2020 + 2021: Most “valuations relative to traction” were crazy

2022 + 2023: Bridge rounds helped startups grow into their valuations

Now + 2024: Most “valuations relative to traction” will be reasonable

But some startups can raise at high multiples due to momentum:🧵👇 Every talented Investor eventually comes to the realization that Momentum is one of the most powerful forces in the growth (and therefore valuation) of a Startup.

Momentum is a very simple Physics concept that ports nicely over to the business world.

AI is undeniably going to change the world but 99% of AI companies will fizzle and die.

I have real, actionable advice about how to build durable AI companies but understanding my perspective requires a primer on how I think about AI.

Trust me, you’ll like it: 🧵👇 Artificial Intelligence (AI) has become the focus of the investing community and business world over the past 12-24 months but it isn’t a new discipline. Dating back to the 1950s, AI is focused on creating machines capable of mimicking human intelligence.

Startup employees are under immense stress right now. They've been told to do more with less and that bad things will happen if commitments are missed.

Stress can't be eliminated but great Leaders take steps that can help:🧵👇 Edit the corporate agenda

A common characteristic of ambitious Leaders is that they set bold agendas and expect their teams to deliver against stratospheric goals.

The energy and feeling of accomplishment that comes with steep forward progress can be addictive.

You’re probably familiar with SAFE notes if you’re an early stage Founder or Investor.

But did you know that later stage Investors and Founders are also using SAFE notes?

And have you figured out that later stage SAFEs can create real downstream problems for a startup? 🧵👇 Background

A SAFE note is a “Simple Agreement for Future Equity” and it was created by Y Combinator in 2013. It was designed to reduce the cost and complexity of the legal paperwork associated with equity deals for very young companies.

Board meetings can be incredibly awkward when the CEO and one or more of the company’s Board members don’t see eye to eye.

When I see this happening, I frequently play the role of “peacekeeper” and start by reminding both parties of a well-known parable: A man in a hot air balloon is lost. He sees a man on the ground and reduces height to speak to him.

"Excuse me, can you tell me where I am?"

"You’re in a hot air balloon thirty feet above this field," comes the reply.

The startup ecosystem is finally seeing good companies come to market again.

But after a year of focusing on costs and runway, some startups aren’t exciting anymore.

Many startups that try to raise will hear: “We want more proof!”

Here’s what you need to know about proof:🧵👇 Investors aren’t always good at sharing honest feedback with Founders. It’s easier to pass with generic decline reasons than to outline “what would need to be true” for a “no” to become a “yes”.

And the #1 decline reason Founders hear is “we want more proof”.

At a startup, stock options can be lucrative depending on the success of the company.

With valuations down, Founders are asking to reprice historical options.

Here’s what it means, why it’s important and when it’s appropriate. Cash governs almost everything that a startup does. It impacts the pace of investment in product improvements. It impacts the amount a company can invest in growth. And it impacts how much runway a company has before it needs to raise more capital.

MANY startups are living with bad decisions they made when cheap capital flowed freely.

Massive value destruction was driven by Founders playing Hungry Hungry Hippo, trying to accumulate as much revenue as possible.

A few thoughts on how to learn from their mistakes:🧵👇 Business 101

The first goal of a startup is to manufacture a product at a lower cost than it can be sold for.

The second goal is to scale enough to overcome G&A costs.

The third goal is to generate profit by capturing additional market share with positive operating margins.

I’ve mentored many Founders stuck in “pre-launch” mode. The most common advice they’re given is “just start”.

Action is important, but here are 5 additional pieces of advice “pre-launch” Founders can benefit from: KNOW WHEN TO START BUILDING

It’s important to know when you’re ready to hire people and start building product. Action orientation is critical but sometimes the best next step is to do more research.

Acting prematurely can burn precious cash with little to show for it.

Startups that have clean narratives and “up-and-to-the-right” results can generally raise capital with minimal friction.

But a fundraise takes on an entirely different form when a startup has “asterisks” that complicate the story.

Unfortunately, asterisks are now the norm!🧵👇 Building a startup isn’t an overnight task.

On day 1, a startup is an idea backed by some combination of research, intuition, experience and a huge number of assumptions.

The goal of a Founder is to learn every day and adjust the business based on these learnings.

There’s a lot of mis-information being shared about VC performance and how it translates into LP returns.

There’s also a lack of understanding about how the VC ecosystem broke the LP ecosystem over the past few years and why this matters A LOT.

Here’s what’s going on:🧵👇 Most VC funds have a 3-pronged value proposition: Capital, Advice and Support.

But while a VC fund controls the advice and support they give, they don’t own the capital that buys them the right to invest and a seat at the table.

VC Funds have to source the capital they deploy.

It used to be common for a startup to de-risk in distinct phases that aligned with capital raises.

Discipline disappeared and the number of rounds a typical startup raised exploded into “alphabet soup”.

The market is returning to “normal”. Here’s what you need to know: 🧵👇 Every early-stage startup asserts five main statements: A problem statement, a solution statement, a go-to-market-motion statement, a financial statement and a team statement.

Founders raise and deploy capital to generate proof or anti-proof about each of these statements.

VCs didn’t know what fintech was until giants emerged like Stripe, Credit Karma and NuBank. Then every VC wanted fintech exposure.

But these “fintech tourists” have exited the building.

What follows is advice 8 VCs who stayed the course are giving their fintech companies.🧵👇 @mattcharris – Bain Capital

Have redundant bank infrastructure. If you are building on top of a bank or other FI, or have critical dependencies, you need backups and backups to your backups. The reverberations of SVB aren’t done yet and strange things are still afoot.

Over 100 startups in our portfolio have refactored their operating plans in the past year.

Some have become profitable with as little as $5MM of revenue while others have found ways to do more with less.

Can you guess the four most common levers they pulled?🧵👇 Focus

Bill Hewlett (the Founder of HP) once said: “More startups die of indigestion than starvation.”

The truth is that great Founders are ambitious. Every day they try to close the gap between where their startup is and their vision for what it could become.

Memecoin trading is back with marketcaps for select coins exploding by 5X, 10X and sometimes even 100X+.

Over the past few days I talked to traders who hold anywhere from $500 to $20MM+ of memecoins.

Their views are eye opening! 🧵👇 IT’S A GAME

The concept that “It's a game” came up frequently so I described the game to get reactions. My framing:

The game starts with a piece of paper with a line drawn down the middle. On the left would be names and on the right would be numbers associated with each name.

A disturbing change to society over the past few decades is the number of people addicted to “unearned dopamine”.

Having spent countless hours with high stakes poker players and professional day-traders, I’ve seen the fallout. It can be ugly!

A few thoughts:🧵👇 Let’s start with the basics.

Dopamine is a neurotransmitter that’s used by your nervous system to send messages between nerve cells.

Specifically, dopamine plays a role in how we feel pleasure which is why it’s known as the “feel-good neurotransmitter”.

The biggest fallacy in the Startup world is to believe that the entry price for a great investment is irrelevant.

While great investments generate great returns, being indifferent to price is a function of sloppy thinking.

A useful mental model that great Investors use:🧵👇 A great Investor spots investments that have attractive risk/return characteristics.

They know that investing is about taking on risk and then getting paid if that risk doesn’t materialize.

They also know that when risk materializes their investment could become impaired.

There’s a major structural flaw in how the VC ecosystem works that we don’t talk about enough.

It’s a flaw that creates confusion and bad advice for Founders.

And it’s a flaw that makes no sense when you dissect it. 🧵👇 Building a startup isn’t an overnight task. A successful startup can take years to find product market fit and then many more years to scale and become a market leader. The journey takes time.

But the journey also takes money.

And the journey is funded one milestone at a time.

People constantly wonder why the US has so many Banks compared to other countries!

Are you wondering if the US system makes sense?

Do you want to know where it's heading?

Here's some history, charts, and thoughts: 🧵👇 Any observer of the US Banking system will quickly realize that the US is an anomaly on the global scene with over 4,000 Banks and another 5,000 Credit Unions.

The “why” behind this divergence is rooted in the history of our Banking system.

SVB’s biggest mistake was creating a balance sheet that wasn’t resilient in a rising rate environment.

Correctly calculating the Beta of their deposits would have led them to construct a short duration investment portfolio.

A primer on Deposit Beta and Deposit Stability:🧵👇 What is Deposit Beta?

Deposit Beta measures the change in the cost of a Bank’s interest-bearing deposits relative to the change in the benchmark interest rate.

In layman’s terms, it calculates how sticky deposits are when rates rise.

What Banks strive for is low Beta.

Every business has a core function. Some businesses make athletic shoes while others make wide screen televisions.

What’s become clear over the past week is that many people don’t understand what Banks actually do.

A simplified explanation if you're interested:🧵👇 Everyone knows Banks safely store and allow access to their money at-will.

They store it. They protect it. You can claim it. You can move it.

Somehow, depositors don’t pay for these services. In fact, they expect to get paid for depositing their money with a Bank (interest).