This Week in Startups - ANGEL: Canaan’s Maha Ibrahim on fund sizing, distribution strategies & early VC days | E1687

Episode Date: February 28, 2023

Maha Ibrahim of Canaan joins Molly to discuss her early days in VC (1:38), managing distributions and exiting at the right time (20:36), the clean tech bubble, being a generalist/specialist, diversity, and more (37:42). (0:00) Molly kicks off the show (1:38) Maha’s first years in venture (11:18) LinkedIn Jobs - Go to https://linkedIn.com/angel and post your first job for free. (12:43) Investing in the early 2000s and Canaan’s strategy (19:12) Cast.ai - Get a free cloud cost audit with a personal consultation at https://cast.ai/twist (20:36) Exiting at the right time and distributing earnings (30:00) Learning from a downturn (34:58) The mismatch between VCs to outlier startups (36:11) Prenuvo - Get $300 off at http://prenuvo.com/twist (37:42) The climate tech bubble (40:14) Generalists vs. specialists (42:16) Responding to cycles and signs of good timing (48:53) Structuring a generational off-ramp (51:39) All Raise (55:30) What does the future hold? FOLLOW Maha: https://twitter.com/mahaibrahim FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood

Hey, everybody. We are back with another episode of Angel season seven, and you already know the theme because it's probably our best one ever. How are we going to top this? Three cycle investors, meaning people who have been investing since at least the year 2000. And they've made it through the dot-com bust, the Great Recession and whatever happened in 2022 and will happen over the next couple years. Today, we have an incredible guest. Maha Ibrahim is a general partner at Canaan Partners, where she has been since 2000. We have an amazing conversation on how venture has changed since 2000. Distribution strategies for early stage investors, valuing startups, the results from LPs being over allocated into venture. And then her experience as the first investor into the real real, the person who helped start all raise to try to get more women into venture. We pretty much cover it all. It's a great conversation.

It's going to be a great show. Stick with us. This weekend startups is brought to you by LinkedIn Jobs. A business is only as strong as its people and every hire matters. Go to LinkedIn.com slash Angel and post your first job for free. Terms and conditions apply. Cast AI. Cast AI automates cloud cost reduction with clients saving an average of over 60%.

Twist listeners can get a cloud cost audit with a personal consultation free of charge. Visit cast.AI slash twist to get started. And pre-newvo. Catch health conditions before they become crisis. with the pre-newvo full-body MRI scan. Get $300 off at pre-newvo.com slash twist. Maha, thanks so much for coming on and talking about we've been doing this sort of three-cycle investor series.

And I'm super excited to talk to you because, A, I'm in all the brands that you invested in, like not as a consumer. And it seems like Canaan has been doing some form of climate or, sustainability or frontier tech investing. So I feel like we might actually have a chance to talk about a double boom. I'm more than happy to. Thank you for having me. Okay, so you're a GP at Canaan Partners, where you have been since 2000.

Tell me a little bit about yourself, your journey, and Canaan and what you do there. Yeah, it's amazing how time has just flown by. I cannot believe that I have been doing what I've been doing for almost 23 years now. through, as you mentioned earlier, through three cycles. It has been a wild ride. And I think the wonderful thing about this profession and most VCs will say this is you just get to meet the smartest, most ambitious people with, you know, these great ideas every day. I just, I feel very fortunate to be doing what I'm doing. It is a cool job.

Yeah, it is. It is. It is. I mean, it's stressful. Don't get me wrong. it is when I when I step back and really take a good look and perspective of what I do, I'm really fortunate. So I've been doing this, as I mentioned, for a really long time. I started out wanting to be an academic and was on that road, got a PhD in economics, was pretty much, you know, going to do that. And then I decided that it was a really solitary existence and a pretty

isolating profession. And so I went to the West Coast. I was on the East Coast at the time. I followed my now husband back to the West Coast and got a job at a upstart telecommunications company called Quest Communications. And I was there for a couple of years. Then, as a result of that, made my way into venture and spent probably the first five or six years of my venture career really looking only at infrastructure software, data center,

data, BI type stuff. And I only did my first consumer deal most likely 2005, 2006. And now, fast forward to 2023, I'm very much a generalist.

Interesting. Which is rare. I wouldn't suggest that for anyone entering the business now by any stretch in imagination, but it's rare for somebody to look in

consumer and enterprise at the same time. Yeah, absolutely. And very different skill sets. How did that evolution, how did that evolution come about? It's just a cumulative knowledge. Was it because you found the real real and you were like, this is it? Totally. Actually, my first three consumer deals, one was Cabam, which was a mobile gaming company, which sold for about a billion dollars. The second was a real real. And then the third was a company called Cuyana, which is still in business. It's an apparel and accessories company. and doing really well.

So I've been very fortunate on the consumer side, and I'd say that yes, part of it was skill, but a lot of it was luck. Tell me about, okay, so let's go to the cycles. So you really started at Canaan,

at least in 2000. Was that the first, that was the entry into venture? Or had you been doing that or somewhere else? That was the entry into venture. Yes. So was it equally bubbly in enterprise kind of software at the time? I mean, was the bubble pretty widespread?

I was mostly familiar with it on the consumer side back then. It was very much widespread. So my first day at Canaan was March 23rd of the year 2000. And about two weeks later, we went into a nuclear winter for several more years. So my first experience in venture was just seeing things either very quickly crash and burn or just experience a very slow death. But it was just like, wow, I've seen this movie. I've seen this movie.

Like, you're watching the same thing over and over again for years. It was a learning experience. I mean, that's, I'll put a positive spin on it now. But having come from economics, though, did you feel like you saw that coming? Or was it as much a shock to the system as it was for so many other people? where you're like, oh, what have I done? I've entered this at exactly the wrong time. You know, I was so early in my career and I couldn't believe that they were giving me, which is, you know, I was in my mid-20s at the time. I couldn't believe that they were giving me

the experience and the opportunity to be investing. So I was more thinking about it from that perspective, as well as the perspective of, oh my gosh, we're in a macro bust cycle here. And what's going to get us out of that? And really thinking about, the time it was going to take to get us out of that, which is very different from the 2008, 2009 issues, which is very different from what we're experiencing now. So each cycle is separate and distinct. And that's also been pretty fascinating. So it must have been, I wonder, like, you may have had an extra awareness, because I, you know,

was probably a similar age, had come here to the Bay Area in 99, was doing, you know, sort of consumer technology writing, but didn't have any of the kind of broader economic understanding of what might be happening in the world around me. You're just, you know, you're just in your 20s being a ding-dong. Like, I'm at work and I hope I don't get laid off. Totally. And so I do wonder, like, do you feel like you were sort of like, okay, this is actually something I can study or something that I have, you know, interest in? It sounds like you had a broader awareness of the macro conditions that might have been led you to be more aware than the average mid-20-something.

I won't say that, but I was definitely thinking about this in the broader context of where this is going to lead. And what was so fascinating, and this is where my economics hat kind of mixed with some psychology classes, and economics is very much about psychology. You know, I would sit down with these VCs who had been doing it, been investing through the cycle and been very, very successful. And even 2001, 2002, you know, they were still puffing their chest out. They were still thinking, gosh, my portfolio is awesome. Life is great. And I'm like, really? Because like, all I'm seeing are falling knives everywhere. I don't know what, you know,

you must have a special portfolio. But then I have lunch with one after the other, after the other, and it's the same thing. Like, we are as a species almost as venture folks. We have to, exude, they felt that you had to exude this confidence level, which was, which was born out of really nothing. And, and, you know, as I look back to that time, that was probably the most, the most interesting part about that bust cycle. It was just so, there was such a facade that was put in place. I can't wait to hear the extent to which you think that, you know what, I'm just going to jump ahead. There are no rules. I don't have to follow. a timeline. Do you see that happening now? Because I will say I certainly have the occasional

founder conversation where I think that those expectations are still in place or that facade of like my business is special or my investment thesis is so special that this will not affect me. So there are several things at play which lead me to think that it's just very different now. one, social media, everyone is very aware of what's going on just because there's so much news and so much conversation happening about it everywhere, that if a company is struggling, and there are many, many, many, many of them that are struggling right now, people are aware. Moreover, there's an acceptance right now that we are in a bad, period. People don't know how long it's going to last, but we're in a bad period in terms of

fundraising. And that means that our companies need to right size themselves and get more efficient and reduce their cost structures so that they can live to fight another day. And it's not like these companies deserve to go out of business. They're not, quote unquote, bad businesses. Most of them are good businesses that just got their cost structure way ahead of where they should have been because access to capital was so easy. So I do think it's a very different cycle than it was back then. A lot because the information flow is so different, but also because these companies are, at the heart of it, they are growing businesses with good technology where they're just

gotten ahead of their skis from an expense standpoint. Hiring the right person is so hard. And right now, so many talented people are looking for work. You know, there was a bunch of layoffs this past year. But where are all these laid off tech workers? What are they doing right now? Well, they're on LinkedIn. They're polishing up that resume, their landing page, putting their skills on there,

getting endorsements. And right now, you need to use LinkedIn jobs to recruit. That all start to your team. That's going to be a barraiser. That's going to teach the other people on the team how to do even better work in specific verticals and skills that you need to make your startup successful. So there is no hiring platform that comes close to LinkedIn. We all know that.

It's almost a billion users, 875 million users. Can you believe that? All the best executives are on LinkedIn. Obviously, you're there, I'm there, and you can add that very slick purple hiring frame to your profile image. That's going to increase your inbound immediately. Trust me, I know. They put it on for me when we had the last job rack.

Oh, my Lord, I got so many great candidates. I'll tell it to you straight, folks. Some of the best people I've ever hired in my career, at launch, at Inside, and countless other companies. They've come through LinkedIn. All you need to know. I'm just going to say three words to you. Better candidates faster.

Okay, let's say it together. Better candidates faster. LinkedIn jobs helps find you the candidates worth interviewing. And every week, 50 million job seekers visit LinkedIn. You can post your job for free at LinkedIn.com slash angel. Oh, LinkedIn.com slash angel to post your first job for free terms and conditions, of course, apply. Okay, so going back in time again.

What was VC like? just going to bop all over. We can do whatever. We're under DeLorean and we're taking our trip through all the time. Oh, we're that old. Oh, geez. I'm going to take you all the way behind the curtain and say that apologies to the producers on the line. Earlier, I made a comment about Xerox and none of them had ever seen one. Really? I've ever seen a copy machine. Yeah. Wow. So that's where that's where we are in that cycle. What was investing, I mean, to that point, right? What was investing like in 2000 and how is it sort of changed over the years? What was diligence like? How did you do it all without, you know, pitch book? It was, there were sources of

information out there, but again, certainly not as rich and as prevalent as there are today. The diligence took long, a long time. You know, it was not uncommon for me to see a company and then issue a term sheet three months later. Wow. We are just coming out of a cycle where it was see a company and issue a term sheet within three days. Right. Right. Absolutely.

Absolutely no time to get to know the business or the founders or the dynamics of the company. So you have to do a lot of that information and diligence in ahead of time. You have to be smart before you get into the company, which is why. this business has changed so dramatically. It's also changed because a lot of those deals that we're getting done were based on Excel spreadsheets. Does this business fit into the model of what an LTV to KAC or what the sales efficiency looks like or whatever metric looks like?

And if your formula is spit out something, if your magic number is the right thing, then let's go ahead and do it. And that wasn't the case in 2000. It was much more about do we feel like the market is big enough? yes, this company's early, but the team looks good and the references are great. So let's go ahead and dive in. Yeah. One of the other things, sorry to talk so much, but...

No, no, please. That's what we're here for. Fair enough. The expectations around outcomes have understandably and naturally changed. Coming out of the nuclear winter, as I call it, in 2003, 2004, if I had a company that exited for $200 million, I'd be thrilled. In 2021, if I had a company that exited for $200 million, I'd be like, oh, crap, right? The high watermark was more like $10 billion or $20 billion, and that's what we were all shooting for.

That hasn't gone away, but it's not going to be as common as it was two years ago. Is that a function of check sizes getting bigger so that you need returns that are outsized like that? because one of the things that has happened is that funds themselves have swelled, or is it just that the expectation became, you know, more and more multiples? Molly, this is the chicken and the egg problem that you're describing, which came first. The outcomes became larger. Venture funds as a result were able to raise more capital. That means that they put more money into companies,

which means that my desired outcome or my required outcome, whichever one you want to call it, was much higher. So it was just this kind of perverse incentive circle or flow. And that's, you know, we all got caught in it. How big is Canaan's fund? So right now we're investing out of Canaan 12, which is $800 million in size. we are series A focused for the most part. If I were talking to you in 2015, I would have said,

all we do are series A's. We want to lead those rounds. We want to take 80 to 100% of the rounds. And we want to be the largest investor on your cap table. Today, that's changed. And it's changed over the last couple of years because we've had to be flexible to deal with market conditions. It was just far too competitive of an area or a space to go into it with that strategy.

So, you know, now we're a bit looser, but Series A and C is still the sweet spot. All right, I'm going to ask you more about that, but now I have to go back to my timeline. Okay, so then, you know, we're coming out of nuclear winter. It's 2004, 2005. At what point do you go, if at all, there might be another bubble building here? Or was that bubble really so exogenous because it was sort of over there in housing while Venture was just doing Venture? Oh, gosh, not at all, right? Yeah.

We had two convert. This is the fun stuff to talk about. Exactly. Right, right. I mean, this is the fun stuff. The party is going to happen. I mean, it was awesome, right? You had two, at least two.

I'll call them, let's say three, three combining massive forces. So you have virtualization, which was bringing the, cost of compute down to the floor. You had mobile, which for obvious reasons did what it did. And then you had social. And those three combined forces almost concurrently, just, I mean, almost every company that we now consider big came out of those three trends. Maybe not all of them, maybe two out of the three, but those three trends were responsible for what we're seeing today. And just to put a finer point on that, if we then look, we're all looking for what the next best thing is, what the next big wave is that we can just surf. And, you know, we've tried the

web three thing. We've tried the crypto thing. We've tried looking at, you know, various other areas, health tech. And there's something in all of those. But there's been a ton of money poured into those areas because we are all in search of the next big wave. Cast AI audits and optimizes your cloud cost and performance for you, which the cloud companies don't do automatically, right? You have to do it. You have to take control of this. And Cast AI is going to help you do that. They eliminate the stuff you're paying for, but that you don't use. And they search for less expensive hosting options within your cloud provider. And then you begin saving immediately. Listen to this. On average, Cast AI customer save over 60% on their cloud spend. You know how out of hand the bills can get, right? The pricing

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So I feel like you can look back and now, right, and say, okay, these three trends were happening, virtualization and mobile and social, and like nailed it. But clearly, much like now, we're all looking for that next wave. In another eight or ten years, we might be doing this interview and we'll say, oh, the trends were. Yes.

Whatever they were. But at that time, there must have been a lot of trends that we thought were equally important. And I wonder if you can remember what some of those were. Like, what were we wrong about at that time? Because there's stuff we're clearly wrong about now. Right. Let's talk about what we've been wrong about. Maybe not, I don't even think I need to rewind it that far back, but I'll rewind it five years back.

So think about, and we've made a good amount of money in fintech, and we continue to be really bullish in that area. But think about the number of financial services investments that have been born out of low interest rate environments. Right. And that have gone public and that have been huge, right? But fundamentally, these businesses are not sustainable businesses in higher interest rate environments. And we just, as a venture class, made the assumption or made the bet. I'm not going to say assumption, made the bet that a low interest rate environment was going to last for a decade plus as opposed to the door being shut in 2022. So there's timing bets.

I guess what I'm trying to say is at the end of the day, so much of success in this industry, yes, it's about riding the wave, but it's also about riding the wave at the right time, making sure you're not too early and making sure you're not too late. And I'll tell you, when I have lost plenty of money in this job, and when I've lost money, it's almost always, it's not because the founder sucked. It's not because the tech sucked. it's because I got the timing wrong. Right, which is

which is brutal because that is the hardest part. But it also sounds like you're saying it doesn't necessarily, the wave doesn't necessarily need to last forever. You just have to get there at the right time. Like you just have to hit that Coinbase IPO and then after that is not your problem. And know when to get out. And no way to get out. It's like it's not only when to get on the train.

It's knowing when to get off the train, particularly if it's kind of a public company, right? Do you want to be holding that company for four more years post going public? Do you want to sell that, sell a, maybe it's not a public company, do you want to sell a company at this price, or do you want to wait and see a, you know, we can ride the way for another two more years and get double your money? Right.

So it's not just about the going in is what I'm trying to say. It's also about the getting out. Yeah. I like that too because we talk about exits as though the exit itself is so final. But in fact, there's a whole series of events that happen post-exit, if the exit, for example, is an IPO, that you still have to get right. You have to know when to distribute. Yeah, especially if you are, it becomes more complicated when you are a very large investor in the company, when you have a ton of shares and when you're on the board. it's it's a lot easier if you hold 2% of the IPO as opposed to owning 20% of it of the company that's gone public, not the IPO.

Because the scrutiny and the regulatory issues associated with distributing the stock and not wanting to, not wanting to distribute too much is to disrupt the float. Like there's just, there's a litany of issues that we have to consider, but, and we'll get it wrong just as many times as we'll get it right because again the timing is not something we can predict and that's that's another challenge in my industry how much are you able or willing to tell us about how you might have handled for example you're best known for the real real for being the first investor into the real real real which had a huge IPO and has since struggled what can you tell me about how you surfed that one um so i have been off the board there for

couple of years. And I'll tell you what we try to do as a policy internally. So again, as a reminder, we are Series A investors. So by the time a company goes public, we've probably been in the company from anywhere between seven to 12 years. It's a long road. And we want to make sure, given that our fund life can be somewhere between 10 and 13 years, we want to make sure that we actually distribute that stock within a reasonable amount of time. So post a company going public, we want to get off the board within a year because we want those degrees of freedom to be able to distribute or sell the stock when we can. And that is, I guess, the benefit of being an early stage investor.

It's also a curse because, again, we're holding a lot of the stock in our hand and the stock can be volatile based on how much we're distributing at any given time. So we try to be very, very sensitive. I didn't answer your question directly about the real real, but that's as much as I'll say. You don't have to. Yeah, exactly. But to put a finer point on it, if you own 5%, and you sell and you distribute, and you're sort of saying as an early stage investor, it behooves you to sell as soon as

possible after an exit or distribute at least. But the sensitivity that you have mentioned, just to be more. explicit for people who may not understand means you're potentially putting a lot of stock back into the market and that could have an impact on the share price. Correct. The float, the average daily volume is something we look at. That is a huge variable in our decision of when and how much stock to distribute at any given time. We know, we're not dumping it all on the market at one period. We do it over, we can do it over a year, sometimes two, depending on the float. But again, our job is to put money back in the hand of our limited partners.

It's not to sit on public stock. And there is this kind of a debate right now, right, about when firms should distribute, whether they should then get into the business. And we've seen some big firms do this of managing then public stock. Where do you, where do you fall on this? So we are not a fund that is a registered investment advisor. We're also not a fund that has a hedge fund. attached to it, we are an early stage fund. So we do not try, we don't try to time the market.

And we don't have enough expertise internally to time the market. There are funds that do, and God bless. Why do you think, though, it got so much more popular? Like, because some of the funds that are doing that now weren't doing it before. They were just early stage funds. Is that a function of the chicken and egg problem that we talked about earlier? Like at some point, you're just got to figure out how to manage and or maximize all this money? Absolutely. And I also think it, first of all, yes, yes and yes. And we have seen nothing but up into the right up until the last year for 13, I would argue probably 15 years.

Right. Nothing but up into the right. when people don't have a history of a negative experience, they just assume it's going to continue until it doesn't. And by the way, everyone is rewarded for it continuing until it doesn't. And when the music stops, everybody's hurt. So it actually behooves you to continue to put your bets down as much as you can until the music stops.

because once the music stops, it doesn't matter if you put $5 down or $500 down, you're still going to lose your money. Right. But while everything has happened and every table is a winner, you can see why everybody would want to be sitting at every table. Absolutely. Yep.

It's going to be an interesting couple of years, don't you think? Yeah. I mean, given the boards that I'm on and the behaviors that I've seen, I would absolutely agree with you. Again, we've seen there's just people who have not, who've been in the industry now for 15 years. They're veterans of venture, but they have never seen a downturn.

Some of them have never even fired a CEO, not to say that's a right of passage, but it's an odd thing, right? And you don't necessarily have to do that when it's been so easy for companies to raise capital at up rounds, round after round after round. I am actually sort of just sitting here reeling at this idea that you could have been in this

business. And this is a conversation I had somewhat recently where I said, actually, you know, in conversation about someone who was 40. And I thought, well, there should be all this wisdom here, right? This person is 40. And then I thought, like, actually, yes, there is probably a lot of experience and water under that bridge. And yet there's not a downturn.

And I wonder how it's easy. Maybe easier for us to sort of sit here and say, like, look, I've seen this story before and I know what's going to happen. And there's incredible value in having gone through this trial by fire. What isn't learned when everything's so easy? I mean, I'd say that there's a bit of envy that I have for people who have only seen up into the right because it did seem so easy. It did seem so, so easy when this business, you could do it on a spreadsheet and make a ton of money and not be worried about the downturn or not be worried about a company that's burning too much money because it didn't matter. Whereas I have never lost that. I've never lost that.

I'm always like, oh, my God, this company's burning a lot of money. I don't understand it. What's going on? And now in board meetings, I think those people are getting, they're learning and we'll continue to learn. We still haven't seen a cycle of down rounds and recaps. I think that's coming. We'll see that in the next year or two. And people will learn.

And then things will go up into the right again. And then we'll shuffle over. It does seem like there's value in that, too, in that. not only do we probably think about budgeting and governance differently, and I will get into that in a second, but we also potentially have a little more hope because we have actually seen a recovery. It's one thing not to have seen a bust. It's another thing not to have seen a recovery or even experienced it as a recovery. Absolutely, because you think it's going to last forever.

Right. And as a result, you are, or one is planning for the, the, a down, down, downside scenario for sure. Yeah. How would you say over the last 23 years, have you seen the average helpfulness of the average VC board member develop? You know, like how do you think about governance and what you see happening on boards, potentially by, again, like you said, perfectly like veteran investors who don't have that

same kind of depression-era mentality. If I take, strip out the governance piece, I'd say that the one of the benefits of the industry growing so much and being so hyper-competitive is that we've all had to be much more helpful to our companies than we ever have been. So I don't know one firm out there that doesn't have a services or platform arm that is helping with recruiting or marketing or go to market stuff for legal or you name it, right, or corp dev. So if I'm a founder right now, I'm feeling pretty good about leveraging the venture firms that I work with in ways that I haven't before. from a, from all of those perspectives, right? And as a result, I don't have to spend as much money myself on any of that.

In terms of governance, that will, I think time will tell. I've seen people not wanting to deal and just get off the boards. I've seen that. I've seen other folks just really spend a lot of time, rightly so, on counseling the companies, on cost efficiencies and all of that stuff. So I actually have been pretty impressed by how the venture industry has handled this most recent downturn. it's been, I think everyone got the message really quickly that belt tightening was a needed thing. Right.

How about the, probably because there was so much money around and return expectations had gotten so high. Talk to me about the just sheer number of venture capitalists compared to, outlier startups. Yeah, crazy, huh? Yeah. You can see why deals had to get done in three days and sometimes three hours. I mean, it was like feeding frenzy. It was a feeding frenzy.

And that's why when we started off and I said I'm a generalist, that's so rare. In order to compete in this industry in the last 10 years, you've had to be a subject matter expert. Right. You have to find that deal because you were looking in the space. and you were actively pursuing a thesis and just driving for it. And because if you didn't, then there would be 10 other people around who would gladly take your place. So it has been up until six months or so ago, it has been a hyper, hyper competitive space where differentiation as a VC is all about the platforms and services that you can provide, but also your knowledge around a specific area. pre-newvo oh my lord pre-newvo i just went you know why i care about my health this is my time to get as healthy

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I sat there with my wife. We went through it all. Listen, I'm in great shape, obviously. Things are going fantastic. But there's a couple things going on. My shoulder, my knee. And they said, hey, this is something you should monitor. Renouveau, thank you so much for making this easy-to-use service.

They're in a ton of cities right now, and they keep adding more cities. They love the speaking startups. They love the All-InPod. They said, hey, we want to give a great offer to your listeners. Get $300 off at pre-newvo.com slash twist. C-R-E-N-U-O-com slash twist and start taking care of yourself today. Is that, so you have been involved in some climate tech investing. I mentioned this at the top of the interview.

And so that's what I'm doing at launch within a generalist firm. And I feel like this sort of interesting thing is happening. And I wonder, you know, to what extent you're seeing this. Because within these kind of cycles, there was a clean tech bubble that was built on in between, right, the bust and then the new boom. And then now we have this kind of crash, but also like a bit of a bubble in climate. And I wonder how you think about like these kind of simultaneous occurrences where you can have a bust potentially in one vertical, but a baby bubble in the other.

So I guess this is where the economics comes in. You know, we are, there are, there's a lot of money chasing returns. the returns are not coming from the public market, or they are, but in, you know, if you're, if you're, if you're basically day trading and not long, if you've been long, you've been losing money. Maybe the returns are coming in the mid single digits from bonds, but for folks that have a pension funds, endowments, that effectively have a requirement to get to five, six percent annual return, you have to be chasing beta. And that beta is in venture. It is in private equity. So what parts of venture right now look awesome?

And climate tech is one of them. Right. And early stage venture is still on that list of what is going to give me beta. And it will always be on that list, irrespective of whether, we are catching a wave or whether we're not. You do not want to time the market if I am, if I'm an LP. So that's, I mean, I just, I'm, I'm raising your question up a little bit and trying to give an answer to that.

And is that answer about how bubbles are formed or just the fact that there will always be money coming in? There will always be some vertical within early stage venture that will be frothy because early stage venture itself will be frothy. Yes. Just to kind of translate. Exactly right. Yeah.

Yeah. And then I dig in a little bit more on this idea of being a thesis investor or having specialties. Like I wonder as we move into a less competitive universe in which we have the chance to be more thoughtful. Like it's sort of interesting what you were saying about the way that diligence used to happen before versus now where, you know, we do this. We talk a lot about accounting spreadsheet outcomes. is there an opportunity, do you think, in being more of a generalist and in being more thoughtful

in looking for outliers? Or is that like a, you know, rosy, nostalgic view of the way we have invested in the past? The latter. The latter. It's just, it's, it's, it's too competitive of a business. There's still a lot of money there. There's a lot of people. When I say I'm a generalist. I go from area to area. I go deep in areas that in six months from now, I might not even touch, right? It's just that I've accumulated 23 years of that. And that's why I say I'm a generalist, because I can always look at a storage software company. And then the next day, look at an e-commerce startup, because I've done all of that before. But in today's universe, if I am looking in one space, I'm just, I'm heads down on it for a really long time

because I have to get smart. Yes, I might have four weeks instead of four days to do it, but hopefully people are just taking the time and not only getting to know the company, but more so getting to know the founders. Why are these founders doing it? What's their incentives? Because, I mean, the surprises that people have had over the last year as things have contracted have really been around the expectation management of the VCs versus, not versus, the VCs and the founders. Right. I want to go back to this early stage investing will always attract money. Is there a world? So just yesterday, the Wall Street Journal published some data on that actually.

said that venture capital firms raised $20.6 billion in new funds in Q4, down 65% year over year and the lowest amount in nine years. Is there a universe where the shine comes off? Or do you think that that's in those bigger, those bigger, bigger, bigger funds that may not be, it might just be harder than, let's say, early stage. So the shine is not coming off. It might be a little less shiny. Yeah. But it's not, it's not coming off. I mean, the reason that the reason that we have not, as an industry, not raised as much capital is basically the denominator effect, right? That the pension funds, endowments, people putting money to work, are limited partners, have now an over-allocation to privates because the public markets have been hit. So in order

to make their own math work, they've had to contract their commitment. to privates, including private equity, including venture, including alternative assets, et cetera. And that will stabilize, but at the same time, the private returns are still in comparison good, and at the same time, the private returns in comparison will lag. So a company that didn't raise money for two years, you're not going to see a down. round until maybe next year. And so you're not going to see the venture industry taking a hit for a while. And by that time, the market may take off again.

Right. But then the market may correct while great venture returns are starting to come in. Like it all just might, exactly. Because that is the reason we call it cycles. Time is a wheel. You got it. And that's why, like, it's just always so hard to, time things and to time the market and to time our exits. I mean, that is the biggest variable

in success or failure of companies. And do you still feel like, how do you think about timing now, having done this for 23 years, having seen the cycles? Like, do you think there are patterns that you are in a position to spot that might make you better at timing? Sometimes and sometimes no. I mean, for the last several years, I've been like, oh my God, I don't get this. Like, I'm a dinosaur. I don't understand why you would value a series A company in the triple digits. Like, it's just, it's shocking to me.

But then again, those companies went on, a lot of them went on to raise a lot of money and have nice exits. So I just, I'm not sure I've learned anything except to say timing is, again, the biggest variable. I will say this, that with every deal that I've done, I try to sit down with my CEOs before the term sheet is signed, and I say, listen,

the chances that this company gets to the finish line, the finish line being a fantastic exit, we don't know what they are. But what I do know is that there is a chance, a high probability, that the company will fail. And I want you to think about this as an opportunity cost. I want you to think about every day you walk in the door to this company or turn on the Zoom as an opportunity cost. If it is not working, I want you to tell me it's not working.

And let's have just a dispassionate conversation about what that means so that we don't waste any more time trying to make it work. And I promise you that I'll do the same. And if you can set those guidelines from the beginning, then timing, you can move on to something that might have better timing. The founder can and I can. Fail fast. Fail fast. Yeah. Or just be aware of what failure looks like as opposed to keeping on hitting your head against the brick wall.

Exactly. I would even go one step farther and say, be aware that the possibility of failure exists even though it has not existed for 15. years or might feel like it has not existed for 15 years. Yes. I think you raise a really great point, though, about the tension between kind of sticking to fundamentals, right? For example, Canaan clearly could have raised a billion dollar fund, you know, like benchmark legendarily keeps its fund sizes around $500 million.

And there is this kind of tension between like, all right, I'm going to stick to fundamentals here. I am going to believe that even though valuations are bananas, they will come back down to earth, but also you kind of have to play on the field that is given to you at any given time. You got it. And it seems like it's really the dance in some ways is evolving without losing that core fundamental. Yes. And so much of it is based on what the core values of the GPs are and how the firm is structured.

both from a carry perspective and a governance perspective. You know, there are some funds that, like benchmark, that have a really open carry policy, Canaan is like this too, where we're set up for generational transition, right? There's a well-established on-ramp and there's a well-established off-ramp. A lot of funds aren't necessarily like that or they govern by, I like to say they govern by monarchy or oligopoly, where it's like the carry is doled from on high.

And that's again, that's a fine, fine model, but it just makes generational transition a bit harder. And so in those models, it's actually really, it's easier to answer the question of generational transition by just getting bigger and giving people pieces of a bigger pie than keeping the pie the same size. Say more about that. What does that structure look like,

the one that guarantees the generational off-ramp? So there may be a way of... So in some firms, the management company is owned by a select few. And the management company has value. and that value means that if I own half the management company, in order for you to come into the firm, you have to buy out my stake or buy out a part of it.

And that's very expensive because the management company in a growing bigger and bigger and bigger firm is bigger and bigger. And I mean, it can be worth hundreds, if not billions of dollars in some cases, right? So buying into that is not easy. And as a result, leadership transitions are not easy. There are some structures of firms where the management company doesn't have value, where the value is at the GP, and as a result, the transitions are a lot easier.

Got it. Okay. That is super interesting. I had not thought about as like a baby VC fund structure as it relates to carry. And how that can incentivize. Yeah. There will probably be people listening to this who are embarrassed on my behalf. but there will be people who are happy

than I'm asking you because they didn't know that either. Oh, Molly, I think most people who are just entering venture who have been hired into it in the last couple of years don't know enough to ask that question. When I joined 23 years ago, I didn't know enough to answer to ask that question. I just lucked into where I am right now.

I have plenty of friends that entered venture 23 years ago that are no longer in venture because fundamentally at the very core because of how their firm was structured. And they didn't know, and I didn't know enough to start it. One of the reasons we started all raise was to educate women who are in this industry or coming into this industry because there have been so many hired in the last couple of years

on what questions to ask about their own firms because it's not enough for us to have more diversity or representation at the investing table. We have to stay there. We have to retain diverse investors. And one way of doing that is to make sure people are educated on what my compensation could be, needs to be, what governance should be and could be and what I should be asking for and a bunch of other things.

That it's not just about, hey, I've been promoted to partner. Right. Right. It's what is your equity as a result of having been promoted to partner. Well, you read my mind because my next question was, let's talk about women. Shocker. Exactly. So you helped.

Well, it's been actually quite interesting and one of the critiques of this series when it first started was, you know, how come there aren't more women? And this has been an industry that has been exclusive, which is almost like too nice a word, has excluded women for a long time, but particularly the further back in time you go. So talk to me about what it was like to break in yourself and then the, and then starting. all race. Yeah, when I started at Canaan, there were no other women in the firm. And within, well, I'll fast forward to today, we have 40% of the investors around the table are female. We have a really diverse set of investors around the table. It's not just, you know, white men and white women. We want to be representative of the entrepreneurial pool out there. We want to to make sure that our investments look diverse as well. And when I started at Canaan,

it was by no means an objective of mine. I didn't think about it. I used to think, I don't want anyone to think about me as a woman. I don't want to do consumer deals because then I'll be looked at as a woman. Like, I just avoided it all together. I'll just do the hard tech stuff. Like, that's where my mindset was at. And it took me a while. to realize that in a way, I was cutting off my nose despite my face. If we want this country to be as successful as it can be, we have to become an industry that welcomes diverse founders, that welcomes immigrants, that welcomes everybody to the founding table and backs them,

backs them, not just with seed checks. And that's actually an asterisk that people don't talk about, right? it's not just the seed checks. It's the bigger checks. It's the folks that write $20 million, $50 million checks. Are there enough of those? No, not at all. No, no, no, no, no, no.

Look around. Because it feels like one of the things that's happened is that women have started their own firms in a lot of cases, possibly because of uncovering the structure of the firms they were at, or because it's sort of in an environment where there's a lot of money around, the easiest way to force change. But if a lot of women started early stage firms and then these founders that they invest in

get to growth stage and hit the wall, isn't. We're not. We've only made so much progress. Yeah, that's exactly right. And we'll continue to make progress, but it's just, it's a much longer road than I thought it was going to be. I was very naive about that.

Tell me more about the goals of all race for people who aren't familiar. I think most people are, but just in case. Yeah, so Aileen Lee brought us all together. And, you know, there were probably 15 of us at the very beginning. And she said what so many of us were thinking, but she put it in a way that brought us all together and rallied us around a mission. And that was to, and I said this before,

not only assure that there were more females at the investing table, but make sure they stay there. Make sure they stay there. And they know what to ask and what to push for and what equality looks like in a venture firm versus just being happy with the partner title.

What do you think, how are you looking at the next, you know, I want to be mindful of your time here? How are you looking at the next five years? Like as you're, you know, we're looking out, we're like, okay, this is a story we are at least somewhat familiar with. We know that there's, we're in a bust. We know there's going to be an upswing.

Give me your best, with the caveat that timing is hard. Give me your best predictions about what we should do next. I have been thinking long, long and hard about that. You know, it's like what happens in high industry environments that are sustained for a really, really long time? Yeah. You know, it's just this is, I think this is going to be a tough period for at least two to three years. There are still areas that are white hot and will continue to be. So I'm really, really bullish in security.

I'm really bullish on areas of workforce management. We are in a period where the numbers show that we're in a very, very low unemployment, environment, I don't believe that at all. Yeah. Yeah. I think that people are doing side hustles and a bunch of other things, but, you know, we probably have another nine to 12 months of consumers having to not dip into their savings as much as we thought.

So there's going to be an inevitable strain put on consumer spending. And as a result, people will go back into the workforce more and maybe not do one side hustle, but do a bunch. So workforce management, absolutely. Education, absolutely. Ed tech needs to be disrupted in a big, big way and security. Amazing. I'm sitting here in Oakland where the whole city is being held hostage by a ransomware attack at this exact moment.

So I could not agree with you more. Lucky you. That's the kind you're talking about. Maha Ibrahim is a GP at Canaan Partners, where she has, in fact, invested through three cycles. Thank you so much for joining us for this episode of Angel. This is incredible. Thank you. It was a pleasure.