be at a down round that is going to break your brain of how much equity you're going to actually have in your own company. How did you deal with all of that, all those inputs?

because listen, I like to play six or seven chess games at once, sure. But when it's 60 and you're behind and you lost your queen and all of a sudden it's like, well, this is not fun. Yeah, I don't think I learned how to deal with it in the internet bubble. But I can answer the question of how I deal with it today. Yes, you power it through it at that time. And situationally, like I survived. And, you know, when I reflect on it, you know, 20, 20, 22 years later,

I survived. I'm really fortunate that my marriage survived to Amy at the end of 2000. It almost didn't. Yeah. And I've written about it in the book she and I wrote called Startup Life, but I'm really happy that we navigated through that. That was a huge sort of input to me to get my shit together on some dimension, which was to realize that the work that had consumed me was not all of life. It was an aspect of life, but it was not all of life. Right. And so, if anything, that was the thing that helped me navigate, one, a key thing that helped me navigate through that time period.

Some perspective. Yeah, but even like in it, right? The perspective came from a person who I wanted to spend my whole life with basically saying, you know, you're like, you know, I think you're amazing, but I don't want to, you're a crappy roommate. Like, you know, I didn't marry you to be ignored all the time because somebody else was more important. No matter, I get it. There's a lot of shit to do, but like maybe pay attention to you and me and other stuff.

So I would put that one as a thing, which is just always remember that life is more than the success or failure of a business or businesses. Yeah, any one business for sure. As I wind the clock way forward. And I think some of these lessons came from again, 2007 to 2010. and that cycle. The Great Recession happens. It's not our fault this time. This is a real estate people playing crazy games with mortgages.

We're building really hard, building cool companies. Facebook is growing, Google's growing, Twitter's growing. I did weblogs, Inc, Flickr, there's a lot of interesting companies being built. Everybody's acting normal in our industry. And it was a particularly weird time because, you know, 2007 coincided with another big unlock, I think in innovation and in the arc that we just experienced, which was essentially the iPhone and, you know, the total shift of the way people thought about software.

There's a bunch, you know, you can spend a lot of time talking about the impact of the iPhone. But that was in that same moment and time a pretty key shift. For me, and we raised our first Foundry Group fund in 2007, which was a particularly hard time to raise a fund because we were raising a fund. when venture still was not popular, it was a thing that, you know, there was an article

that was still floating around that was a Kaufman Foundation article that said, you shouldn't bother investing in any but the top 10 venture funds. All the other venture funds don't return any money. And it turned out to be completely wrong.

Like if you missed the emerging manager segment from 2004 to 2010, you left, you missed a huge amount of upside. And then getting into that next generation of funds, many of which today are funds that everybody talks about as name brand funds. Going back to sort of how do I navigate it today, I view the dynamic as one that the most important thing I can do as an investor for, and I'm going to say CEO rather than founder,

CEO is often a proxy for founder because they're often the same. But in the companies that are later, you know, mid or later stage, I'm typically dealing with the CEO versus the founder, but use those words interchangeably or concepts interchangeably, depending on the stage. I have a very, very simple perspective now, which is as long as I support the CEO, I work for her. And if I don't support the CEO,

if I get to the place where I don't support her, I have to do something about it, which doesn't mean fire her. It means try to get back to the place where I support her. But otherwise, I work for her. And if I work for her, every CEO needs something different from me.

if I'm a generic board member, generic VC, generic investor, generic whatever, I'm not really serving a useful purpose for that person because there's some specific things that are going to be her strengths, her weaknesses, things she needs, the way I need to engage with her. And so I focus my energy on that with a very clear lens for me of being direct about what I think is going on, but recognizing that I'm providing data, not the answer. In other words, I'm wrong a lot. And I think one of the things that is a weakness in the venture industry broadly writ is I think a lot of VCs just don't have the ability or humility or self-awareness

that when they're making a statement about something that's a hypothesis or that's data from their experience, it might or might not be right. And if it's right, great, but if it's not right and it's done in a way where the person that's receiving the information feels compelled to have to execute on it, you're making the problem worse, not better. So you're literally telling them how to run their business without having any responsibility of being in the cockpit. This is what you should do. Here's the right answer. You know, you're much better. There's a way to frame it, that's much more helpful, which is, in my experience, in three decades and three boom and bus cycles, these tend to last 18 to 24 months. Do we have 18 to 24 months of runway?

How do we get to that? These are maybe things we should model out and have a discussion about. There's a way to phrase it that is not fire everybody. Or you should do this, or you have to have this. I also try to put myself in, at best, a peer position with the CEO, but actually, in a one down position instead of one up position. I don't want the CEO to feel like they work for me. I want them to feel like I work for them. And this is hard. And it's hard for the person in the CEO seat to understand that too because that's not

the behavior of your investors. You're getting investors that have all different kinds of pressures and you have board members that have different frames of reference and you have this canonical. sort of language that the and the tension frankly between CEOs and and founder CEOs and investors, much of which, you know, contemporary media has made a big deal about in a way that polarizes everybody between like who's in the seat running the company versus the power struggles behind the scenes and the person making good decisions and bad decisions and people sort of lobbying in grenades and whether you use an extreme example like WeWork and then watch the,

you know, however many TV shows that were made about WeWork. Like that's an extreme example. But like that phenomenon plays out over and over and over again in the investor board member founder, CEO interaction, which is very, very different than, hey, let's deal with reality. I don't know the answer. I want this to happen. You want this to happen. okay, let's try to figure out the best way that we have the highest probability of that happening.

Oh, you want something different to happen? Let's talk about it. And oh, by the way, I think the thing you want to have happened is completely unrealistic and is going to set ourselves up for failure. So let's talk about that. And by the way, I could be wrong and you could be right. So let's make sure that that's an okay part of the conversation too. It's a very different interaction. When everything is going fine, it's very easy for either side to be dismissive of the other. when things are not going fine, both sides need each other. Yeah.

Well, it's all hands on deck, right? Everybody's job function, everybody's contribution is, could be the result in this company succeeding or failing. That's right. And the leaders, you know, the leaders who, you know, use a couple pejorative words,

the leaders who gaslight everybody else or grin to fuck everyone or view themselves as the only one that's in the position to make the decision or think they're smarter than everybody else or have no ability to acknowledge that they're wrong. I think those are the leaders who in this environment get hurt the most and whose companies suffer the most

and who everybody around them suffers the most. It doesn't necessarily mean, by the way, that they won't ultimately be successful. Right. And that the other company or that the other type of company will ultimately be successful. I use the word suffer pretty deliberately. It's one of Jerry's, Jerry Colon's favorite words.

And sort of this notion of creating suffering for yourself and for everybody else that's unnecessary increases the degree of difficulty of having a positive outcome. Why in the world would you try to increase a degree of difficulty in something that's already incredibly hard? and that can come from just ignoring people's input or diminishing people or not being focused or not having a plan. I mean, it can manifest itself in so many ways like a lecture term grin. All the stuff we talked about, right? Like, I mean, it's very easy for me at a moment of being frustrated with somebody to tell somebody how stupid they are and how wrong they are and how dumbness is. And oh, by the way, well, why did I say that, hey, Jason, I'm, you know, if I called you the next day and said, Jason, I'm sorry, I called you an idiot. It wasn't actually anything about you.

I was really mad at Mary. Yeah. And I was just taking out my frustration with Mary and the situation I was in on you. And I'm sorry. If I called you and said that after I was a jerk to you, you'd probably accept my apology and we'd move on. Think of the number of people who don't have the self-awareness in that moment to do that. Yeah. Or who feel like, well, I can't show weakness.

I can't say I'm sorry to that employee or that partner or that investor that I just, you know, I'm moving on. I gotta just get this stuff done. Not healthy. I mean, in some ways, really, accepting reality, and then bringing your team into that reality seems to be a piece that people miss. If the reality is, you know,

our sales are going to be down 50% this year, and we doubled our staff thinking we were going to triple revenues, once you have that discussion, all of a sudden, the pressure has been released. Okay, we know the reality. The company's way too big. The revenue is going down. Okay, is there a way?

Let's come up with ideas. The obvious idea is to cut expense. But another idea might be to increase revenue somehow. What are people's creative ideas? Maybe if everybody here is 20% more efficient every month for three months, maybe we don't have to lay off as many people. Maybe if we automate some stuff, maybe we do partnership. And when I see founders who can move to that sort of state of being where they're in the board meeting saying,

like, here's reality. we hired based on a 20-23 projection that there's no way we're hitting well it keeps rolling all let me let me let me let me give a a fun example one that I say it's fun it's a hard example to understand at some level unless you're in this type of business and I'm sure there's plenty of plenty of people that listen to all the stuff you do that have hardware related businesses because I know plenty of your angel investments are hardware related business And it's very challenging.

But here's the dynamic. Hey, sales are slowing down because of the macro economy. The supply chain's been a total mess for the last long time. So everything got more expensive. It's more money to ship stuff to us. The parts cost more. It's shipping, blah, blah, all that stuff. And ad revenue or sorry, ad investment is getting less efficient.

because Facebook's not working as well because the changes Apple made and, you know, da-da-da, whatever. You have all like this long... Customer acquisition costs is a headwind. Right. Your KAC isn't right anymore and da-da-da-da. And you look at it and you say, okay,

and the current reality is my gross margin is 30% and my contribution margin, so my gross margin minus my cost of sales and marketing is zero. And so basically I'm losing money. You know, the G&A and R&D of my business and all sort of the rest of the cost is what loses money. What do you do? And there's a whole bunch of conversation, but fundamentally the starting point, there's two big levers. One is increased gross margin and the other is essentially increased contribution margin.

How you do that in this environment is very straightforward. but very hard for people to get their minds around. For gross margin, your only solution is raise prices. Right. You have to raise prices. And everybody goes, oh, my God, if we raise prices, nobody will buy our shit anymore. Right. Okay.

Well, you have to raise prices. Well, if we raise prices to sell the same amount of shit, we have to spend more money on demand gen to get more customers in the mix. what is missing from that whole analysis is that the cash flow dynamics of a hardware business, which is that you have to make the thing, that you then sell to the customer, and then the customer pays you for it, with the exception of certain types of models that are negative working capital models where the customer pays you in advance, and then you make the thing, and then you deliver the thing. Kickstarter style, yep.

Okay, well, Kickstarter style or Tesla, bought, ordering advance, pay and fully. Dell's business, uh, And the brilliance of Michael Dell early on, absolute brilliance is he created the first negative working capital computer model. They assembled the products basically as they were selling them. So somebody would buy it and they'd assemble it and ship it. And that allowed them to grow with very little investment because they were essentially using the customer order dollars as the starting point.

Now, if you use the customer order dollars, but you never deliver the product to the customer, you've got a different category of problem. Right? So, you know, which of course happened on Kickstarter for lots of hard of a problem. where they took the money but never deliver. So lots of pieces you've got to get together. That's why I say it's a complicated story.

But the leadership team that sits around, talks about it and says, I mean, you have two things you have to do. You have to raise prices and you have to lower the amount of money you're spending to get a customer. That's it. If you can do those two things, you can meaningfully improve your business. All the other stuff is going to have so much less impact on you. in a hardware business.

And yet if you look at all the hardware businesses that have been venture-backed, that have been chasing growth and not paying attention to gross margin and not really paying attention to contribution margin, they don't know how to do that. They don't have the muscle for that. They've never had to.

You wrote a blog post, you know, the day we taped this or the day before, we were just talking about, hey, if you're under 40, you probably haven't been in a leadership position, almost by definition. and there's a few in a down market. Unless you started your company at 20,

you have not experienced this before. It takes a level of humility that, gosh, you know, I could always raise that incremental $10 million bridge, $5 million bridge, you know, some strategic would want to put a little money in. Everyone's telling me I have to grow as fast as possible.

And so all of my behavior has to be oriented around growing as fast as possible. Everything I read, other companies that are sort of like me are growing really fast. My business is better than them, but they're raising money at these crazy prices. Therefore, okay, that's going to be available to me when I raise my hand and look for money at crazy prices. Yeah. Right. Like, again, understanding how to navigate your way through. Now, the positive thing in this environment comes back to the emotional question you asked,

right? There's a lot of people that actually can be quite helpful with this, including many of the investors sitting around the tables of many of these companies. The key, though, I think from a CEO's perspective is to force the people sitting around the table to think hard about your business with you rather than you as the leader just sort of deal with whatever platitudes are coming your way. And use this as a moment to forge tighter relationships with the people sitting around the table, both your leadership team and your investors. Because you're trying to figure out how to navigate out of a challenging environment.

And then the last is for companies, and there are many companies, plenty in our portfolio, that are on very solid footing, right? There are plenty of capital. Their businesses are working reasonably well. They were proactive in terms of their cost structures earlier in 2022. Or maybe they didn't have to be because they didn't get as far ahead of themselves for whatever reason. Like, in some cases, the companies actually this environment works better for them, because of the demand characteristics of other things that are going on.

Whatever the reason is, those companies all of a sudden can pick up lots of market share in this environment because of the distress of their competitors. So it's understanding each company and as a leader figuring out what your company needs to do over the next couple of years, assuming that it's going to take a while before things get easier. and I think the generic, this is the emotional problem. Everything's terrible, it's all screwed up, the world is miserable, blinking red lights everywhere. You carry that around for enough times, and that becomes the truth. And yet, you know, we are, we do happen to be, at least me and you, we're alive, we've got plenty of resources, you know, lots of good things. Energy, wisdom, strategies, play healthy. healthy. You put your energy into it even in really challenging environments. If you can get closer

to the people you're working with in that, when the environment gets less challenging, it's really satisfied. The state we've been in for the last 10 years is the aborition. Startups have always been hard. It's always been about sacrifice and suffering and trying to solve hard problems. We just happened to have lived through, what is this, seven, eight years of just a complete delusion that startups were easy. And it must have been frustrating for you to watch people say, there's no time for diligence, we're not going to have a board, uh, you need to give me an answer today. Maybe you could just reflect on how you interpreted the last five years of peak weird behavior, people giving millions of dollars to people who don't know how to build products

and then giving them tens of millions of dollars before they have product market fit. It feels like the entire ethos, the entire playbook of startup and venture capital, was thrown out the window, having a good board, meeting regularly, building a plan, giving milestone-based financing. Hey, we give you some friends and family, a seed, series A, series B. Hey, let's just skip that and go right to the series B. Let's give some crypto project a $100 million valuation. Give them $25 million.

And then, you know, I read the white paper and I had FOMO, so YOLO. What was that like when you were watching it? For you, was that like watching people just flying the plane like without even looking at the dials? And did you see it coming? Yeah, a couple of different layers of it. there was in our world I think for whatever reason and I say our world I mean foundries world for whatever reason I think it's this of the bidirectional affinity with the founders we want them to want us as much as we want them the founder that calls me up and says you have 24 hours

to make a decision because I've got seven other term sheets my answer is awesome take one of those It's, you know, good, great, good for you. Like, it's, and it's not with any negative feeling. It's just like, not the game I'm playing. Right. I don't know how to do that. Some of that, by the way, came from, again, I'm going to tie back to Len Fasler. You know, he was in his, he passed away at 88.

So it must have been late 60s when this was going on, 65 to 60s. he ate, let's say, during the bubble somewhere in that age. And there were lots of moments where he basically said, I don't understand what's going on. It's not, I don't understand the internet. Or I don't understand these products. It's, I don't understand what's going on. And he had the ability, he was willing to say that.

You know, we bought a bunch of companies at that company. We'd be looking to buy a company and, you know, become competitive and the price somebody was willing to pay, you know, was five times or ten times more than what we were willing to pay. Not, you know, five percent or ten percent, five times. And, you know, be like, we don't understand. Oh, by the way, you know, one of those companies was a company called Exodus, which, you know, gloriously went bankrupt actually before we did. Right. And part of it was just kind of some of that stupidity. So for me, a lot of, I would say, probably 18, 19, there was a lot I just didn't understand.

I did understand the linkage between zero percent interest rates and people going after risk and the dynamic of that. Like I understood that, but I didn't understand how, I'll just use a simple example that that became normative. The number of times I heard somebody say, yeah, we're willing to pay in 2020, or even, early in 2020, sometimes,

yeah, in 2021, we're willing to pay a multiple of 2024 or 2025 revenue. That was weird. Right?

I'm like, that's stupid. Or somebody who would say, hey, you know what, the new valuations, you know, the public markets

are telling us that B2B SaaS companies are worth 50 times, you know, for 12 months. So we'll give you 50 times next year's revenue.

Actually, we'll give you 50 times ARR exiting December of next year, which is December times 12. Like, I don't know any planet where that actually works long term. Yeah. And well, we just want the best companies and the ones of the best companies are the ones that are growing the fastest. And you get this rationalization. And my reaction to the rationalization was kind of, I don't understand.

So that was one category. Just entry price matters. There has to be some thoughtfulness to the price that you're, if you're a capital allocator, the price you're paying at that moment in time. And this was complete faultlessness. Well, thoughtlessness are just an assumption that there was no downside risk. I mean, if you're investing in a project that is a complete raw startup, you have to assume that the vast majority of those projects are going to fail.

Right. So if you invest a small amount of money in those at the earliest stages, hence pre-seed or seat investing, okay, that makes sense. But if you invest $100 million just because that doesn't make sense. there was another layer of it which you know I've been negative on for a while and I'm going to separate crypto from Web 3 because I think they really are different things

and there was you know for a while an effort to separate out the idea of blockchain from it I just sort of separate the construct of things that are I become a Matt Levine disciple I don't know if you read him from Bloomberg just spectacular and you know the whole deconstruction of what's happened in crypto and his lead up to it over the last 18 months, I think encapsulates how I feel and how I've talked about it to people.

And there were a number of people in my world who started would start saying things like, you know, Brad, Brad, me hates crypto. I didn't hate crypto. I just thought the vast majority of it was nonsense. Yes. And in the nonsense, what do you mean by nonsense? nonsense is like I understand, I think I understand what's going on here and it doesn't make any economic sense to me.

Well, let me tell you why. I'm like, no, no, no, all you're doing is you're speculating on an asset. It doesn't matter whether it's a thing or another thing or another thing or a CDO or a derivative or derivative or derivative. Like, you're just speculating. No, no, no, no. These have long-term durable value in terms of like, what's the value? What are they doing?

Hand-wave. And whenever the handwave would come, be like, well, look, I don't need to argue with you. I'm just going to go play in a different sandbox somewhere else. Like, you know, I get it. And maybe I'm totally wrong. That's okay. So I had a lot of that in the last couple of years where me too.

Yeah. I didn't really, you know, I was, I didn't understand. And so in a couple of places I wandered in to try to understand better and understand by doing. And I learned a lot in the cases where I wandered in and understood by doing. and in the cases where I just either had no interest or didn't want to learn, I just ignored. The interesting thing in that whole crypto was

why are we allowing early shareholders to create enormous wealth before there's any consumer value being created? It's almost like giving somebody coming out of tech stars, which you co-founded with Amy and the David's, you brought in. if I'm correct in the history of that, just think about if a Techstar's company was IPOed

a demo day. And you'd be like, here's your IPO. And it's like, I was just like, wait a second. How are these founders going to come to work if they've already sold $25 or $50 million worth of a token on some exchange to somebody? It just didn't make any sense to me. And why is all this liquidity happening without,

a product providing value in the world. So again, I was like, I don't understand how to evaluate this opportunity. Maybe I'm too stupid. Then I realized, wait a second, I'm recognizing a lot of these people. And this is where like being a judge of character, I was like, I remember some of these people from the doccom era. I remember some of these people from Web 2O. These people are charlatans. Why would you, if this is such a great project, why are you clearing your bag?

Why are you selling your equity in month six of the project? it doesn't make any sense. Well, you know, it also became very clear, very quickly if you were looking at it with a critical eye. And I think a number of people figured this out that were very smart. And for a period of time, there was a set of people who worked hard to maximize their own economic outcomes from this. Once you sort of figure out, oh, I get it. I can create something from nothing. I can give myself a whole bunch of it.

I can then get other people to inflate the price of it. And then I can create some liquidity and get some liquidity out of this early position that I have. And whether it was on the entrepreneur side or the investor side, that accelerated because of a very classic phenomenon that's the greed cycle, right? I mean, once people start getting greedy around that, all of a sudden, more and more happens. It became a playbook. It became a playbook. I was in some of these meetings. with normal startups, Brad.

And they were like, hey, we're going to do a token. I'm like, what does that have to do with this core business? And they're like, yeah, well, we can raise all this money. I'm like, well, we could also go to venture capitalists and we could have revenue from customers. And they're like, no, no, we ICO this. Public buys it. We're going to raise this money.

And then I'm in a meeting with a lawyer. And they're like, we're setting up a foundation in Panama. And I'm like, Panama, between the U.S. and South America? The one in Kansas. Panama, Kansas. Panama? we're setting up a foundation and pat it why oh it's more you know uh it's more reasonable for

this type of transaction i'm like i don't know i've been on the planet for 50 years and 30 of the year in business we we kind of were going with delaware since i've been here i think i think though this is uh you know what what happened again is is kind of a normal part of the entrepreneurial cycle um which is you know you could talk about the same thing that happened that has happened in 2000 where the suspension of disbelief emerged writ large. And then there were a series of different things people did, and I'll just describe two of them that I remember companies. Yeah.

That with the benefit of hindsight were either, in some cases, clearly fraudulent, and in others had no economic benefit to anybody except for the speculative phenomena that was going on. One of them, which I think was most prevalent in telecom, but also was very prevalent in Internet media, was essentially the equivalent of round-tripping. Oh, yes, AOL. Right? A-O-L was the big example of round-tripping. They got fun.

Quest, you know, Joe Nacho, who is the CEO of Quest, went to jail for a long time because of it. and what round-tripping and for people that don't have any idea what this is is company A takes balance sheet dollars, invests in company B, and buys equity in company B, and by the way that equity might be public. So it's tradable. Yeah.

And then company B signs a long-term revenue contract with company A for company services and the really stupid versions were when they were in the exact same dollar amount as the investment. People were a little smarter than that. A lot of cases where, you know, it might be a $100 million investment, but it was only a $97 million five-year revenue deal. Right. And so on one side, one company is taking its balance sheet and getting a balance sheet asset that's liquid for it stock and the other company, which everything is going up. So theoretically, that stock inflates also, they, in exchange for that, getting that, they get a long-term customer deal. So they inflate their revenue. On the other side, it's a net neutral to the other company. And nobody

was caring about how much money you lost. They only cared about your revenue growth. So you watch that play out over and over again. It was crazy. There's, there's some of that that's showing up in crypto. Yes. You know, some of the, I mean, there was clearly some going on between Ben Anson and FTX. You see it with Gemini Genesis right now. There's clearly this sort of, I gave you money, you gave me money, you know, this money

moving here, that money moving there. Race and venture capital, yada, yada. It's the same kind of, it's a different flavor of the same kind of thing. Yes. And, you know, in some cases it was legitimate in the dot-com era. there was real business and real reasons for those deals. But once people realize that you can inflate your equity value by doing these transactions at basically no cost to you, that inflation took over.

The other example that I'd give just flavors that sort of echoes from the past is the whole phenomenon of eyeballs. And using eyeballs as the measurement of value, eyeballs probably are a little more tangible to us than the magic beans that are tokens but they are still pretty ephemeral and there's no question that the reporting

on eyeballs was a highly suspicious thing. It was very easy to inflate whatever measurements you were using for traffic at the time but there was a sort of a whole industry overlay where everybody started talking about that as a proxy for how your business was doing and whether it was remember Alexa, the old Alexa, not the new Alexa, but the thing that Amazon had for people that don't know

the old Alexa, it was a ranking of sites and how much traffic they had website traffic. And you know what? It was all kind of bull-shund because a lot of that website traffic was manufactured, a lot of it was round-trip, a lot of it was miscounted. And it was a proxy for something, but it was not a proxy for economic value. not a business, not a proxy for a real business. As investors, private and public, entrepreneurs, we all decided to suspend disbelief and decide that was a proxy for value versus what, you know, whether it's long-term discounted cash flow or how much free cash flow you have or some measure that's tangible in terms of a business generating real economic value. As we wrap here, this seems to me. That felt, that felt good.

I don't know if that was a good rant for you. off your chest. No, it's for both of us because for, it was, I have to say, the psychological sciops that they were going after anybody who criticized crypto. I would say something critical

of crypto on the pod or on Twitter, wherever, at a conference. And the amount of people who would say, have fun being poor, OK, Boomer, not going to make it. And I was like, wait a second. My normal tweets get 50 replies. These are getting 500.

And all of them are saying, saying, you're a fat, Greek, balding bastard. Da-da-da-da-da. And I'm like, wait a second. These have a different qualitative nature to them. Why are the laser eyes? You're going after me. Your deep Brooklyn nature caused you want to fight with.

My Colorado nature causes me to want to say, I'm going to go for a run. Well, yeah, and here I am trying to explain to an account that's 72 hours old on Twitter, has no followers, how, like, well, no, my perspective is. like, you know, here, like if a, this kind of database, like aren't there, is immutable, not, that's like a not a good quality. You want to be able to change a database. If there's something wrong in it, and I'm like having this logical discussion with somebody who's placed a bet.

And they're just trying to get every, pump everything up. Looking forward here in 2020, as a capital allocator, I'm raising my fourth fund. I'm doing it publicly. Um, I'm investing in more companies now than ever. And I am more excited about 2023 than I have been for the last four five years because as great as it was to watch the markups or maybe get some liquidity here and there, a company's going public, all kinds of great things happened for me. I felt like people were doing it wrong. I felt like there was a lack of discipline. I felt like the same thing you experienced, hey, you got seven terms sheets. I don't want to get to know you. I just want the highest price. I don't want you to do diligence. We're not going to have a board. I want a hundred X founder

shares. I'm like, you haven't even made a product yet. It's your first startup. All this mischugina, this craziness going on. Now all of a sudden I'm seeing companies with real products who are, you know, four or five people with 10K in revenue and they got a seven, eight million dollar evaluation and they want to get to know me. I want to get to know them. We'll talk to some customers, do some really thorough diligence. Feels to me like this could be the best, you know, next two or three years in terms of professionally for me as an investor. I hope, you know, maybe hitting the top of my game where I can assess things and the prices are right and people are being thoughtful. How do you look at

2023 for the right capital allocators, the thoughtful ones, and for the founders who really want to build real businesses? Yeah, I think at the early stages, 2023, is a great time to start a company, period. I happen to think that any time is a great time to start a company. So I don't think that there's timing. I think that as a founder, wherever you are, whenever you are, and you find something that you're obsessed about, that's a great time to start something.

An opportunity cost of not going after it is higher than, you know, going after it in that moment. Like waiting another year just to get the timing right makes no sense to me. So sort of my view is at the early stages, it's a continual process that whether the macro is good, the macro is bad, there's a lot of capital,

there's not capital. It's good. I think from an investor perspective where you're sitting, this is a much cleaner and more energizing time to be a seed investor because the kind of craziness part of the cycle is being occupied by something else right now. And I'll talk about that in the second in the 23. So at the early stages, I think for both founders and for investors that are investing at the early stage, you know, it's a great time for investors that have big portfolios that are early

stage investors, the part of it that's going to be hard is the next piece, which is that if you have any engagement with your existing companies, a lot of precede and seed investors, once the company raises a series A or a series B, their influence on the company diminishes. And by the time the company gets to a series C or a series D, you have no influence on the company. You might know the founder. You might listen to your e, take your emails and respond to you. But there's a different set of people that are impacting it in terms of the investor cycle. That universe, 23 is going to be a very hard year for. You know, we are nowhere close from my perspective to the point at which companies have had to deal with the reality of what kind of capital they have or don't have.

And that's just going to happen continually throughout the year. If you have capital where you don't have to think about capital till 24, 25 or later, you're fine. Yeah. Right. Like, it'll be a hard year, but, you know, that's not going to be on your head. But if you have to raise money and 23 is a mid-stage company, you know, it's a really hard time. It's going to be a difficult time depending on what's going on your business. If you have investors and you have the capital lined up and you have line of sight to where it's going to come from or your business is working well, really, the financing is probably a matter of price more than anything else.

Right. But there's a huge number of companies who do not have that going on. Their businesses are not working well. It's not a situation where they have a lot of support from their existing investors. Those companies are going to have a lot of hurt. And it doesn't matter we're on the capital stack you are as an investor, whether you're early stage or mid stage. That's just hard work.

And then the really confusing place that probably doesn't unwind until 2024, is companies that raised a lot of money, you know, name your flavor of investor, doesn't matter. And some of those- Private equity firms, hedge funds that got a little frisky and wanted to drop a hundred million

into a pre-IPO company or what they thought would be a pre-IP company. Or maybe did that with, you know, a hundred companies. Yes. Or several hundred companies. I think that those companies, if they don't have, if their businesses don't work on the money they have today and get to a

place where they don't need to raise any more capital ever. Yeah. Those are going to be very challenging situations. There's, you know, there's already people who have raised, you know, structured equity and structured equity and structured debt funds. You know, the knives are sharp. People are coming out trying to figure out how they can extract the most value in terms of being the new player in the capital stack. If your company's working, you'll figure out how to navigate through it. But if your company's not, and this is, you know, the definition of working or not is important here. Right? Because growing revenue fast does not mean that your company's working. Back to those gross margins, back to the contribution, back to your PAC. People are going to start looking thoughtfully at these companies.

Yeah. And we're back to basics now. I mean, people might even start doing customer references. I tell a founder, we want to talk to two customers. I mean, we're a seed fund and we want to talk to two or three customers. And we don't want you to give us the two or three customers. We want you to give us a list of 100. We pick three. People look at me like I'm crazy. And they're like, nobody else has asked for this.

You're putting in a million. These other people are putting in two, three, four million. They're not asking for it. And I'm like, okay, that's them, not us. Do you want us on the cap table or not? But yeah, people are going to get friccated. People are going to get wiped out. You're going to have people in the capital stack.

There's going to be recaps. There's going to be liquidation preferences. There's going to be pain and suffering. If you can't use that capital you have to get to break even or, you know, show good margins on your business, correct? Absolutely. And, you know, I'm like I think many people in our industry, I'm generally optimistic person. I think that the last year was prelude to this year. I don't think that last year was the story.

Oh, this is a story, yeah. I think this year is the story. And I don't know whether it's three months, six months or 15 months. Yeah. Right. But I think we're in the story now. We're not in the prelude anymore. But most of last year was the prelude.

Yeah. It said another way. My wife, going back to our partners, right? Because there is more to life than just what we do every day at the, you know, when we're on these screens in our Slack rooms and emails or previously on our BlackBerry. I was like, she's like, how's it going? And I was like, I kind of feel like we went into the eye of the storm and we're in the eye of the storm. And now we've got to get the hell out of here.

I don't know if it's going to be worse because it feels like it suddenly got calm in the middle of it. I'm like, oh, wow, calm. Oh, shit. We didn't get out of the storm. We're in the center of the storm. A brief respite of, you know, in the class. That was called Christmas break, right? Yeah, exactly.

I'm like, I got 13 ski days in. And here we are in January, you know, first week of January. January, we're back at it. It's just as crazy. It's just as crazy. But relationships, building meaningful relationships, having thoughtful conversations you can get through this. And if you fail and you did your best, you just, you brush yourself off. You get back up. It's one of the great things about our industry. We look as failure. If you worked hard and you failed, my Lord, you get the respect of everybody who watched to do it. And then your chance to come back again is, guaranteed. You said you had somebody you did eight businesses with.

Talk about investing in the arc of a career. Not all of them have been successful. You need only one to be successful to make that relationship work. Some have gone great. Some have been terrible. And, you know, it's a friendship. Raj and I have a friendship that is, you know, my parents have effectively adopted him. I think they like him better than me and my brother. They like my brother better than me.

My younger brother is the favorite son. me than me, but I think Raj gets on top of both of us. Brad, you're incredibly generous for your time. You come on the show. I know you don't do a lot of shows, but you always take the time to come on my show and be honest and candid. For you, since I never see you in person,

I'm happy to have a virtual, a virtual hug from you anytime. It's basically like we do this for us and then everybody else gets to enjoy. If anybody wants to listen, great. If not, I had fun. Hanging out with you for an hour. This was nice.

All right, my brother. And just for one story, one of the first meetings I've ever Brad, his phone rings, we're in the middle of like an intense conversation. He says, got to take it. And I was like,

well, that's weird, because I'm an important person and he says, it's Amy. I'm like, I don't know who Amy is. Boom.

It cuts back in three. Hey, Amy, okay, yeah, I'm in a meeting. Hold on one second. Give me 90 seconds. He walks out,

but I don't know if like the gutter was backed up or kids in school. I don't know. The tennis court had a problem. Whatever it was. you're back in 90 seconds, and you said to me, and this is 29-year-old Jason, you said this to as, you know, my big brother, 37 or 38, he said, she's my priority. And I just made a deal with her that when she calls me, I pick up no matter what the circumstance. And I just, it never left me.

This prioritization that this guy Brad had, she's different than any other person on the planet. And I always just looked up to you for that and just for the way you do what you do, the thoughtfulness, the care of. you know, you know, this is a business capital allocation, it's got capital in it, we're supposed to make things triple X. There's a lot of numbers and moik and multiples and TVPI and all this stuff. At the end of the day, you know, people say it's not personal, it's business. It's quite the opposite. Is it not? Yeah. All this is so personal. And at the end, the lights go out, right? I mean, that's it. And so what's the sum total of your experience while the lights were on.

And that's what I care about. And I'm fine with it. Anybody can care about whatever they want to care about. But what I care about is just I'm totally experienced when lights are on. And if people listening got one nugget out of all this stuff we talked about, then that's awesome. As we tell people with some episodes, we say, this is when you're not going to speed up. You're going to slow down on your podcast player. And you're going to listen to twice.

All right. There you have it, folks. Bradfelds, buy his books. You know, just follow him. Read the blog. It's just nuggets. I love you, brother. Thank you for doing it again.

And I'll talk to you soon.