Brad Feld: what founders need to know about recent changes in VC deal terms

In our interview, the long-time investor talks about the key updates to his classic book

Extra Crunch offers members the opportunity to tune into conference calls led and moderated by the TechCrunch writers you read every day. This week, TechCrunch’s Connie Loizos hopped on the line with prominent investor, entrepreneur, thought leader, and Techstars co-founder Brad Feld to chat about the latest edition of his book “Venture Deals,” his advice to founders and investors, and his take on hot-button issues of the day.

In their conversation, Brad and Connie discuss the need to know information when it comes to preparing for, structuring and executing venture deals, and how that information has changed over the past several decades. Feld walks through the major topics that have been added in the latest edition of the book, such as how to handle venture debt, along with tactical attributes that aren’t currently in the book, such as secondary market trading.

Brad also shares his take on the most effective fundraising tactics for founders, and which common pieces of advice might be overblown.

Brad Feld: “I think the approach to the amount of money that you’re raising is both nuanced and evolves based on what financing round you’re at. So if you’re in an early round, some of the characteristics are different than if you’re in a later round. But I think the general truism… that I like to use when people say, ‘Well, how much money should I raise?’

I start with two variables and you the entrepreneur get to define those two variables. The two variables are: the amount of money you raise and what getting to the next level means. The amount of money you should raise is the amount of money that you need to get your business to the next level. There are lots of different ways to define what next level is and by forcing yourself internally to define next level and then define what you need in terms of capital to get to that next level… when you’re raising that first round of financing or even the second or third round of financing, it helps you size rationally what you need versus reactively to whatever the market characteristics are.

I actually encourage entrepreneurs to raise the least amount of money they need to get to the next level, or at least that’s the number that they go out to market with. Not a range, not a big number because you’re trying to drive some kind of valuation characteristic off a big number, but the amount of money that you actually think you need to get to the next level. Then if you can be oversubscribed, that’s an awesome situation.”

Feld and Connie dive deeper into current issues in the startup and venture landscape, including Brad’s take on the impact of the SoftBank Vision Fund, what went down internally and externally at both WeWork and Uber, as well as how boards, executives and founders can manage cult of personality and static company cultures.

For access to the full transcription and the call audio — and for the opportunity to participate in future conference calls — become a member of Extra Crunch. Learn more and try it for free. 

Connie Loizos: I think the last time I saw you in person was out here in San Francisco at an event I was hosting and that was maybe two years ago?

Brad Feld: Yup, that’s right. That was at the Autodesk Lab if I remember correctly.

Loizos: Yes. It’s good to hear your voice, and thank you for joining us on this call. We have a lot of readers who are big fans of yours that are on the line and are eager to learn about your book “Venture Deals” and your broader thoughts about the current state of the market. That said — and I know you only have so much time — let’s dive first into the book. So Wiley, your publisher has just put out the fourth edition of this book “Venture Deals,” and it’s really easy to appreciate why. I was looking through it and it’s so incredibly instructive how venture deals come together and possible pitfalls to avoid. And given there are always new entrepreneurs emerging, it continues to be highly relevant.

How do you go about updating a book like this, given that some things change and some things stay the same?

Feld: It’s a fun process, because it allows me and my partner Jason Mendelson, who’s also my co-author, to reflect whenever we do a new edition on what’s changed in what is generally the last two or three years since the previous edition. So we wrote a first edition in 2011. That’s when we first came out with the book.

The book was built off of a series of blog posts that I wrote in 2004 and 2005. Only about 10% of the book is the blog posts, and it’s not just the blog post. That was just the kernel that then turned into a book. And you know, we wrote the book from a frame of reference of 2011 and venture funding and entrepreneurship in that timeframe. And if you think about now in 2019, almost 2020, what’s happened between now and the last decade has been remarkable. And if you then go back even further into the mid-2000s, entrepreneurship and venture capital and technology as far as the broader world was dead on its back. I mean, it was really one of those things where post-internet bubble even in 2004, 2005, there was a lot of stuff going on, but it was really out of favor. And in 2011, while it doesn’t feel like that long ago, in some ways it was a long time ago relative to not just venture capital and entrepreneurship, but the overall arc of it globally, and the education around it, the availability of it, the notion of where it could happen. And so as we’ve done each of the editions, we’ve looked at the book and we’ve done three things. One is we essentially do another proofread of the book. And it’s amazing each time you find things that you didn’t explain very well in the previous edition that we clean up, and some of them are things that readers have sent us notes about or that we’ve written about.

Sometimes it’s just as simple as reading a sentence or a paragraph and saying, “Yeah, it doesn’t really make sense.” The second thing we do is we always add at least two chapters to the book. So in the fourth edition, the two new chapters are on venture debt and we worked with SVB on it who helped us with the chapter and it’s a very extensive explanation of how venture debt works. And as far as I know, it’s really the only comprehensive view of it that sort of talks through all of it. The other chapter we added, we did with a friend of ours, Rex Golding, who runs a boutique investment bank called Golding Partners, about how to prepare for selling your company and how to work with an investment banker. So, you know, we’re sort of adding in things that we think are contemporarily relevant that are very misunderstood — or not well-understood is maybe a better way of putting it — by entrepreneurs. Occasionally it might be understood well by VCs, lawyers, or other people around the system. But that information asymmetry in the system is significant and could be demystified. The last edition, the third edition for example, we added a section on other sources of financing with a specific focus on crowdfunding. And in that, there was a lot of misuse of the phrase crowdfunding, whether it was product-based or equity-based crowdfunding. So we went through equity-based crowdfunding, via the Jobs Act in some detail, but also product-based crowdfunding, a la Kickstarter and Indiegogo.

So those are the dynamics where we’re fixing a bunch of old stuff and just cleaning up the writing from stuff that we continue to find. We try to introduce a couple of new chapters on things that we think there’s a lot of contemporary relevance, or where there is an information asymmetry. So it’ll be additive in a significant way. And then the last thing we do is we sort of reflect on the whole book and we’ve often reordered sections of it to make them a little more clear. So that’s a little different than the first thing where it’s sort of more of a top-down view versus a bottoms-up view.

Loizos: Right. Well, it’s a great reminder of how much things change and how quickly. Even the venture debt piece, we’ve obviously seen venture debt over the years, but it’s interesting that you felt that it was time to zoom in on it a little bit. Because I do think people don’t understand venture debt as well as they should. You write in this book that, basically it means you’re insolvent. The one thing I don’t think you covered here is the secondary market. Is that something that you considered? The rise of the secondary market and maybe when to sell, how to think about that? Is that something that you might cover in the future?

Feld: That’s a really good catch. So let me use the arc of time to try to explain that and there’s a very simple answer to a secondary market. That’s a topic I expect we would have on the list for the next addition a couple of years from now and what will happen between now and then we’ll write on it publicly, whether it’s on the website or the website or some combination of it. Just our thoughts about the secondary market as a topic. And it’s one of the topics that we have and we considered when thinking of which topics to add to this book.

Here’s a historical example. In the first edition, we didn’t have a chapter on convertible debt and we talked about it, but we didn’t go through it in a lot of detail. It was sort of a mention. In 2011, there were some convertible debt transactions happening at the earlier stages. But there was still sort of the endless debate between should you do convertible debt at a seed round or should you do an equity priced round? And the idea of a safe hadn’t been created yet and there wasn’t really a standard approach to convertible debt. And on top of all of that, nobody was talking about the downside of if it’s not structured correctly. So in between the first and the second edition, Jason and I wrote I think about a dozen or 15 blog posts on convertible debt. And those blog posts were all on, what at the time was a website that we called “Ask the VC” that’s now called In that, we did the same thing we did with a term sheet — where we deconstructed a term sheet, section by section, and then started talking about a lot of other things around not just the term sheet, but how to think about economic terms on the term sheet versus the control terms, versus a bunch of terms that don’t actually really matter but that often get used against entrepreneurs in the negotiation if they’re not paying attention.

We did the same thing with convertible debt and in the second edition we ended up having… not republishing the blog post, but we put together a chapter that I think is a very comprehensive view from an entrepreneur’s perspective on how to think about convertible debt. My guess is a secondary sale was one of the categories that we decided we’d leave for another edition. But we’re not going to wait from a content perspective, we’ll go ahead and write stuff about that publicly over the next 12 to 24 months. It’s interesting also, by the way, for anybody that is on the line that’s been involved selling secondary shares in a company that they were a founder or an employee of, there was very active non-market activity around Facebook pre-IPO that started to emerge.

There were a number of companies then that very actively tried to shut down or prevent secondary market activity from happening. At the time that there were some companies like SecondMarket and Shares Post and a few others that tried to create actual marketplaces. On top of that, you then had this phenomenon of a handful of funds that were created to help employees get liquidity around secondary market activity, whether it was buying around companies’ restrictions, in some cases probably against the rights and the agreements, but creating synthetic transactions whether they were with options or stock so that there was a fair amount of that activity. And then there started to become the VC-led secondary activity in rounds that became more of a norm, especially when rounds were oversubscribed and rounds started to become multi-hundred million dollar rounds where there’d be a secondary purchase.

So there’s a lot of stuff that’s involved. Interestingly some of the dynamics, whether they’re tax-compensatory issues around how the transactions are done, pricing, whether there is an external actor participant or a non-external participant, and how the pricing translates into compensatory, which translates into tax. Many of those things are not well understood by not just companies and company management, but also the folks selling their secondary stock. And there are some very specific things that if you don’t do them the right way, puts you at a disadvantage from a tax perspective, and from a company perspective can create some downstream liabilities that unclear whether they’re actually material liabilities, whether the IRS or the SEC will ever enforce them. But it’s the same thing along the whole spectrum. There are a lot of edge-case stuff that in our industry just gets ignored.

And anybody who lived through the internet bubble and got creamed with AMT because they’d exercised options, pay the AMT, then had public stock that lost a whole bunch of value but they couldn’t get back to the place with the tax bill that they had, now realize that when things are good, none of these things matter that much. But when things are reversed, some of them matter a lot. Without being negative, we try to incorporate those things into the book and to the way we talk about it just so people have a full perspective of it.

Loizos: It’s so great and you’re right. I think there’s such a dearth of information around secondary as it has exploded. People are getting pitched constantly on selling their shares and I don’t think there’s nearly a thorough enough understanding of what’s going on. In fact, I just talked to a startup recently that’s trying to center its entire business on educating founders about these tax issues while also being a matchmaker to some of the secondary players.

It’s one of the only things you don’t cover in this book, which again to the people listening, if you have not bought this book and you’re a founder and you’re trying to figure out how to go about fundraising, you have to get it because it covers everything and very comprehensively in a very readable way. There are so many hacks in this book, both big and small. For example, a very small layer. You warn founders to never tell VCs that they’re testing the water when it comes to fundraising because it turns the VCs off and signals that a founder hasn’t had much success.

I thought that was sort of particularly interesting coming from you because you’re someone who seems to be not a fan of bullshit. You’re a straight shooter, but even still, your advice, which I think is probably right on, is that you can’t be too transparent. You’ve got to put on some armor when you’re out there fundraising or you won’t stand a chance. Am I interpreting that correctly?

Feld: Yeah, I think it’s a good interpretation. I really personally think that people are much more effective when they’re fundraising, when they have clarity about what they’re doing and they’re direct with the prospective investors that they’re talking to about what they’re doing, regardless of the stage and regardless of the business.

When I started investing in the mid-90s after having been an entrepreneur, one of the hardest things that I wrestled with as an entrepreneur, now investor, that I watched over and over again — it just may be absolutely batshit crazy — was the inability of VCs to tell entrepreneurs, “I’m not interested.” Even to this day, people say to me, “Well, how do you say no to people without giving up your future ability to have interactions with them or giving up your option value of interacting with them or offending them?” The answer is like, “Hey, what you’re doing is neat but it’s not for me.” Or, “It’s interesting what you’re doing but I’m not interested.” Or simply when somebody asks you a yes-or-no question, be polite, engage with them, but say, “No,” or, “I’m not interested,” just as an example.

When I flip it around as an entrepreneur and my view is if you’re testing the waters, what you’re doing is you’re not giving the person on the other side a chance to be clear and direct with you because, well, if you’re testing the waters, I’ll have a conversation with you. You’re actually trying to fundraise. You’re trying to get somebody either into a process with you or not. You actually want them to say no very quickly if what you’re doing is not something they’re interested in so you can spend all of your time on the people who actually have some interest.

There’s this endless set of cliches or language that I think both entrepreneurs and investors promulgate around this notion of a financing. I go back and I say it in the book, I go back to what Yoda says, right? It’s do or do not. There is no try. You’re either financing or you’re raising a financing or you’re not. If you’re not raising a financing, but you want feedback from me about your business and about what you’re doing and you ask for that and I’m a VC who’s willing to engage with people and what you’re doing is interesting to me, I will engage with you.

If I’m a VC who doesn’t have any interest in engaging with people in that way, they’ll either blow you off or ignore you, and you’ll learn something about the investor through that approach. That’s very, very different than this in the middle mealy-mouthed, ‘maybe I’m raising money, maybe I’m not raising money’ kind of thing that I think doesn’t really get you anything on either end of the spectrum.

Loizos: Well that’s great. So founders, pay attention: don’t be wishy-washy when you’re out there. Also you discuss how to position in rounds. You say not to ask for a round that’s significantly larger than you need because it can put off investors. I think your example was specifically you don’t say you’re raising $1 million and then tell people you’ve got $250,000 of that secured because others might wait to see how you’re able to fill out that round. Your suggestion is raise what you need. In this case, maybe target half that amount, $500,000, and then once you’ve raised $400,000, you tell people you only have room for one or two more investors and it spurs them to action because they love being part of an oversubscribed round.

Again, it’s like a little bit of the fear of missing out, which unfortunately is an inevitable part of investing. I wonder how as a founder, you can use that to land that first big check?

Feld: Let’s separate it into a couple of different things. I love that you mentioned fear of missing out or FOMO, because my blog post this morning on is a JOMO. Do you know what JOMO is?

Loizos: I saw it, I loved it. The joy of missing out.

Feld: The joy of missing out and I revel in JOMO. I couldn’t care less about FOMO. It’s one of the reasons I live in Boulder, Colorado. It’s just a different frame of reference on things.

I think the approach to the amount of money that you’re raising, it is both nuanced and evolves based on what financing round you’re at. So if you’re in an early round, some of the characteristics are different than if you’re in a later round. But I think the general truism across all of it that is part of my own philosophy and I think is more helpful when you’re raising money if you’re an entrepreneur is… or a line that I like to use when people say, “Well, how much money should I raise?”

I start with you have two variables, and you the entrepreneur get to define those two variables. The two variables are: the amount of money you raise and what getting to the next level means. The amount of money you should raise is the amount of money that you need to get your business to the next level. There are lots of different ways to define what next level is and by forcing yourself internally to define next level and then define what you need in terms of capital to get to the next level, and then having mentors who can help calibrate you with that, people that are trusted, whether they’re existing investors or people that are other entrepreneurs. Again, when you’re raising that first round of financing or even the second or third round of financing, it helps you size rationally what you need versus reactively to whatever the market characteristics are.

I actually encourage entrepreneurs to raise the least amount of money they need to get to the next level, or at least that’s the number that they go out to market with. Not a range, not a big number because you’re trying to drive some kind of valuation characteristic off a big number, but the amount of money that you actually think you need to get to the next level. Then if you can be oversubscribed, that’s an awesome situation. If you want to raise $1 million bucks and you generate demand for $1 million and a half or $2 million bucks, that’s a good problem to have. If you go out to raise $1 million bucks and you only find $250,000, that’s a tough place to be because it’s going to be very hard in a lot of cases. In some cases, if you haven’t set it up so that you have $250,000 comes in and you have it rolling and it closes. The $250,000 says, “Great. I’m good for $250,000. Call me when you have your round come together.” “Well, how much of the round has to come together?” “Well, you have to have at least three-quarters of the round coming together before I’ll give you my $250,000.” That’s a lot tougher than if you set the expectations differently.

The other thing that happens, I think around this, is many good angel investors and seed investors are investing in people but they want to understand what the future view of what they’re investing in is.

One of the challenges, and I think this is going to happen more in the future and not less just because of the number of people investing and the amount of early-stage companies that get stuck, is early-stage investors are increasingly finding a phenomenon that happens over and over again. It’s not anything new and TechCrunch has written about it. There’s probably a calendar reminder to write about it about every nine months or something like that, but they give it different labels. Sometimes it’s a Series A crunch, sometimes it’s a Series B crunch. Sometimes it’s the C crunch, right? But you have this phenomena and it’s correct.

You have this phenomena where you have a mismatch between supply and demand at a certain stage. Usually what happens is you then have a wave of companies that can’t raise money to get to the next level. If there’s enough of that happening at the same time, you have some recalibration of behavior by the early-stage investors, in some cases slowing down, in other cases speeding up. It’s a complex system, right? It’s not a normative phenomenon.

From my perspective, giving advice from an entrepreneurial perspective to other entrepreneurs is control your financing, not based on what the market is telling you, but based on what you need and try to set up situations so that you are always in a position where the demand side of the equation for buying stock in your company is greater than the supply of stock you have to sell at any given time.

You’re in a position where you’re on the positive side of that imbalance. Maybe that’s the wrong way. It’s a battery analogy or an electronic analogy. You’re the thing where the imbalance is pulling, you’re the gravity that pulls the other side towards it. Money wants to come to you because there’s demand, because there’s scarcity on your side. I think a lot of entrepreneurs just don’t think about how to construct their businesses, so that’s the case. And again, when everything’s great you don’t find yourself caught in this part of whatever the dynamic is, everything’s fine.

If somebody says, “Well gosh, seed investing, hasn’t it been great for the last decade? Hasn’t it just been tons of supply and tons of demand and everything’s good?” Well no, actually walk around and look at all the startups that actually go out of business because they don’t raise another round. That’s part of the cycle. If you’re an entrepreneur, you shouldn’t plan for that. You should plan against it, figure out how to configure your capital structure so you don’t get into that problem.

By the way, that is an issue at later stages too, right? You raise a huge amount of money, you crank up your burn rate, lots of things look like they’re going well, you’ve got your growth rate going. Something changes and you need to go find some additional capital and all of a sudden the availability of capital is not as easy. The characteristics of your business in that moment of time are not gravity pulling capital towards you. All of a sudden, you could be in a really rough spot as an entrepreneur.

Loizos: It’s so tricky. Everything you’re saying makes perfect sense and it obviously gives you much more optionality on the backend. It’s a lot easier to sell your company if you haven’t raised a ton of capital. But I think the issue that founders have to overcome right now is that we have had this bull market for what, 11 or 12 years? And so everyone’s like, “Go raise now. Raise as much as you can before things close up.”

Feld: Well, it’s about a decade bull market and I think people can say, but here’s what I would respond to that. There are moments of time during the last decade that there were massive, just negative dislocations in the market. There are moments that people should remember. An example of a moment that people should remember is, I can’t remember whether it was 2013 or 2014, but there was a huge amount of late-stage capital from hedge funds that came piling into the market and all of a sudden hedge funds were doing late-stage financings. Some of it was crossover public, private hedge funds, but some of it was just random hedge funds nobody ever heard from before.

I’ll use B2B SaaS as the example because that’s the one that I remember viscerally. B2B SaaS companies in the public markets had bid up to eight times this year’s revenue or something. That was the benchmark for valuations. All of a sudden, that number went up a little bit because the hedge funds came in and the public markets looked great, everything was going good. A couple of B2B SaaS companies that were public had a bad quarter. The public markets on B2B SaaS companies, I don’t want to say they collapsed, but they reverted back to the norm and they reverted back to three or four times forward revenue which is a more normal multiple for the average. An outlier might’ve been eight to 12 times revenue.

Bloomberg, I believe, published an article. I think it was Bloomberg, that had a graph like in Q2 of the next year that showed the financings that happened by non-venture capital investors into private companies. It had gone some from something like 50 in Q2, and I think in Q1 of that year it was zero.

So everybody freaked out in the venture community and there was about a two-month period where Sequoia’s ‘RIP good times’ presentation made the rounds again and everybody was talking about how the end of the world was near and how you needed to cut heads and get ready for this and that. Then a year later, someone put out a graph that showed that the four X was back to eight X, and here’s what happened. Obviously, from that point forward B2B SaaS companies with certain characteristics, there’s a period of time where it was anchored in the public markets around the rule of 40 which was EBITDA plus a growth rate on a percentage basis. As long as you are greater than that, you’ve got a premium valuation.

All these dynamics move around. I say that as a long windup to the idea that as an entrepreneur, you can’t time the market and you can’t anticipate the market. Really what I think you should focus on is building a great business and using the resources that you have in a way that fits within the value system of the company you’re creating. Loading up on a bunch of capital prematurely because you’re afraid that there’s not going to be capital available in the future could work. But if it doesn’t work, your company’s done. There’s not a lot in between those two things. The tension that emerges when you have a change in characteristics of the market against the capital that you’ve raised is undeniable.

I’ll end with one other point, but the cliché on the venture side of the business is every time a large financing is done, the VCs say, “Now don’t overspend.” And the entrepreneurs say, “Don’t worry, we’ll be really disciplined. We’ve got a really good plan and we’re not going to overspend and we’ll accomplish our goals without overspending.” The cliché is that that’s said, and invariably the burn rate gets ahead of where it should be because the company has so much capital. No matter how disciplined of an entrepreneur you are, it’s not a truism. It doesn’t happen 100% of the time, but that’s why it’s a cliché, it happens over and over again.

So in some ways defining, even if you raise a large round using the theory of constraints and defining really clearly what your constraints are independent of the amount of capital you have, and I’ll reinforce it, especially if you’re an entrepreneur who says, “Ah yeah, whatever Feld. You’re full of shit. I’m not listening to that noise. I’m going to go raise as much money as I can.” Okay, fine. But apply the theory of constraints to your business and make sure that you’re allocating capital in a construct that actually is fueling the priorities of your business versus having this abundance of capital and then just spending it without that notion of saying, “I have constraints.”

Loizos: Right. I want to ask you, speaking of startups raising too much funding, you were involved with SoftBank a long time ago. Your company I think had raised some money from SoftBank and then you went to work for them. This way predates the Vision Fund, but you did know Masayoshi Son, I’m assuming. I’m just wondering, what do you think of how they’ve been investing their capital? It looks right now like their strategy has maybe not panned out so well, although things can change. I’m just wondering as an observer with some understanding of some of the thinking that goes on there, what your view is.

Feld: Yeah. Just for factual reference, I was initially affiliated with SoftBank with a couple of other VCs; Fred Wilson, Rich Levandov and at the time Jerry Colonna, who now runs a company called Reboot. During that period of time, a subset of us, a group of people that worked for SoftBank and I ended up starting a fund that eventually became called Mobius Venture Capital, but it was originally called SoftBank Venture Capital or SoftBank Technology Ventures. We were essentially a fund sponsored by SoftBank so we had SoftBank money. The partners ran the fund, but we were a central part of the SoftBank ecosystem at the time. I’d say that was probably ’95, ’96 to ’99, 2000. Maybe 1996 to 2000 was the core of that time.

We changed the name of the firm to Mobius in 2001 because it was endlessly getting confused with the other fund activity that SoftBank had been created and sort of what was connected to what. Whether that was a good choice or bad choice is a matter of old history at this point. But that was my connection. I do know a handful of the senior principals at SoftBank today very well and I have enormous respect for them. Ron Fisher is the person I’m closest to. Enormous respect for Ron. He’s one of my mentors and somebody I have enormous affection for.

I think that there are endless, endless, endless piles of inks, or whatever the metaphor in the journalism business is, spilled on SoftBank and I think there are loads of perspectives on Masa and about the Vision Fund. I would make the observation that the biggest dissonance in everything that’s talked about is timeframe, because even in the 1990s, Masa was talking about a 300-year vision. Whether you take it literally or figuratively… one of Masa’s powers is this incredible long arc that his vision has and that he operates on.

Yet the analysis that we have on a continual basis externally, I don’t know about internally in terms of the Vision Fund and SoftBank but externally, is on very short term, a matter of days, weeks, months. I wrote a book in 2012 called ‘Startup Communities. The premise of the book was how to build an entrepreneurial ecosystem in any city around the world. And at the time, even in 2012, there was a very heavy focus on, “Ah, if you want to be an entrepreneur, you need to be in the Bay Area. That’s the only place you should bother in.” In fact, it wasn’t called the Bay Area, it was called Silicon Valley. Today I think it’s very well understood that you can build great entrepreneurial companies anywhere in the world, and that you can build startup communities all over the world in lots of different types of cities for lots of different reasons. I make the assertion that every city in the world should build a startup community.

In that book, I talked about having a very long-term vision and I was kind of boxed in by my publisher to define what that meant. So I said, “20 years,” but I said, “20 years from today,” and I’ll give that as an example. I’ve been living in Boulder 25 years. Boulder now has, I would assert and believe it’s own world-renowned startup community, especially for a 100,000 person city. It’s an incredibly vibrant place. I don’t talk about being minus five years into my 20-year journey in Boulder. I talk about being 25 years into my 45-year journey.

I’ll play that back to the point that I want to make about the Vision Fund, which is that Masa and the Vision Fund conceptually are playing a very, very long term game. How that instantiates in the real world will be interesting and it’s always interesting to see. I think that’s somehow lost in this storyline right now as everybody reacts to the last week, last month, last quarter type activity. I’d separate that from is the strategy an effective strategy? My response to that is I have no idea and I don’t think my opinion matters anyway because it should be an entrepreneur-centric frame of reference. If you think, as an entrepreneur, you have a business and you think that SoftBank can be a great partner investor for you, you should work hard to get them as an investor. If you don’t or if you think that their approach to what they’re doing doesn’t make sense to you, you shouldn’t. Time will tell whether it’s an effective funding strategy or not.

I’ll end with, there’s a VC cliché, which is when you start being a VC, it takes a long time to know whether you’re any good at it out or not. It takes maybe a decade really before you actually know. You get a signal in five or six years. It probably takes a decade before you know whether you’re any good or you suck at it. The Vision Fund is very young. What is it, two years old now? It is a different strategy than any strategy that’s ever been executed before at that magnitude. It will take a while to know whether it’s a success or not.

One of the things that could cause that success to be inhibited would be to have too short a view on it. If a brand-new VC or a brand-new fund is measured two years in, in terms of their performance, and investors look at that and that’s how they decide what to do with the VC going forward, there would be no VCs. They’d all be out of business because the first two years of a brand-new VC, with very few exceptions, is usually a time period that it’s completely indeterminate as to whether or not they’re going to be successful.

Loizos: It’s interesting because so many funds, not just the Vision Fund, are deploying their funds in two years where it used to be four or five years, so you could make the case that you’re still waiting to see but it’s a little bit harder when you deploy all your capital and then you need to raise funding and it is early to know how your bets are going to play out.

Feld: One comment on that Connie, because I think it’s a really good one — when I started, you’re right. In the ’90s, it used to be a five-year fund cycle, which is why most LP docs have a five-year commitment period for VC funds. You literally have five years to commit the capital. In the internet bubble, it’s shortened to about three years, and in some cases, it shortened to 12 months.

We actually at Mobius, raised a fund in 1999 and a fund in 2000 so we have the experience of that compression. When we set out the raise Foundry, we decided that our fund cycle would be three years and we would be really disciplined about that. We had a model for how we were going to deploy capital from each of our funds over that period of time.

It turned out that when we look back in hindsight, we raised a new fund every three years and eventually we lost a year in that cycle. We have a 2016 vintage and a 2018 vintage and it’s because we really deployed the capital over 2.75 to three years. You can’t raise a fund in Q1 or Q2 of a year and call it the next year fund. It eventually caught up with us. I think the discipline of trying to have time diversity against the capital that you have is super important.

If you talk to LPs today, there is a lot of anxiety about the increased pace at which funds have been deployed and there has been a two-year cycle in the last kind of two iterations of this. I think you’re going to start seeing that stretch back out to three years. From a time diversity perspective, three years is plenty against portfolio construction, but when it gets shorter you actually don’t get enough time diversity in the portfolio and it starts to inhibit you.

People may know, and I think Connie, you know, a part of our strategy now at Foundry is that we invest in other early-stage venture funds. We have now 31 partner funds that we’ve invested in as LPs. We’re just a typical LP. I say typical as in we are a standard LP. We try to be atypical in terms of being more helpful than others. We deploy about 25% of our capital towards that and we really encourage the funds we invest in to have a three to four-year cycle and to really be disciplined about that.

Loizos: That’s great. And I wouldn’t be surprised at all if you’re right and things slow down. In fact in part because of the Vision Fund. Just a ripple effect as a signal to LPs that maybe things have started moving a little bit too quickly.

Caller Question: Hey. Brad, I want to say thanks for doing this. I was reading the third edition of your book and I really appreciate the fact that you guys went back and updated it. I’m looking forward to seeing the new edition. And Connie, thanks as always for hosting these. They’re awesome. So my question is basically that I’m a founder of a very early stage startup. We just got our first customer who is going to be working with us throughout the MVP. We’ve done our innovative accounting exercises and set up our experiments and such.

I wanted to know if, from your perspective Brad, is there a balance that I have to maintain as a founder between this lean startup methodology, where we’re always experimenting and learning as much as we can, and cutting corners in terms of just making an MVP that can work and answering those questions, versus going for traction and actually creating a product that’s more fleshed out. And how do you view that balance?

Feld: Yeah, it’s actually a very important question. It’s something that we spend a lot of time at Techstars during any individual Techstars accelerator program, trying to help companies and the founders to find a balance of. I think Eric Ries, when he wrote ‘The Lean Startup,’ did an amazing job of translating a bunch of ideas around customer-focused development into this construct of lean startup. And more recently, and some people on this call may be incorporating this philosophy into their companies of product-led development, which is really using your customers to help you define and iterate product-led growth as an emergence of product-led development, where you let your customers drive your growth curve.

Interestingly, the idea of a lean startup and product-led growth are very simpatico. In a lean startup, you run a bunch of experiments early; the ones that fail, you put an X through them, the ones that work, you do more of. On the ones that work, if you do more that are product-centric, and if you can get the feedback loop with your customers or your customers are both giving you the feedback to do more things of, but they’re also the amplification of your product to more customers, so they help you attract more customers, you get a flywheel going that can be incredibly powerful.

And there are some companies that typify that today. Zoom is one of the examples that people use over and over again as a really extraordinary one, in a category which was video conferencing, that’s been around for a long, long time. And that notion of staying very, very focused on the linkage between the product and what customers need, and running those experiments and… fiercely prioritizing is a phrase I heard recently at a board meeting that I love. Fiercely prioritizing what you do next rather than doing a whole bunch of random things without that prioritization, but along the guise of continuing to run experiments so that you learn, but doing it in a way that is a feedback loop that drives more customer adoption or traction.

Those two things are very self-referential. A mistake, by the way, I think a lot of companies make, is they stay in experiment land too long, and they don’t say, “this experiment worked, do more of it.” They just keep trying experiments, or they lockdown, and even though they’re running experiments, they have a preconceived notion or a bias of an experiment that they really want to do, and so they don’t really listen to the feedback that they get back from their early users or early customers, and they don’t iterate according to the experiment quite right.

Loizos: A reader wrote in to ask an interesting question saying, “Peter Thiel says his favorite challenging question is, ‘what important truth do very few people agree with you on?'” And this reader would love to hear your response to this. So what important truth do very few people agree with you on?

Feld: Oh, so he’s asking me to answer the contrarian question. Let me first state what I think is problematic with the question. I have always really had a sort of a knee-jerk reaction to the use of the word “truth” in that question. I don’t know whether my knee-jerk reaction is an emotional one or rational one but just so you know… I think I have a different way of stating it and approaching it, which is I think it’s actually really important that everybody understands that what they believe to be true, other people may not agree with and believe to be true.

Certain circumstances, you can observe the same exact thing occur, and you can come away with two different views of what you believe happened or what you believe the truth is, and I think it’s one of the challenges. It’s a broad challenge across our society, where people have different frames of reference or different perspectives, and they anchor on them as quote, “truth,” when in many, many, many cases, it’s not a truth, it’s an opinion. So I have always struggled with the use of the word “truth” there.

I just say that as a disclaimer, so people can get inside my head a little bit more, in case that’s interesting to you. If it’s not, feel free to ignore the last 20 seconds. For a very long time, one of the ones that I was very vocal about is that you can build startups anywhere in the world. And in fact not just should you, but that cities needed to have a vibrant startup community in order to continue to be vibrant and relevant cities long term.

Now in 2019, I don’t think that fits in the category of an answer to the question, because in the context of the category of the question, it’s what’s a truth that I believe that nobody else believes. In 2012, that was heretical. Literally, people looked at it and a lot of people around the world were like, “that would be awesome if that was true here in my little city over wherever,” and they were places like Boston where I spent 12 years from college on, that would walk around with an endless chip on their shoulder about how gosh, we should be better, and we need to compete better in New York, screaming, “we should be relevant, pay attention to us.”

But then lots of other places in the US and around the world where somebody said, “oh there’s going to be a massive, huge, enormous startup community.” In the country of China, if somebody had said that in 1993, it would have been like, “How? What?” And you know, in 2012, if somebody had said that in 2019 that there would be this massive amount of investment in entrepreneurial activity in China and it was questionable whether that was going to continue the way it was because of dynamics between China and the US, somebody would say, “How? What?”

It’s useful to know that these things shift over time in profound ways. Let me answer the question with one that you could play with: what’s something that I believe to be true that is opposite what most people think to be true. I don’t think I’m alone in this anymore. I think there are relatively few people or a set of people that think that Bitcoin is nonsense, and that the corollary to Bitcoin is nonsense is the idea of blockchain and cryptocurrency is incredibly interesting and important, but the instantiation of it in Bitcoin and the way that it currently runs and what it currently is as far as I’m concerned, is primarily a speculative activity. But in terms of a really productive infrastructure piece of the technology layer on a go-forward basis, I think when we look back in a decade, there will be many, many things that were inspired by Bitcoin and blockchain that become the critical and canonical and important things, but it won’t be Bitcoin.

Loizos: That’s super interesting. I don’t disagree. So you haven’t and you wouldn’t invest in a blockchain-related startup anytime soon or if ever?

Feld: No, no, no. I need to say that… No, no.

Let me say it really clearly. I’m separating explicitly Bitcoin from blockchain and the idea and construct of cryptocurrency. I think blockchain and cryptocurrency are incredibly interesting, incredibly important. I think decentralized applications, distributed applications, whatever you want to call them, are incredibly important. The whole construct of a distributed ledger that’s transactional and performant is incredibly important. That Bitcoin is the thing that everybody will build on top of, I think is not interesting, not the right starting point, not the right architecture, not the right place in time, and as a result, much of the activity around Bitcoin specifically has become speculative trading. But like many innovations, the essence of the idea and the thing that the idea enabled, became incredibly important as a starting point for infrastructure of everything else that happened.

Let me give you a parallel example. In the early 1990s, PC-based databases started to emerge, and for anybody that’s old enough to remember dBase and Paradox and R:Base and a bunch of other databases, these things worked on PCs, but they sucked and they were slow and they were hard to use and they would crash. And if you tried to use them for more than one user, they were a disaster. But the idea of a PC-based database that you could actually do something with and that you could build a network around it that people could interact with, was transformative.

The evolution of that became client/server computing, where you had a thin client to the application ran on a PC or whatever your computer was, could be a Mac, but a PC mostly at the time. And the database ran on a server, which was another computer that was on your network, but instead of the database being somewhere, it was on that server, on a dedicated machine to running the database, but the applications around the individual PCs’ clients.

That evolved into a whole bunch of jargon language around the end of the 90s with web services and service-oriented architecture and a whole bunch of other marketing bullshit that the technology industry is so good at creating, that in the mid-90s, prior to that client/server phenomena, as the internet started to emerge, all of a sudden there was this idea that maybe the database could be on the internet. Looking forward to today, 2019, and you take the linkage of cloud computing and web-based applications or even cloud computing and mobile-based application, it’s client/server computing. It’s client/server computing writ large.

If you say, “well, who are those client/server computing software companies and what are they doing today? And are those technologies embedded within this stuff?” Kind of with the exception of Oracle, they’re all gone. I guess Microsoft still has some of that action, but even within that, if you look at Microsoft, the trend that they’re on is really aggressively towards a cloud-based server piece against the lightweight client front-end. And so it’s just 30 years of technology gets you a different place, and I don’t know whether Bitcoin is the dBase II of technology where it became dBase III and was still a leader for a while, and then became dBase IV and quickly became irrelevant, because it just couldn’t keep going.

I don’t know whether that’s a good metaphor or not, but it’s different, Connie, and the reason I pushed back, I wanted to tell the longer story, is it’s different than, “\no, I don’t believe in blockchain and I don’t believe in the idea of crypto.” I absolutely believe in it, but just not in that particular instantiation.

Loizos: Right, thanks for clarifying. I guess, either way, Bitcoin has captured the imagination of a lot of entrepreneurs, which got this whole thing rolling. Brad, you’ve written a post about your reading of all the WeWork coverage and pondering this idea of cult of personality around a company or an institution. I’m just wondering, for people who haven’t seen that blog post, what do you think of what happened there?

You also talk about the comparisons to Uber, big personalities but operating in a very transparent way. You know, Adam Neumann was always saying bizarre things. He was spending money in a public way. Travis Kalanick was not trying to hide the fact that he had a win at all costs mentality. So where did those companies kind of go off the rail there? Are there lessons to be learned by these two companies?

Feld: Well, sure. There are lots of lessons to be learned, not just from them, both positive and negative. What I tried to abstract from posts was the separation between cults of personality and thought leadership. And often, I think thought leadership is incredibly important. I think it’s important for entrepreneurs. I think it’s important for CEOs. I think it’s important for leaders, and I think it’s important for people around the system.

I’m a participant in the system, right? I’m a VC. There are lots of different ways for me to contribute, and I think personally, rather than creating a cult of personality around myself, as a contributing factor, I think it’s much better to try to provide thought leadership, including being wrong, running lots of experiments, trying lots of things, being wrong a lot and learning from it. That’s part of being a thought leader, to go back to the lean startup construct earlier.

Cult of personality a lot of times masquerades as thought leadership, but it gets categorized the same way. And one of the things about thought leadership that’s so powerful from my frame of reference is that people who exhibit thought leadership are truly curious, are trying to learn, are looking for data, and are building feedback loops from what they’re learning, that then builds on the thought leadership, that then allows them to be more effective leaders in whatever role they have.

Cult of personality tends to be self-reinforcing around the awesomeness that is that person or the importance that is that person, or the correctness of the vision that person has. And what happens with cult of personality is that you very often, not always, but very often, lose the signal that allows you to iterate and change and evolve and modify so that you build something that’s stronger over time.

And in some cases, it goes totally off the rails. I mean, just call it what it is. What business does a private company have regardless of how much revenue it has to buy a Gulfstream V or whatever they bought? It’s crazy. In any scenario, like forget about all the other crazy shit that’s going on, there are attributes of leadership that have extremely intense, very visible leaders. And those leaders often do create elements of cults of personality around them, but they’re not dominated by that. They continue to drive with their own thought leadership inside and outside the organization and the cult of personalities tend to be very insular. They surround themselves with people who affirm them. They marginalize people who challenge them. They attack anybody who disagrees with them. Sound like anybody we know in a public sphere in our country right now? Independent of whether or not the person ends up being effective.

From my frame of reference, from an entrepreneurial perspective, I think being a leader with thought leadership and introspection around what’s working and what’s not working is much, much more powerful over a long period of time than the entrepreneur or the leader who gets wrapped in the cult of personality. Yeah, there’s loads of clichés, right? Inhaling your own fumes. You’re inhaling your own exhaust or stuff like that. Like when you start believing, and I’ll use me as an example, I make tons of mistakes. I’m wrong a lot. I’m sure I said some stuff in the last hour that’s completely stupid.

By the way, my email is If I said something that you violently disagree with on the call, or you think I’m just way off base on or that I missed a point on something or, “hey Brad, that just sounds like a bunch of promotional bullshit,” send me an email. I’m all ears. That’s how I learn. You don’t have to be mean about it. You can be if you want because it won’t bother me, but I love the signal. I love the feedback. That’s way more interesting to me than the fetishization of individual people in the context of entrepreneurship.

Loizos: Well, I think it’s really interesting, and I’m glad you sort of drew that distinction, because I do understand now what you were saying better. And for what it’s worth, I had talked with Ben Horowitz about some of these same issues, and he agrees completely. He just basically talked about the importance of culture changing with an organization over time. He was saying Travis had very specific goals for the company from the outset and so that was great, but they needed to change over time. They didn’t, and that’s how we got into this problem. Similarly, Adam Neumann maybe wasn’t taking enough feedback from other people.

As a VC, I’m just wondering what your take is if you’ve been in the situation yourself.

Feld: Sure, sure. I don’t think it’s letting them off the hook or not. The VCs’ incentives in some ways are not at all divergent from the founders’ incentives, from the standpoint of trying to create a valuable company where the measure of that value and the economic worth of that value is the increase in the price of each share, which also benefits the employees and all the other shareholders, right? So theoretically, there’s alignment, there are lots of different ways … and by the way, there are lots of different ways legally to increase the price of your share, a share of stock through the performance of the business. There are many different frames of reference on the tactics and the path that you get there. So VCs have lots of different views of it.

One of the difficult things to do I think, not just as an investor, but as a board member, and it’s frankly also difficult for entrepreneurs, is to deal with the spectrum that you’re on where one end of the spectrum as an investor or board member is dictating to the charismatic, incredibly hard-driving founder who is the CEO at one end of the spectrum, what they should do, and at the other end, letting them be unconstrained so that they do whatever they want to do.

And I think one of the challenges of a lot of VCs is that when things are going great, it’s hard to be internally critical about it. And so a lot of times, you don’t focus as much on the character. Every company as it’s growing the leadership, the founders, the CEO, the other executives, has to evolve. It’s just a given, and a lot of times for various reasons, and it’s easy to categorize them, but it’s a wide spectrum, there are moments in time where it’s easier to not pay attention to that as an investor or board member.

There’s a lot of investors and board members who are afraid to confront it. And there’s a lot of situations where, because you don’t set up the governance structure of the company in a certain way, because as an investor you want to get into the deal or the entrepreneurs insist on it, or you don’t have enough influence because of when you invested, it’s very, very hard. If the entrepreneur is not willing to engage collaboratively, it’s very hard to do something about it. So it’s not let anybody off the hook, everybody’s complicit in the same phenomena, and for me as an investor, I have a simple line and my partner’s a founder, and I use this line all the time internally when we calibrate ourselves, which is, as long as we support the CEO, which oftentimes is a founder, our job is to work for her.

If we don’t support her, our job is to do something about that, which does not mean fire her. It means to put energy into trying to get back to a place where we support her. And that doesn’t ever mean that we won’t take action to replace a CEO as major investors or board members, but that arc and that clarity of the focus of I work for the CEO and yeah, I have governance responsibilities and I got responsibilities to my LPs and my investors, but that’s all in the guise of the construct of how I operate and how I comport myself. By having clarity on it, it creates some internal consistency in situations that start to become very complicated. I think that’s the challenge, is a lot of investors don’t have clarity on their own approach, or they say one thing and do another. And if they say one thing and do another, that catches up with them.

By the way, there are a lot of entrepreneurs who say one thing and do another. And so having your words and your actions line up, whether you’re an investor or an entrepreneur, that’s a value system that’s personally very important to me. Some people it’s not important to, and that’s fine. And those are people that I personally would rather not work with. And I’d rather work with people who it’s important to them that their values and their actions line up. If you look at some of these situations when things go off the rails, you can very, very clearly see where those two things don’t line up.

Loizos: Absolutely. Brad, I could talk to you all day long, but I’m sure you have other things to do. Thank you so much for doing this. I so appreciate it. Everybody, thank you so much for joining the call. We really appreciate our Extra Crunch readers. Please, if you don’t have “Venture Deals,” get it. It’s a great book. You will not regret it for a second. I’m going to keep it next to my desk from now on because I can use it as an aid as well. Brad, thank you again.

Feld: Thank you. This was a blast. I love that you’re doing this, and thanks for having me.