Henrik Torstensson's Weblog

Breakit continues to write about ‘dirty term sheets’ and Julia Dalin argues against preference shares when raising seed capital. For most startups I think only accepting common shares at seed will give a worse overall deal for founders, as they will get a lower valuation and higher dilution.

The reason is that terms have value. If you change terms, you are likely to see an impact on valuation. And of all the terms that can be negotiated, negotiating for common shares instead of a 1x non-participating liquidation preference doesn’t seem to give the most value for money when raising equity capital.

Frank Slootman of Snowflake and previously ServiceNow and Data Domain on leadership, management, career, tempo and more. Obviously a very high intensity approach to building and running a company, but thoughts anyone can learn from.

One quote that stuck with me. “Okay is terrible. You want great, you want fantastic, you want wow. Everybody is just excited about it.”

Given how important momentum is in company-building excitement is very valuable in creating that and setting high standards gets people excited.

Early-stage venture capital is the best (with the exception of being able to combine high profits with high growth or having a large personal fortune) way to finance ambitious technology startups. Founders can, when the company is young and unproven, raise significant amounts of capital (€1+ million) at good valuations (about 20 % ownership dilution) with limited personal liability if things don’t work out. That combination is normally not available from other financing sources.

The drawback is that venture capital funds expect startups to try to become very large in a short period of time, which brings some risks compared to slower growth. What very large is exactly can be discussed, but the lower level is somewhere around €100 million in annual sales within 10 years while still growing at least 30 % per year.

This is only one of the aspects of venture capital that founders should try and understand, as other financing venues might be better.

Julia Delin of SSE Ventures is interviewed by Tech Hustler podcast and talks about what venture capitalists are looking for. Each firm will look for something slightly different, but for anyone trying to get an initial understanding of venture capitalists it is a very good listen.

Related to what venture investors look for generally is how it is specifically described in term sheets containing an offer to invest. Pale Blue Dot has shared their term sheet with an explanation of and reason for the terms. Good read and I think it captures a lot around terms.

Every year Forbes ranks the most successful tech investors at venture funds on the Midas List. On the global Midas List for 2023 there is one Nordic investor; Fredrik Cassel of Creandum at place 47.

While rankings are always subjective, I believe the Midas List’s overall approach is quite fair as they look for the “investors have earned the strongest returns – that is, their portfolio companies have gone public, had an M&A transaction or raised rounds of financing at an increased valuation.” 

More specifically they evaluate by:

“Investors are evaluated based on their portfolio companies that have gone public or been acquired for at least $200 million over the last five years ($50 million for Midas Seed), or that are private and valued at $400 million or more, also over the last five years ($100 million for Midas Seed). The five-year lookback period helps quantify the success of a VC by rewarding recent bets. For example, a company with a massive IPO could help propel an investor onto the list, but that investment is eligible for consideration for only five years after the exit and at a decreased rate each year during that five-year period. After the five years, it falls out of consideration and allows opportunities for newer investments to make an impact. This means that investors must make continuous successful bets to maintain their standing on the list. Securing a spot on Midas is a reflection of good investment decisions over a long period.”

A friend and I scrolled through the top 110-120 downloaded apps in the Swedish iOS App Store a few days ago. Among the 120 we found big social media services, the apps of established companies (banks etc), companion apps for physical services (delivery, parking, food delivery) and a few simpler/wrapper AI apps. What I missed, with the exception of BeReal, was new consumer mobile apps that are or could have been venture capital backed.

This supported my sense that there hasn’t been many new consumer startups that have reached scale in the last few years. I think that is partly due to the timing of founders building new products, partly to the fact that established companies (Instagram, Snap, TikTok et al) have executed well, and partly due to the environment for scaling consumer apps have become worse.

I believe a great environment to scale a consumer product (and just building a great product is really hard) has at least three components:

1. a new, popular platform (to weaken incumbents’ position)
2. open organic distribution channels (to enable low cost user acquisition)
3. data-driven, paid advertising channels (where startups can compete with established companies)

Over the last couple of years each of the components have become less friendly to digital consumer startups. There has mainly been one big improvement in the environment, the fact that consumers have become more used to paying for for digital services.

I’m eagerly waiting for the world to change and ignite a new era of digital consumer startups. Currently my guess is that AI can be used to create great new products, rather than the environment becoming more friendly to consumer startups.

The story of TikTok is fascinating on many levels. One aspect is how the politics is causing problem for venture investors to convert the paper profits on the shares they hold into cash.

A leaked paper from Google says that open source models are catching up with Google and OpenAI, and will overtake them. If the author is right the future of AI could be more diverse, more chaotic and less centralized then I had the sense it was likely to end up.

The model that kicked off a lot of the recent open source creativity, LLaMA, was developed by Meta, so the foundational work was likely still costly. But with LLaMA in the public domain, normal developers can build things that run on cheap hardware. Making the area even more exciting.

Waymo is expanding the coverage of its driverless taxis in San Francisco and Phoenix. Driverless cars seem to be an area that combines actual technical progress over the last 10-15 years with still a fair bit of hype, making it hard to know how far along the technology really is from a mass-market perspecitve.

It might be a long-time until we have driverless cars everywhere, but driverless cars seem destined to be me in more and more places over the next few years. The time it will take to have driverless cars everywhere will likely be as much about regulation as it will be about technology.

That correlation and causation are not the same thing is good to remember when reading Sifted’s article about senior leadership hiring practices of unicorns vs non-unicorns under the headline “Want to become a unicorn? Expand your leadership team”.

Unicorns should be larger companies than non-unicorns and thus would require more senior leadership (and managers and individual contributors) than smaller non-unicorns. In addition a unicorn would likely have more money and a more aggressive growth and hiring plans to add leadership roles.

While I think the headline completely misses the point, the data provided in the article can be used to benchmark the size of a startup’s leadership team for the first five years, which is helpful.

Invest Like The Best interviews Jeremy Levine, Kent Bennett and Brian Feinstein of Bessemer Venture Partners. Interesting listen on how to run a venture/investment firm (for nerds) and how the three partners think about what to invest in and what they like (radical product advantages + wild capital efficiency + ‘path to market leadership’).