I advise startups on how to prepare for the coming hard times. I interview a B2B whiz kid. I introduce you to my wonderful, world-conquering partner Lauri. Plus, 8 life lessons from the founder and CEO of Zoom.
BY ashu garg
Let’s start with some good news. A recent report from the National Foundation for American Policy found that over half of the startups in the U.S. that are valued at $1B or more have been founded by immigrants.
The report also identified 10 entrepreneurs who founded two or more unicorns. I was thrilled to see that three of those founders (Mohit Aron, Ashutosh Garg, and Ion Stoica) are FC founders. I and my partners at Foundation Capital are proud to have partnered with such exceptional, best-of-the-best entrepreneurs.
Now for the other kind of news… Over the last month, I’ve spoken with several public-market investors, in an effort to better grasp the economic moment. Based on these conversations, my current (humble) opinion is that heightened inflation will likely persist for several years (4-5% a year for the next three to four years, would be my guess). In an attempt to bring inflation under control, the Federal Reserve will continue to raise interest rates, as it just did earlier this week. This will likely result in a recession (or perhaps one has already arrived, depending on what the terms of the debate are). The stock market will continue to be volatile as it tries to price in the impact to earnings of sustained wage inflation and a recession.
So, what are the implications for software companies? Well, in the near term, I think they should expect, and prepare for, a slowdown in demand as G2000 companies adjust their cost base in response to recessionary conditions. As illustration, Goldman Sachs tracks a predictive index of enterprise spend, the Enterprise Activity Index (“EAI”); the EAI recorded a steep decline in June, and Goldman now predicts a deep recession in enterprise capital spending in the coming months. (Hat tip to my friend Karthik Subramanian at Goldman.)
But cheer up, because the long-term prospects are bright enough to charge your Tesla to full. Just as Covid escalated the need for software, so too will the current economic exigencies. The focus will be different, however. Whereas the pandemic drove demand for tools that enable remote work and digital-customer experiences, wage inflation will call for software that increases operational efficiency and reduces labor costs. So after, say, a two-to-three-quarter pause in demand, G2000 companies will become even more avid technology buyers.
The challenge for all software startups, therefore, is to make preparations to weather a three year period of economic uncertainty by reexamining their cost structure and customer-value proposition. Keep in mind that despite a possible decline in enterprise spend, enterprises will still be devoting $800B+ to software. So there’s plenty of budget to be had if a startup can align with enterprise priorities.
Furthermore, capital-efficient growth matters more than ever. In the last B2BaCEO newsletter, I introduced a new metric that I call the “Golden Velocity,” for calculating whether a business has a clear path to positive free cash flow. The idea is that current revenue multiples highly correlate to the sum of LTM Growth + FCF Margin. Companies should aim for a Golden Velocity of 50+, with best-in-class companies approaching 100.
Every company’s situation will vary, obviously, but my directional advice is as follows:
None of the above will be easy or fun, and individuals will be adversely affected; but hopefully it will serve the greater good and benefit far more people over the long run. It’s an undeniably choppy period, but for leaders who act responsibly and navigate deftly through it, the opportunities will be even more enormous. Who knows — maybe one of you reading this will make it onto a future top-ten list of founders! 😉
Christian is a fascinating fellow. He dropped out of high school at 16 to run his first software company, which he scaled to $5 million in revenue. Then, he started his second company, Paddle, when he was 18 and, in the ten years since, he’s scaled it to a unicorn with over $55M in revenue.
In this wide-ranging conversation, recorded in person at Paddle’s offices in London, Christian and I cover everything from his brief and wondrous career, to how to scale an enterprise company when you’re starting as a complete novice, to what the current economic environment means for a “growth at all costs” mentality.
Where are you from originally? I grew up in Champaign-Urbana, Illinois (home of the University of Illinois), which is a few hours south of Chicago. My parents separated when I was young, so I split time between Manhattan, where my dad lived and worked, and my small hometown in Illinois, surrounded by cornfields, where I lived with my mom. In a sense, I was a very early adopter of hybrid living ;-). I do think the juxtaposition of circumstances and a travel-heavy childhood was helpful in shaping me into someone who can connect with a lot of very different people.
What did you want to be when you grew up? I wanted to be the first person to win an Olympic gold medal in gymnastics in the Summer Games and figure skating in the Winter Games. After that, I imagined I’d go on to receive a joint economics Ph.D. and J.D. and eventually be appointed to the Supreme Court. My mother is a lawyer and my father is an economist, so it seemed like the surest way to win an argument in a house with strong logicians.
My gymnastics career didn’t last long — no amount of hard work could make up for my lack of innate talent for the sport. My figure skating career lasted much longer, but ended abruptly due to injury. In my early professional years, I felt ill suited for the pace of academic life — but will still go to great lengths to win an argument.
What do you invest in? I am drawn to technologies that create value by enabling people to do their best work or work that wouldn’t have been possible or was done less efficiently before. I’ve spent most of my career building and leading enterprise and marketplace product teams. So while I invest across the enterprise stack, I have a soft spot for exceptional products and teams. I’m currently spending a lot of time exploring tools that support developer productivity — where talent demand has vastly outstripped supply — and other solutions needed to operate in the future of hybrid work.
What’s the coolest technology experience you’ve ever had? One early memory stands out to me. One time in elementary school, I traveled to the American Convention for the Blind with Linda, a close family friend who is blind but looked after me as my nanny from the time I was two weeks old. Walking the exhibit hall with Linda, I saw “smart devices” for the first time: thermometers, traffic lights, and alarm clocks that spoke to people. Readers were on display that would convert any text to speech in real time. It felt like science fiction come to life for me. I had a frontrow seat to technology’s ability to foster inclusion and access.
One word to describe the kind of founders you look for. I am going to cheat and say that three words come to mind: bias towards action. Great founders accept that some missteps will happen throughout the startup journey, but they’ll learn from them and move forward. Building a business is always a race against the clock in some sense — cash doesn’t last forever, competition doesn’t sit still, and markets and technology are always changing. Speed + action is the only way to learn and grow fast enough to beat the clock.
Great founders accept that some missteps will happen throughout the startup journey, but they’ll learn from them and move forward. Building a business is always a race against the clock in some sense — cash doesn’t last forever, competition doesn’t sit still, and markets and technology are always changing. Speed + action is the only way to learn and grow fast enough to beat the clock.Lauri moore, partner at foundation capital
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In an uplifting conversation, Zoom founder and CEO Eric Yuan tells my partner Joanne about how he came to America and his early days as a newcomer to Silicon Valley. They also delve into Zoom’s origins and what it took for Eric to get it off the ground and turn it into a success. And they discuss what qualities immigrant founders share in common, what Eric loves about Silicon Valley and this country, and his relationship with his father. Perhaps more than any other CEO, Eric Yuan embodies the American ideal of the “pursuit of happiness,” which maybe explains why reading this left me so happy.
Now, to change the channel. Here’s something from Foundation Capital’s fintech team. If you want an 18-minute crash course on neobanks, my fintech partner Zach Noorani explains it all on this podcast. Neobanks: the what, the why, and the what happens next.
published on 06.29.2022
Written by Ashu Garg