This Week in Startups - Bing dodges $100B bullet & IVP's Tom Loverro on the looming startup collapse | E1678

Episode Date: February 14, 2023

Molly is joined by Rachel as they discuss the news that some companies are selling data about their mental health patients. (1:33) Then they discuss how Bing’s AI chatbot was presenting false information during its reveal last week. (11:57) To wrap, Tom Loverro joins Jason to talk about his viral tweet thread about a “mass extinction event coming for early & mid-stage companies”. (24:36) (0:00) Molly and Rachel kick off the show (1:33) America’s mental health data is being sold (10:28) Squarespace - Use offer code TWIST to save 10% off your first purchase of a website or domain at https://Squarespace.com/TWIST (11:57) Bing dodges $100B bullet (20:23) House of Macadamias - Get 20% off at https://houseofmacadamias.com/twist by using code TWIST20 (21:51) Molly and Rachel’s AI predictions (24:36) IVP’s Tom Loverro joins Jason (39:32) Fitbod - Get 25% off at https://fitbod.me/twist (40:42) Tom’s prescriptions for founders FOLLOW Tom: https://twitter.com/tomloverro FOLLOW Rachel: https://twitter.com/_rachelbraun FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood

Hey, everybody. All right, it is Tuesday. Happy Valentine's Day. Happy Galentine's Day. Happy Valentine's Day. Happy Momentine's Day, whatever it is that you're doing today to celebrate love in the world, which you should celebrate because love is great. It's all right. I agree. I agree. I'm wearing earrings with hearts. We're wearing a sweatshirt with hearts. I feel like I'm ready. This is my holiday. I love it. I love it. And in case you are listening to the show and you're like, wait, that's not Jason, because you would definitely never wear heart earrings.

You are correct. Jason. You never know. You never know. You never know. Jason's out of speaking gig today, but Rachel and I, Rachel reporting and I are going to do a little bit of news. And then we have a great interview for you coming up. It's going to be a great show. Awesome. Stick with us. This Week in Startups is brought to you by Squarespace.

Turn your idea into a new website. Go to Squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10% off your first purchase of a website or domain. House of macadamias, the next big health trend. Get 20% off your first purchase in a box of Jason's favorite dark chocolate covered macadamias with every order over three boxes. And FitBod. Tired of doing the same workouts at the gym?

FitBod will build you personalized workouts that help you progress with every set. Get 25% off your subscription or try out the app for free when you sign up now at FitBod. Dot me slash twist. All right. So it turns out, let's go into a little bit of news here because there was a little bit of a bombshell report from the Washington Post yesterday. Actually, I think this published Monday, but we definitely want to talk about it today about apps sharing all kinds of our data.

Rachel, give us the overview here, if you wouldn't mind. So it's pretty crazy. American's mental health data is being sold from telehealth and therapy apps. and it's perfectly legal, even without the person's knowledge or consent. I think we all kind of knew that our data was being sold, but we didn't kind of know at this scale, especially in the health data department. And research from a team over at Duke University's Sanford School of Public Policy,

not Stanford, by the way, it's Sanford. I thought that was interesting. Okay, tricky. They found that, I know, right? They found 11 companies, too, that they were willing, but they found 11 companies were willing to sell bundles of data that included, quote, information on antidepressants people were taking, whether they struggled with insomnia or attention issues, and details on medical alignments, including Alzheimer's disease or bladder control difficulties, according to the Washington Post. And if you remember back on episode 1469, we actually talked about a telehealth company called Cerebral.

And basically, it's fast and loose prescription method. And it was probed by the DOJ at that time for overprescribing a lot of prescription medication. And some of the data that was offered during this research was in a format that would have let buyers know information, like how many people in a zip code might be depressed, and other brokers when even deeper offering identifiable data, names, addresses, and income. And by the way, cerebral is not one of these people actually identified. They just said that there were 11 companies that were willing to sell bundles of data. Right. But we should specify here that in this case, because, we had already talked about cerebral and Rachel in particular was like this company seems like

they are pushing the boundaries and indeed there have been investigation since. But so you could imagine a company, you know, like cerebral being an example of a company that had collected a lot of data. Like you would do this intake with these companies where they get a lot. I don't know if you've ever done any kind of a mental health intake, whether it's with an app or even a doctor, but it is a very invasive procedure, if you will, right? get a lot of information about you. And one of the things we should point out here is that the data brokers offered personal identifiable information, names, addresses, incomes about people.

They would even show lists called things like anxiety sufferers and consumers with clinical depression in the United States, which yikes. It was described as a tasting menu for buying people's health data. and Rachel, one of the things that you found is that this is just 100% legal, right? It is, it is totally legal because everybody is like, wait, how does this legal because of HIPAA? That was definitely my first first thought. It turns out, after looking into it, HIPA only restricts how covered health entities share American's health data. And covered health entities, by the way, that means places like hospitals and doctor's office.

This does not protect the same information when it's sent anywhere else. So that means app makers and other companies can legally share and sell data, just however they want. I mean, that's absolutely bananas. And it just to me, like, points to how overdue we are for freaking federal privacy legislation in this country. Like, as soon as we realize we could apify mental health and prescriptions, and now you have all of these companies who are doing some version of supplements, right? Like all of these things that are kind of medically adjacent and are intended to treat the same issues that you would see a doctor about, but instead you get Ashwaganda instead of, you know,

hormone replacement therapy. But then they have all of this information and there's nothing stopping them from sharing it. Like in retrospect, I can't believe that Congress had a big hearing about ticket master and not this. Like, what the hell? Yeah. And what do you think, I guess the main problems are with companies actually? having this data. One example that the Washington Post used was they were doing more targeted advertising, but is there anything else you think consumers should be worried about with this data

really being humbled by people we don't know about? Yeah, I mean, this is sort of like you could imagine that if you have access to this data, among the many things you could do is like crappy social engineering to hack people. You can pull all kinds of scams, you know. And also, this is one of those where it's sort of like maybe the harm. is hard to imagine. Maybe the harm is like, well, certainly there's the privacy harm, right? Like, let's say you start getting targeted with advertisements for your clinical depression and like someone in your family doesn't know you have that, right? You're underage or you're a wife and maybe you are somebody who's in an abusive relationship and you sought help for that. And then all of a sudden

you get like a flyer in the mail that's like being abused and all of a sudden your life is in danger. Right. Like the harms here aren't even particularly hard to imagine, but then there's just the sheer sick absurdity of the fact that we have HIPAA rules that are in some cases so ridiculous that you can't even like email with your doctor. Yeah. On one hand. But on the other hand, the exact same information is just like packaged up and sold and it's like, you're all depressed. You could get dropped to buy your insurance. If this data got out, you could get fired, you know, or put on some sort of. leave, like, you could be discriminated against at work because it comes out that your clinical

depression supper, like, absurd. It is beyond unacceptable that this is just like, la la, la. Yeah. This has been an issue. Do your job. Right? It's been an issue for so long. Back in 2013, Pamela, Pam Dixon, who is the founder and executive director of World Privacy Forum, which is like a research and advocacy group, testified at a Senate hearing, then Illinois pharmaceutical and marketing, company had advertised a list of reported rape suffers, and it had over a thousand names on it, and that whole list was going to be sold for 80 bucks, and they were selling it. And after this testimony, it was removed shortly. But Dixon even commented now on what's happening with this health data, and she said, quote, they're building inferences and scores and categorizations

from patterns in your life, your actions, where you go, what you eat, and what are we supposed to do, not live? And I think that's a great point. Like, there's no real. way of getting around this. And now it's even targeting what we saw during the pandemic as something great, telehealth, because not everybody can reach a hospital and afford to go into a hospital. So it's like, what do we do now? If telehealth is the option for a lot of people, what are alternatives? And it's where the government has to step in. Yes, 100%. I mean, we have been, like, consumers, privacy advocates have been asking for federal privacy laws for, I think, close to a decade at this point. Like, it is a truly unacceptable failure of governing at this point.

Get it done. Get it done. And the government's had also issues, I guess, like regulating pharmaceuticals coming out of these telehealth and pharmacies. Like we mentioned earlier with cerebral and how they were getting proved by the DOJ. And I know, and there's a bunch of stuff kind of on Twitter about this, about people lying about their symptoms and getting medication and stimulants and any presence or whatever online. And I wonder, do you think this amount of data that is probably false could impact data brokers and how that impacts, like, in turn, the consumers that are being targeted by these data brokers? Sure, right? Potentially. Like, there's a million problems with it.

Is the data accurate? Is it? And then are people going to be wrongly targeted with advertising because they're. lied about stuff. Like, it's just, it is a huge mess and should probably become, I mean, congratulations to the Washington Post for publishing it

because it should probably be a way bigger story. Right. And if you go on the subways in New York, there's actually an advertisement right now for LexaPro, which is an anti-anxiety medication, I believe also a antidepressant. And it's by a company called hers, hymns and hers, I think.

Yeah. And it's really interesting, seeing that marketing. And when I was on the subway, I was like, I wonder if this is one of the companies who was able to get data and target it in like this certain area because there's more people that suffer from anxiety. So interesting to see where this goes in the future. Okay, everybody, I'm thrilled to announce. We're bringing back the show us your space competition in partnership with our friends at Squarespace. We did this last year and it was a huge hit. Here's how it works. Very simple. We're going to give one twist listener $1,000 in Squarespace credits.

If you run any kind of e-commerce related business, maybe a D to C, consumer goods business, a marketplace, a subscription service, online courses, you get the idea. I want you to go to show usyorspace.com. And that's going to redirect you to a tweet from my Twitter handle, Twitter.com slash Jason. And you will reply to my tweet with a short video image, link, gift, anything you want to show off your e-commerce site on Squarespace. And then we'll pick one winner and give him a $1,000 square space gift card. This time the contest is just for e-commerce businesses. Next month, we're going to mix it up and do a different category. If you want to be an entrepreneur, start a side project.

Squarespace is how you do that. You all know that. And on Squarespace, you can build or sell anything. We love it here at launch. We use it for all our different projects, including Remote Demo Day. So here are some Squarespace features that founders love, templates, analytics, inventory management, APIs, and they're always optimized for mobile as well as your desktop. So you can sell courses, content, whatever you need, directly on Squarespace,

and keep that 15% that other platforms take. That's your money. You keep it. So head to Squarespace.com slash twist for a free trial. And when you're ready to launch, use the offer code twist to save 10% off your first purchase of a website or a domain. Speaking of things that are too good to be true, let's talk about this interesting development in AI accuracy. Yesterday on the show, of course, we actually in a conversation about, you know, how to moderate, this technology and how to deal with the content,

we made the point, I made the point, that this is very like alpha level tech that we're sort of presenting as though it's ready for prime time. And now here we have a story, take us through it, if you will, a story about how it's super not. So I'm sure remember last week during Google Bards unveiling, it recalled false information about the James Webb Space Telescope,

and that was super embarrassing. The mistake caused the stock to tumble and wipe out $100 billion worth of market cap. So that was a super expensive mistake. And now a report and a blog post from this morning suggests maybe Bing's new chat bot isn't accurate as everyone thought it was. So I guess it's not just Google.

During the Microsoft event last week, the company shot off new capabilities in the edge browser and included a demo where Bing's AI could consolidate the key takeaways of Gap's third quarter results, as well as compare the numbers to, who lemons quarterly results. But the demonstration, you know,

we thought it was short and sweet and accurate, but it turns out it was not. Turns out it was not. There was a blog post that went up today, a DKB blog, shout out to Dimitri Bariton, and we hope we're saying your name right, wrote a post breaking down some of the information

that the AI bot presented that was inaccurate and in some cases apparently invented, which is kind of bananas. So a couple quotes from the post. He said Bing AI starts off fine with a statement that is totally correct, probably a direct copy paste from the financial document. And in that case, he's saying, you know, Gap Inc reported net sales of $4.04 billion up 2% compared to last year

and comparable sales were up 1% year over year. Then the chat bot reply went on to say, Gap Inc reported an operating margin of 5.9% adjusted for impairment charges and restructuring costs. and then Baraton reports, no. 5.9% is neither the adjusted nor the unadjusted value. This number doesn't even appear in the entire document. It's completely made up.

So producer Brian went and checked the actual gap earnings report and found that, yep, the operating margin, including impairment, is 4.6%, and excluding impairment is 3.9%. None of those numbers are 5.9%. So it looks like my job is safe for a while, though. I think it probably is. It is not producing jobs. That is good. Definitely not.

Right. Like, AI, and that is not the only thing that it just made up. Like, it said the bot presented a diluted earnings per share of 42 cents, adjusted for impairment charges, restructuring costs and tax impact. According to Baraton, again, this number is fabricated. and does not appear in the earnings report. The adjusted diluted earnings per share are 71 cents, and the unadjusted is 77 cents.

And again, the bot said 42. That's insane. It's just bonkers. And there are multiple examples like this in his blog post where it's just like, whoa. Have you used AI yet where it has given you a super wrong data point? Because I have. I was on Notion, actually.

And what I was doing is I was taking bullet points for my resume and saying, hey, can you write these in paragraph format so I can put them up on like a personal website or just do something else with my information. And it came up with like data points that were just pulled out of the blue on when during the notion AI use case. And I was like, where is it getting this? Like have you, have you had any of these experiences like using generative AI to try to like create text? No.

And I guess I'm glad that I am weirdly like too busy or too lazy to go try to. Like, I'm always just like, I'll just do this thing. And I haven't tried to do that yet. But now I'm not going to. I mean, and this is like, I think what probably more and more people are going to discover because you only have to get burned by this once or twice. And if you were like, let's say you're a financial reporter and you pulled numbers from chat GPT or Bing, right, open AI like or whatever, Google's barred.

And it just literally like, the, during this demo, the bit of this, the Edge demo, the Bing demo, they compared Gap's data to Lulu Lemons' earnings. And the bot reported that Lulu Lemons gross margin was 58.7%. And the gross margin reported in the earnings statement was 55.9%. 58.7% does not appear anywhere in the document. That's crazy. Pulling numbers out of thin air. And producer Brian made a good point.

And he was like, AI is like the new NFT. It's overhyped with a really poor. core user experience. What are your thoughts on that? I mean, I think the user experience is actually probably too good. Okay. It's too good in the sense that like if something just confidently gives you, if it's like who, like who in their right minds and clearly this is why this happened, like it's easy to be like,

was maybe you would go, okay, was the James Webb telescope the first to see an exoplanet? Right. Like when I went to journalism school, one of the things that we was drilled into our heads was to always be wary of superlatives. So when you hear like first, best, greatest, any of those, exclusive only, those are words that you always want to double check. They should ring an alarm bell inside your brain because it's like, you will always find a case of something else. It's very rare for something to truly be the first or the best or the greatest or the only. but like 57.8 cents

you know diluted earnings per share whatever you're just like yeah that sounds I mean what would make you think I should go check that so that's a case where the user interface is perfect it's like here's here's some super legit sounding information and I got it for you in six milliseconds

and you're like amazing but then it's wrong yeah and it's crazy how it like started off I guess like chat GPT everything was super open and others more paywalls and stuff being opened up. But there are other startups and other companies coming out that don't have paywalls. And unlike NFTs, NFTs where there was always a kind of a barrier of knowledge or a barrier at least financially, Chad GPT, it feels like every time somebody tries to put a barrier on one

product or generative AI in general, every time somebody tries to put a barrier on one product, another one pops up and says, hey, it's free, at least for like this limited time. and everybody just starts using that one until the next one comes up and it says it's free. And the first one they used puts up those barriers again. Totally. Yeah. I mean, I think the takeaway here and really everybody really should go read this blog post, it's quite shocking, the degree to which huge chunks of, I mean, and again, like,

let's not skim past the part where Google lost $100 billion. in market cap over putting out an ad with inaccurate information in it that somebody happened to catch. Microsoft has been booming, soaring, right? Everybody's like, Microsoft wins. Google's not ready for prime time. And in fact, Microsoft's tool was literally inventing financial performance. Yeah.

And that's not all that's in the blog post. See, basically fact checks almost every part of that Bing demo and is like, nope. It's kind of all lives. And fact-checked ham. Yes. So we have like so many people fact-checking being like, wait a minute. Wait a minute. Something sounds fishy.

Maybe the upside here is that human fact-checking will start to have more value. But yeah, do not. Like Microsoft really got away with one here. And the real takeaway should be is that like none of this is ready for prime time. Let me tell you about House of Macadamia's. Yes, this brand has a special place in my heart because the founders, Carmen and Brandon, Well, they're twist listeners. They've been listening to this podcast,

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It's vegan, keto, and paleo. I love these. I love the dark chocolate covered ones. That's just me. They have beautiful macadamia bars. Buy some of these. Keep them in your desk draw. That's a healthy snack for you to have.

They also have some zesty, spicy ones. If you have that kind of a day, I like to do that if I have like an ice tea. and I can pair it with the zesty salsa dry roasted. So here is your call to action, support a founder, and have great macadamia nuts that are healthy and delicious. Houseof macadamas.com slash twist. House of macadamias.com slash twist. Right now, you get 20% off by using the promo code Twist 20.

That's right. 20% off. House of macadamias.com slash twist. And over under five years, when will it be ready for prime time? I mean, honestly, I've been using the self-driving car analogy, which is like everybody I was at the DARPA the second DARPA grand challenge in 2004

I know so sick very old it was a really fun day in the desert but that was 2004 and they were like we'll have self-driving cars on every road by 2010 and here we are in the year of our Lord 2023 and like Amazon I think just today

launched some self-driving taxis with like really really limited rollout and we're like still so far from that technology. And if you assume that actual AI that is accurate and trustworthy and safe and all of those things is in the early innings,

I'm taking it over. Okay. I'm taking over on a decade even. Oh, wow. Okay. Yep. I, the only thing I can think about where it's under would be education just because I have college age siblings.

And even if it's not for doing something like writing an essay, if they have a prompt, it at least gives you like an outline. line. And so I do wonder about that use case, but that's really been the only one that I've seen. And I guess small copywriting like over, I've seen a company called Tribe Scalar. He was actually an OK boomer, Alex Banks, great company where they made short tweets. And I was like, that is that is smart. But I haven't seen anything like long form yet where I'm like that seems like a great idea.

Right. I think it'll be an assistant in some ways. But it's an assistant that you have to monitor very carefully. It's like having a toddler as an assistant. I like that. I like that. It's like an assistant. That's actually so true. That is a good. That's a good analogy. I guess there's another. So right now producers are safe, but EA's, you know, keep an eye out. Yeah. I mean, the fact that Google can call it, like its chatbot can call and make you a restaurant reservation and then you know that you have that. Like, that's true. That's a very scary one. But still, it's not even as as good as that. It's like, it's going to be an extremely narrow use case. I predict for a very long time.

Yeah, definitely. All right, next up we have an awesome interview. Jason talked to IVP partner Tom Levero. And if you are a listener to Allin, you heard a reference to this, or maybe you just saw this thread on Twitter, Tom's thread about a mass extinction event coming to startups. It went viral recently. And so Jason was like, get them on.

And they had apparently quite interesting conversation about Tom startup and VC predictions for the second half of 2023 and early 24, you might just want to like steal yourself for this conversation. But it's a great, it's a great interview that's coming up right now.

All right, everybody. Last week, a Twitter thread went viral about a mass extinction event that would happen to startups late in 2020 and into 24. You might have heard me talk about it a little bit. We referenced it on All In last episode. So I thought I would invite the author on to this week in startups to talk about it.

Tom Leverro is a general partner at IVP. Institutional Venture Partners has been there for eight years. Welcome to the program, Tom. Thanks for having me. All right. So you wrote this tweet storm. Did you expect that this would get so much attention, number one? To be honest, the amount of attention it's gotten has been a pleasant surprise,

but that was also kind of the point to get the founders advice, out there and hope folks paid attention. But yeah, I think it struck a chord we weren't really fully expecting. All right. Yeah, 2.7 million views in less than a week here. Yeah, in exactly a week, actually. So you said prediction. There's a mass extinction event coming for early and midstage companies.

Late 23 and 24 will make the 08 financial crisis, which we live through, look quaint for startups. Below I explain why and how it will start. start and offer detailed advice to founders surviving the looming die-off. So let's start with why is this going to happen? Because the prevailing wisdom is a ton of dry powder was raised during the upmarket, 2020, 2021, 2022, not so much, but we are told there's this massive amount of dry powder. Wouldn't that dry powder go right into these startups?

It's a great question. And to me, it's kind of like when you hear the old adage, don't make hope your strategy. I would say, don't make dry powder your fundraising strategy. And what I mean by that is this is kind of the point of the thread. The world has changed. And I do think there's going to be an extinction event. This is not an asteroid hitting Earth, though. This is climate change.

It'll creep up on you very slowly and quietly. and if you don't notice it, you could get burned. And so, you know, what happened? Well, you know, a lot of younger founders, entrepreneurs, and VCs alike, the last couple years and beginning of 20 just were very atypical. It was like the laws of physics were suspended. You saw public companies trading at 50 times revenue, lots of private companies getting valued at 100, 200 times revenue.

It's like the laws of physics have set back in. You look at the valuations of public companies, and when gravity returns, things fall. And so that's where we are now. And it's not like the economy's in bad shape. It's in fine shape. It's just that when you go back to normal times, there's this hangover effect. And that's what folks need to be careful of. And I think there's some knock on effects from a lot of capital having been deployed the last

couple years, there's going to be less capital in a pickier fundraising environment ahead. Okay, and you point out correctly, many startups, they did, what's the expression, make hay when the sun was shining? They raised intelligently in 2021 and maybe even in 2022 when the window is still open a little bit. And they raised, typically a startup raises 12, 18 months, I think we would agree. And some of them made cuts and got that to maybe two years of run So there's many startups here sitting on two years of runway as of 2021, but that means in 2023, we're going to see them arrive. And you point out that January of Ventures did a survey of 450 founders in four in five

of early stage companies said they had fewer than 12 months of runway. And so this means a flood of folks will start raising at the back half of 2023 based on this sort of multi-signal data that you're picking up on, correct? That's correct. I think it's going to be a busy fundraising time, the back half of this year and next year. And we're already seeing it begin to tick up just in the last few weeks. And we're seeing more structure on deals. We're not imposing that structure, but hearing about structured deals getting done, down rounds. It's all very quiet. It's on the hush, but it's beginning to happen. And so this is kind of the, you know, the quiet before the storm, so to speak.

Let's talk about structure because many of the founders listening to this week in Serbs may not know what you mean by structure. Structure generally means a liquidation preference or a cram down round or warrants. Why don't we explain mechanically? Maybe you can give an example of something you've seen but obscure it. Obviously, you want to tell us the companies, but give us an example of structure being put into a deal and how that affects. say founders and employees at a startup? Yeah. So typically when venture investors make an investment, they have what's called a one-time's

liquidation preference, which means if the company sells for an amount where it's not, you know, a huge number, they're not converting into their ownership percentage. They're just getting their capital back. And so it's sort of a safety mechanism. It almost makes the venture investment debt-like. in downside scenarios. And what you see begin to happen is in good times, that's the only feature is that 1X lick breath.

That's considered very plain vanilla, run of the mail. Standard. Totally standard. No lawyer's going to tell you, take this out where this is non-standard. Founders' attorneys, venture capital firms attorneys, okay, yeah, 1X participating,

or 1X liquidation preference, not participating preferred, but just a 1X reference. Okay, yeah, that makes sense. And incentives are pretty aligned at that point. But what happens when companies raise a lot of money and then maybe the price goes down where the entrepreneur just loses leverage, especially in times like this, entrepreneurs will see term sheets that have 2x liquidation preferences, meaning if they put in $5 million and the company sells, let's say, for more than the capital invested in the company, but less than the price. on the term sheet less than the valuation, that investor doesn't get,

there are $5 million back, they get $10 million back. So they're earning a return in this sort of downside scenario, and it can get worse than that. You can have participation features, which means basically it's sort of an equity like kicker for investors.

They get extra returns after you subtract out the liquidation preferences. And you can have just funky things like blocks on different parts of the business, sale of the business, just the investors exerting more control over every aspect of the business once that sort of negotiating power turns around.

Yeah. And so this liquidation preference, it was designed to preserve the downside of, oh, hey, the founders sell the company for only $5 million. We put, I don't know, $3 million into it in a seed round. Okay, we get our $3 million back. There's $2 million left for the comment to split up. which kind of sucks.

That means 60% went to the investors, and maybe the investor said only bought 10% of the business, but because they get that out in a short sale, they get the majority of the money, just like if you sold your home and it didn't appreciate the mortgage you would have to pay back is there. And then there's this concept of participating preference, which is just another way of saying,

you get your money back and you get your prorata, you get your percentage ownership. So all this funkiness you're starting to hear, and I actually had the first example of it, just last week where somebody was trying to close in on a company and just buy it for a dollar and basically foreclose on it. And that I haven't seen since, yeah, the dot-com era. I didn't even see that in the 2008 era. So we're starting to see these funky things get proposed or even some deals get closed with some of this funk in it, huh? Yeah. And, you know, it's unfortunate because

what a lot of structure can do is create disaligned incentives. between classes of investors, say between your seed and your A and your B and between the founders. And so many VCs are hesitant to use a lot of structure and are hesitant to do down rounds because they don't want to upset entrepreneurs or just get themselves into complicated situations like that. And so that's just another reason why the sort of notional amount of dry powder is less than it appears. Because VCs are trained to generally buy and large, keep things pretty clean and incentives aligned. And psychologically, it's harder to invest in a company if you know they're in a tough spot than something that's just clean and up into the

right. Okay. So now this requires a little unpacking. Venture capitalists are humans, despite what people may have heard. And when a human is faced with the founder, and we've had this founder friendly environment and the founder's last valuation, let's just pick a number here, was a hundred million and they had a million in revenue in today's market, even if they hit two, that 100x no longer applies. They're not worth 200 million on two million in revenue, even if they doubled their revenue since their last round in 2021, that two million today might be worth 10 times that, and they're a $20 million company. And if they're a $20 million dollar company and they've raised $15 million, that overhang is going to lead a venture capitalist. If you were to look

at that deal, what would you think? You like the company, you like the founder, or let's just say you love the founder, and you love the market, and you love the fact that they doubled revenue in a challenged market, but they have a hundred million valuation, and there's been 15 million put into the business, and you valued at 20. What are you going to do as an investor, Tom? How are you going to look at it? What's your internal dialogue going to be? So this is where it gets a little thorny, and I think it comes down to the investor's conviction. If you absolutely fall in love with an opportunity, a market, a company, and of course, and most importantly, the founder, you'll figure out a way to get it done. I think the trick is there were some VCs out there trying to put a lot of money out very quickly.

There were funds getting deployed in six, nine, 12 months. Now, as a VC, if you're, you know, maybe a series B or C investor like myself, you normally, do maybe two, three investments a year. We kept that pace the last several years. There were folks doing 10 investments a year. You have to imagine if you go from doing 10 investments a year back to two or three, some of the ones where your conviction was a little more marginal, you don't do that deal.

And that's where I think the ones that are down are going to be harder for a lot of folks in the venture industry to do. I've only done two or three deals a year for basically my, whole career. So I hope and I and we have a pretty good track record these you know last several quarters and 22 and 23 of announcing deals and getting deals done where we have high conviction. But it's hard. It's harder in a down environment. And that's where I think a lot of the, the dry powder, you know, begins to sort of sublimate and go away and, and some of the deals, you know, the bar gets higher for a lot of firms as they slow their pace to a normal

venture pace of two and a half to three and a half year fund cycles. Okay, so this is critically important. People were going at a pace that was unsustainable. Venture capitalists and some of the public market investors who dip down into our world, they just started sprinting. And they were running at a break next speed. They're doing a deal a week, a deal every two weeks. They're racking up 50 deals a year, sometimes two deals a week.

Sometimes they're barely meeting the founders. They're just putting money in after a basic diligence. and talking to the series B investors or series A investors and just throwing an extra 10 or 20 million on top, they're gone. They're not on the board. They're not company builders to begin with.

They were making a late stage bet and trying to deploy capitaling and they were even outsourcing their diligence, right? So, you know, in basically a very scaled way. They were giving this diligence over to us, venture capitalists, and saying, well, we assume you did the work. Now those people are not going to even

pick up the phone, are they? They're just, they don't even have the dry powder themselves to invest or do bridge rounds. So what happens to that relationship that a founder might have had with some, let's call it what it is, people who got excited about venture, but maybe just for a year or two. Yeah, you know, the industry term is venture tourists that I've heard quite a few times. And I think it's, you know, during the tough times that the tourists tend to leave. but that's why it's an adage in venture but like your board is so important and the quality of your investors is important and I think there was a bit of a you know a deal with the devil so to speak last few years where folks took money from lots of different sources they knew that might not be

around forever but the incentive was probably to take it because you know when it rains you turn your umbrella upside down and you and you take that capital But, you know, now it's the sort of other edge of the sword there where the downside is they might not pick up the phone. I've heard from some of our founders where they've texted some of that type of capital and they literally don't get a response. Wow. These are people on the cap table and they're not even minding the store or the investment. Incredible. Yeah.

It's unfortunate, but, you know, that's where I think founders, like, if you're thinking about as a founder, what can I do better? How can I avoid these sorts of situations? You know, frequent communication with your board members and your investors is really critical. You know, there are probably some founders who thought they didn't need to communicate with their venture investors over the last couple of years. Now is a good time to change that. Monthly communication is best. Quarterly can work, but the better, you know, insight and the better relationship you have with your founders, the more, or with your investors, the more likely they are to support you. As you know, I've been on a health kick for over the past year, and you know I care about

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get 25% off your FitVod subscription or try the app for free when you sign up now at FitBod.me slash twist. That's F-I-T-B-O-D-M-E slash T-W-I-ST for 25% off. There is a, where there was some advice going around to founders. That governance was not cool. Board meetings, not cool, don't need to do them. control provisions, you know, that venture investors were asking for, also not cool. And maybe that comes from, you know, a past where maybe venture investors had a little too much power pendulum was swung another way and founders were replaced.

Obviously, we know the history of that in Silicon Valley. But make your best case for when governance is a great thing and governance can help in times like this. Absolutely. I mean, first of all, I think hearing from founders, is really hearing it from the right source. If you look at my Twitter thread the other day, some of the founders I work with retweeted it,

folks like Armand Dadgar, the co-founder, CTO of HashiCorp. I think when you have a really engaged board, like Dave and Armand and Mitchell from HashiCorp, they will work with you through the hard times. They will be there for you, giving you good advice, because it's their job.

and they have a sense of urgency. A board will ask tough and uncomfortable questions, which is tough and uncomfortable. But the good news is it makes you stronger. And we've noticed that the best founders tend to opt in to having things be more render of a microscope. They want the, you know, amazing VP sales who's going to push back in the Met Times and the CTO who's not

just going to, you know, do as they're told, but ask good questions. And so I think. it's the process that dialogue with a board that makes a company better. And it's not just about having brand name board members. And it's not just about like, you know, legal governance. It's really just about having a relationship, having people you can bounce things off of here and outsiders perspective. And the best boards are really good at asking hard questions and also being influential with a founder. You've also started to give some advice in the tweet storm. you gave seven prescriptions here.

Number one, raise money now before the Great Flood later in the year. This makes sense. And as you say, if you raise now and you don't get the, you don't close the deal, at least you tried, and you're not part of the deluge that might overwhelm investors at the end of this year.

Maybe expand on that a little bit. Yeah. It's a little bit of the hope as a strategy thing that I'm trying to combat with that piece of advice, which is, well, you know, we hear from founders, hey, maybe the economy will be better in six months. multiples will go back up. Yeah, but multiples could go down further. You could miss a quarter.

Yeah. VCs could be more scared, deploying slower. There's a lot that could go wrong. And if you go out now and you get a frosty reception, you can always go back out again, go to a broader set of investors, go to strategics, whatever it is, you have more time. And if that fails, you have a chance to either cut burn again, you know, potentially try and sell the company. The most dangerous mistake is to make it a high wire act and just really be out there without much room for error, where if you can't raise your funding in a given period of time, then you're barely making payroll. And you'd be surprised how often that's happened. I haven't seen that in several years, but after the dot-com boom and the great financial crisis,

this was something that was pretty commonplace in venture, where you had investors bridging companies that have three weeks of payroll together. And those bridges are almost always, you know, throwing good dollars after bad, meaning it's not really funding the company enough to get them to a substantial milestone or even to a sale. And so you back into it and you say, we need to raise capital at least. least, I say a minimum of six months before you need it. And that means starting the fundraising process probably nine months before you need it. Making a list of targets, starting to set up the meeting. So if you've got, you know, 12 months of runway right now, in the next three months,

you're going to want to start this process up. You're not going to want to wait six months or nine months for the market to get better. That's just not worth it. You need to have that runway. When you only have a couple of weeks of runway, what does that do in terms of VCs in this kind of market, even being able to get consensus inside of their firms. Yeah. I mean, once you're, I think, within under that three-month mark, the clock is ticking. First of all, just from a, you know, negotiating point of view, I would counsel our CEOs, hey, you've lost leverage because they know the longer they draw out this process or the longer

the process gets drawn out, the less cash you have as CEO and the less negotiating leverage you have. So that's thing number one. Number two, if you're out there, you just, you have to find chemistry with venture investors. You have to find investors you really like. This isn't just about the capital. And that's a process. That doesn't happen over 30 minutes in Zoom.

You have to take your time on this stuff. And, you know, what a VC might do in a partnership to, you know, directly answer your question is they may say, you know, hey, I really like this company and somebody asks, how much cash do they have? You say two months of cash. Another partner may ask, well, does that mean every other VC on Earth has passed on this company? That's a tough dynamic, especially for a younger investor who's maybe newer to their firm to answer. Like, why did the CEO let it get to this point? So if that's a legit question.

You do burn it down to the end, you just say, hey, what is this person's judgment? If I do give them 18 months of runway, are they going to be? going to do this again? Yeah. Why weren't they cultivating relationships with VCs for the past two years? You know, why hadn't they found people they clicked with and venture firms that really got excited about them? And, you know, why did they not cut burn earlier?

It just, it begins to introduce all these questions that you're now in the wrong territory. You want the VCs excited, thinking about the upside. You've got the venture investor thinking about all the potential downside within three months. All right. Your second prescription, which you just, uh, teed up was, hey, listen, you did your layoff, you cut burn, great. Maybe we cut it even more. You got to get rid of good to have.

Everything's got to be focused on the core. That's super important. Point three, you want people to focus on survival, not valuation. Why don't you unpack that and how sometimes people get themselves into a little bit of a trap anchoring off the last price or what the market looked like last year as opposed to maybe what it looked like five or ten years ago? Yeah, so this is human psychology at work. it's what's called anchoring bias.

You know, we often believe something is worth the last reference point, regardless of how the world or the environment has changed around us. And listen, there are good reasons why it's nicer to raise up or flat rounds versus down rounds in venture. Down rounds can be messy. But the truth is, at the end of the day, public companies, as I said in a thread, their stock prices go up and down, you know, look at Facebook, look at Google's. Amazon, these largest market cap companies on earth can fluctuate wildly within weeks,

months. Startups seem to think if their valuation fluctuates a little over a year or two, that, you know, it's absolutely devastating. And the truth is, no, if you have cash, you're still in business. Even if you have to take a lot of dilution and it's complicated because of a cram down or investors losing some of their money because the next round is at a lower price, fine, so be it. investors lose their money too when when the price of a stock goes down. It happens very quickly and

nobody really talks about it. I think culturally, CEOs need to understand, you know, it is a little, it will feel emotionally hard, but at the end of the day, it's the market that sets the price, not the last round. And so, you know, what I advise founders, sometimes listen, it's a clear case. You're going to raise an up round or you've justified a flat round. Are there, cases, it's unclear. Is this going to be a down round? Is this going to be a flat round? CEOs almost never assume it is. They say, oh, it's going to be flat at worst, right? I think that's when you let the market decide. You don't say, you don't go out and say, hey, this is the price unless you have supreme confidence. I think you say, hey, we're raising

this much money because it's the right thing to do for the business. And the way you get the price up is you get multiple bids. Ah, so let people put a price out there. And when you have multiple people bidding, then you say, hey, listen, you came in at 50, this person came in at 60, and another person came in at 80 to the two people who didn't hit 80. Is this something maybe you want to reconsider your offer? And feces take that well. That means, okay, yeah, we did diligence here. This is a real company. And anchoring is one of these, what we call in the business, cognitive biases. This is something you and I do. And a lot of folks who are making investments, we look at our bias, We look at, hey, when are we thinking straight?

When are we making good decisions? Because we're placing large bets. Maybe you talk just a little bit about the different cognitive biases that we face as investors. You must have thought of many of these over time. Yeah. There are a number of biases that venture investors can have. There's some of these cognitive biases like a recency bias. Like you heard about something recently.

And availability bias, which means, means maybe you see it more often or more easily, like a consumer investment might seem more appealing, especially earlier in your career versus some deep infrastructure type of stuff that nobody's talking about. And then an anchoring bias certainly comes into effect. And that cuts both ways, right? We can, as venture investors, we can be anchored by the last round in a negative way or a founder telling us, hey, it's got to be at least X. But it's kind of always trying to ask yourself, why do I believe something and evaluating it that, you know, as analytically as you can, that helps overcome these biases. Yeah. And the anchoring one, you see it all the time.

People will offer you an $800 wago steak. And you're like, no, I don't want the $800 co-based steak. But yeah, I would love the Tomahawk for $150. Let's go with that. And, you know, the venture version of, hey, this AI company just raised at a billion and they didn't have revenue and so, you know, we're worth at least $750 to a billion, right? Like, that's a different, that's a different company, you know, and maybe that round was three months ago or six months ago. I think that's one of the most common forms of anchoring we see for entrepreneurs is another company or a friend perhaps raised a while back.

And that's sort of the target or the bogey that the CEO has in their head. All right. Number four on your list. For mid and later stage startups, bring on season operators. in C-level roles and for some companies that scale might even mean bringing in professional CEOs. Why is this so important in a down market and in the fundraising process? Because of the focus on unit economics, your growth's going to come down as you get more efficient and cup burn. So what investors are going to really evaluate is, well, if we put more capital into this business,

could I imagine it growing at a faster rate or potentially keeping its current growth rate for a really, long time because the inherent unit economics of the business are so good. Bringing on operators is really a way of saying, you know, experience, hopefully the right type of experience can help you achieve that operating efficiency because they've learned some of the hard lessons. They're not going to waste, you know, an experienced CMO won't waste a bunch of money, for instance, in, you know, poor performing customer acquisition channels. They're just going to hit the efficient frontier as soon as they come into that role.

and I think that extends to all roles. Which leads it to your fifth point, trade better unit economics for growth. Let's give an example here. What's an example in this last 14-year bull run where people were trading growth for unit economics, and now we see maybe they've got to change that and go for unit economics over growth. I have a bunch of different ideas here, but I'm sure you have some at the tip of your tongue. So, I mean, this is what's going on in the boardroom of nearly every Series B and later company, certainly that I'm involved with, which is,

You're saying, okay, well, we could burn, I'm just going to make up some numbers here. You know, we could burn 65 million and, you know, we're going to grow 90% this year. But what happens if we wanted to burn less and we wanted to burn 40 million? What would the growth look like at that pace? Or 30 million, is that an acceptable tradeoff? Okay, instead of growing 90%, we're going to grow 65%, but be efficient. and our magic number on sales is going to change from X to Y. And then, you know, some deeper questions become, well, what are the benefits of growth?

Is this a land grab? Are we early to the market? Is there a strategic reason that we want to get out there and get customers before others? Almost all founders and boards think they're in a land grab situation, but it's not always a land grab. It can be really hard to quantify why it's important to grow a little faster this year. But I think, you know, the truth is in a time like this, you're being comped against, and I realize this is like later, I think maybe the next tweet.

But you're really comped against your sort of peer group. And if in 2021 at your scale, you know, growing 100% was the benchmark, 2023, it's probably not growing 100%. Right. Forecasted growth rates for companies are coming down. And so you get a little bit of a gimme from venture investors, at least the savvy ones, who are saying, you know what, that's okay. We see you're growing a little slower, but you're pretty efficient.

And we respect that. Right now, a lot of us are concerned about, if we were to use a metaphor, people finishing the race in one piece. And, you know, if you're going so fast that you're going to flip the car, and I'm talking about growth, you know, and it's unsustainable, man, it's very hard to change that inside of an organization. If you look at the dog and fight, lift, side car, and Uber went through DoorDash Uber, Postmates, and another dozen forgotten delivery services for food, you look at that competition. They were all being judged in a zero interest rate environment when there's plenty of money by their top line growth.

You said it before. Hey, what is the price to sales ratio here? How much was the total sales? And let's give them 10 times that. now everybody's going to go and hey can Airbnb actually be profitable on a unit economic basis is each room going to be profitable

and that is hard to change maybe we can talk about how hard that is for an organization just on a culture basis to change that thing yeah I think that's right especially the part about it being cultural

if you tell your employees hey you know set the speed to maximum, you know, on the accelerator, like let's do everything as quickly as we can, get to market with the product sooner, more features, as big a sales team as possible. You're conditioning your employees to think that's what matters, that growth at all costs is what matters. And so, you know, I'm on a board of a company that's an education called

Paper and the CEO there, co-founder, Phil Cutler, great founder. And he basically had a meeting, told employees recently, hey, we want to make sure you're on board. With what we're doing today, it's about efficiency and growth, and it's not growth at all costs. And Phil gave this speech, but every single one of, you know,

my great CEOs is giving this speech internally today. Making sure, it's not just about changing the expectations that, hey, what we care about is being good stewards of capital, about product market fit, happy customers, all those great things. It's about making sure that your employees are still on board with that.

There's going to be employees who, you know, were there for the good times and they, and, you know, they might not want to opt into this next harder chapter of life for all companies. And, you know, we saw this certainly at Coinbase, Rose, a board observer there. During the crypto winters, a lot of employees opted out. And listen, crypto is an extreme. Sure. you know, people wanted to get in while the money was good and things were up into the right.

And then, you know, as soon as some doubt seeped into the market, a lot of people, you know, decided, hey, this is too much for me. But like, sometimes you learn from the extremes and crypto is an extreme. But I think that also happens day to day in regular startups where you have some folks who are in it because they think the value of their options is going to, you know, 5x in a year. And as soon as that stops happening, you know, they were just there for the money. They're not bought in. And so I think. think it's not only a good time to change the goals and

and set that up for your employees and tell them what matters, but also make sure they're bought in. Missionary versus mercenary is how it was taught to me early on. There are people who are mercenaries. They'll come in. They assume this is going to be the next Uber, Airbnb, Coinbase, whatever it is. They want to get that four-year

grant. They want to hit a big win. They did it before because they were at Google or Facebook or both. And those folks, if they aren't true believers, when you know, you hit a bump in the road and listen, Airbnb, Uber, DoorDash, Coinbase, all companies hit bumps in the road. Literally all companies. Like, name one company that didn't hit a bump in the road at some point.

And it's only because you didn't know about the bump, right? Like every- They disguised it. Yeah, exactly. Facebook, mobile and VR-A-R, right? And they've had to survive both of those missteps, right? Every single company. It always seems smoother from the outside.

And those are tough points for founders. They're tough points for boards. But, you know, those tough moments, like, listen, I don't want my thread to seem all doom and gloom because it's not. Like, maybe we can flip a little bit to talking about some of the bright side, like the positive aspects of all this. Let's talk about that. What is the positive here for founders who are missionaries? Well, you know, I think this is like when this is the, the cauldron or, you know, that sort of forges a lot of startups because they have to

refine their product market fit. Competition tends to go away. It's no longer about a race. You refocus on what your customers need on the core product. And honestly, this is like the times that I think, you know, the best startups can make, hey, their customer acquisition costs are lower. You can hire better engineers. You can hire better talent because not everybody you know, obsessed with changing jobs every 12 months and optimizing pay. They begin to optimize sort of, you know, more globally around everything they're looking for in life and passion. And so, you know, there's all these reasons that like if you're really committed to

your startup, you know, this is the best time. By the way, like for a regular rank and file employee, getting promoted, easier. If you survive the cuts, getting promoted is easier. Your startup comes out stronger. They're not burning as much. What does that mean? You're not taking as much dilution from raising capital and from option grants. And so from the founder to the VC to the rank and file employee, like, well, if you can survive these times, these are some of the best times to grow a company. Yeah, I have to agree. And, you know, this is where the people will get, the people who, you know, put their heads down and do the work are going to get rewarded.

They're going to get another stock option grant. The companies are going to run. reward the employees who remain even after the riffs and the layoffs and you're going to get more experience and you're going to get more responsibility. And that's really what it's about when you're in the startup game. How much can I be responsible for for the right person, for the person who's dedicated? How much can I be responsible for? How much of an impact I can make? If the company's main product is raising the next round, that's really not great for the employees. Then they're just doing all these projects or working on 17 different things. It's really about that core business and making it profitable, just think about all the talent that's going to be

available. Maybe you could speak to just how challenging it's been to get great talent on a team because of the number of teams and the fact that a startup is being asked to compete against Google, Amazon, Apple, and Alphabet for an employee. I mean, these are places that have essentially money printing machines. They can make any offer they want. And that really doesn't work at a startup doesn't. Yeah, if you look at the board decks for just about any of our companies, you know, 20, 21, you'd see that, you know, in this sort of the, a lot of times founders use this green, yellow, red, you know, a metaphor for what's going well, what's not going so great and what

needs to be fixed. And in the red, every single company for the last few years had talent, attracting top talent, not churning talent, not losing talent to the large, you know, large cap internet companies that you mentioned. And lo and behold, just in the last, you know, few quarters, all of a sudden, that moved from red to yellow or yellow to green in many cases where all of a sudden they can meet. Now, they're hiring fewer people, so the goals are less aggressive, but they're hiring, you know, on average, I think more tenured, more talented people for the same role in compensation. Well, and there you have it.

If you have 10 people fighting it out to get this one position, the chances of you having a true All-Sar take it go way up, as opposed to, hey, you're trying to, you found somebody and they have 10 offers. It's literally night and day. And the same thing is happening, I think, in terms of customer acquisition costs, people are going to be able to spend marketing dollars more efficiently, no? I certainly hope so. You know, that's one of the trickier things, especially on the B to C side, with the changes in Apple, you know, that affected Facebook for ad targeting and the ability for folks to opt out, there was a, you know, I think a massive change that's gone on in the past year or so. And I think folks are still trying to recover there. So, you know, jury's a little out on that side. On the B to B side, it's more straightforward. I think competition's

receding and cacks will recover a little bit better in terms of cacks going down. And I hope that's true on the consumer side. I imagine anybody who had a COVID tailwind and now is facing a COVID headwind, I imagine those cacks are going down. But there's some more complications on the consumer side for sure.

As we wrap here, what's the ideal stage for a company to approach you, for investment, for founders? And what are your personal signals that, hey, this is a match for me as an investor and somebody I want to partner with for the next decade to build this business. Yeah, great questions. We are very focused on series B's and series Cs, which means we like meeting companies right after they've raised their series A. We want to get to know them months, if not a year or two before we're funding them.

I want to develop chemistry, rapport with a founder. I don't want to meet a founder, you know, when he says, hey, we're kicking off a fundraising process, you know, in three days. That's, that can work, but it's not the preferred route to go. If I can meet a founder, you know, months before they raise, that's better. I think that's better for the founder too. Listen, it's hard to say what makes a great founder and they come from all, you know, different stripes. So I don't think there's any one thing that makes a great founder to me, but a sense of, you know,

there's some characteristics maybe. an incredible sense of urgency is one thing and the second thing for me is an ability to distill a different perspective on the world in plain English. If it seems complicated

when the founder says it, it's going to seem complicated to the customers, it's going to seem complicated to their perspective employees. This ability to kind of take what's complicated and really distill it,

yet it's still be compelling is just a magic quality. I'm not sure I have it, but good founders do. The Brian Armstrongs and Armands of the world, they've got it. And you know, you just kind of feel it in the air when you meet that founder. Yeah, the ability to communicate well, super critical. And that sense of urgency to get things done and speed, you know, intelligently is super critical. All right, listen, great job on the program. Great job with the tweet storm. Come back again

soon and continued success in filling out those series Bs and Cs without maybe some of the venture tourists, which had to be incredibly frustrating to do what you do and then have people come in and let's just be honest, like do it in a less thoughtful way, I guess would be charitable. I think that's right. I like to think this is both an art and a science. And You know, it feels like we're getting back to the like artistry adventure here, more of an artist and thing and not, you know, it's not Costco. We're trying to be personal with founders here. Yeah, I mean, I tell you the thing that stood out for me in our discussion, it's just the idea that somebody could put some large check into a company and then just ghost the founder. In one way, it makes sense because they were doing two deals a week, one deal a week.

And they had a portfolio approach. Hey, let's just buy the index. but then you look at the reality of a founder having that kind of overhang, that kind of slug into the company, and then they're not participating when you need them. And there's no follow-on investment from them. There's no, I mean, gosh, even to get signatures from them, you're going to need to get some signatures at some point to approve the next round. Where are these people? What are they doing? I think a lot of them left the firms they were at in some cases. Got to think of your investors more like building your team, like hiring an employee than just taking money. It's not a bank. It's another team. member. What do you think founders should look for? You've seen bad behavior on boards from crazy venture capitalists. What's the worst thing you've seen of venture capitalists do without getting into specific names, please? We don't want to get ourselves in trouble here. But what's

the worst behavior you've seen from investors? And what should founders look for in terms of finding great investors? You want an investor who has conviction. And they should develop that conviction as they do their diligence. They don't necessarily need it when they're uninformed, you know, on day zero. But as they learn more about your business, you can sense their excitement. And by the time they give you the offer, you sense,

listen, venture funds are 10 years for a reason. They may be with you for a decade. You know, they say it's harder to get out of a board or a investor relationship than a marriage. And I think that's largely true, especially in California.

So you want to be sure that you're finding the right person. So conviction, personal chemistry. If you don't want to grab a, meal with your potential board member or investor, you know, step back a second and ask yourself, is this my preferred investor? I think they should know about your vertical. They should understand your industry. But you're not trying to hire another engineer. You want them to have a broad perspective and feel like there's somebody who can have a chemistry with you where they can ask hard questions and push back. If the chemistry isn't quite right or you think they're too

conflict avoidant, they're not going to ask the right questions. They're not going to be a good board member. And in terms of like the worst behaviorism, I'm not going to call anybody out. But I think generally like the pattern recognition for for bad behavior is folks who aren't reading the board materials. They're not paying attention to the industry. But then they come in with really strongly formed opinions and aren't willing to change them, you know, in spite of what the founder saying, it's lower EQ, you know, combined with not doing the work. And so you want an investor who's, you know, not on 55 boards. They're going to have the time for you because if they don't have time, they're not going to be informed. Yeah, being informed and being able to have that

intelligent conversation, man, being a, you know, dictating to the founders. I see this sometimes on boards where people think they know how to run the company better than the founder. And that, listen, You do get some signaling when you're doing this for a while and you can see some, you know, potholes ahead and, you know, turns to slow down on and be careful with and be thoughtful about. But, man, you can't, no founder is looking for a boss. They're looking for somebody who's that guide on the side who can really have a good conversation with them, right? And, man, I do see that archetype of somebody who's ill-informed, underprepared, but then have

these incredibly strong opinions. And you're like, what is that exactly based on, like, someone? company you founded 20 years ago or some, you know, incredible investment you had five years ago. Like, what about this moment, right? Like, we're in this moment with this company and this management team. Like, it's first range. But it is an archetype, huh? Yeah.

I mean, I think, you know, the meme out there in founder land is that that's 75% of VCs. In my experience, it's not. Like, at least with the quality of companies I've been privileged enough to work with, it's pretty rare to see that. Most board members are very engaged, work really hard for their founders. But, you know, it only takes one bad board member to really poison the chemistry of a room.

And so I think being really choosy about who you bring on to your board is a really, really important thing. Otherwise, you know, you can derail a really high-quality, eight-person conversation with one person who doesn't know what they're talking about. I think in the cognitive bias list, it's salience bias, tendency to focus on items that are more prominent or emotionally striking and ignore ones that are unremarkable, right?

Like sometimes people just will look at venture capitalists or founders and they see, I don't know, Adam Newman do something walking around in bare feet and they think, oh, well, all founders are working around in bare feet and smoking weed on G650s and, oh, all Vs. are doing this bad behavior and replacing founders. And it's like, no, you're just, you're remembering those because they're so memorable. What we do in building companies is much more pragmatic. It's tactical, it's strategic. It's a lot of blocking and tackling and just showing up every day, every week, every month, month after month, quarter after quarter, year after year, and doing the work. And I think that is, I think, a good place to end when you said, like, doing the work and

being prepared. Come with a prepared mind. Everybody come with a prepared mind to that board meeting and to that business and that opportunity. Listen, great first appearance here on this week in startups. And I would love to have you back on again, continued success. And we'll see you all later. Have a great day. Thank you. All right, that's it for today, folks.

We will see you back here tomorrow. Wednesday, thanks to producer Rachel for filling in for Jason. Look out. Thanks for having me on. Your job is safe from AI, but is Jason's job safe from you? Just kidding. Just kidding, boss. tomorrow we have another episode of Angel.

This season of Angel is like beyond fascinating. Yet another three cycle investor, Devin Perrek of Insight, is going to be coming on tomorrow with some lessons learned. You do not want to miss it. We'll see you then. Awesome. Bye.

Bye guys.