This week, Extra Crunch hosted a call with General Catalyst managing director Niko Bonatsos to discuss a number of startup topics, including what the novel coronavirus is doing to investing in the Valley, as well as his thoughts on robotics, homeschooling, edtech, SMBs, international investing and what he’s looking to see today in startups. Joining me on the live call was my fellow Equity host Alex Wilhelm and a couple of dozen EC members.
If you missed this conference call for EC members, don’t fret: We’ll have more of these to come in this era of work-from-home. In the meantime, here is a lightly edited transcript, along with a recording of the call if you’d like to listen in.
Danny Crichton: And just for disclosure, Niko and I worked together. So we first met, God, almost … we’ve almost known each other for a decade at this point.
Niko Bonatsos: That’s correct. My God, it makes us sound a little bit old, yeah.
Danny: You call yourself a dinosaur VC, I don’t know what that makes me. But diving in here —
A fossil.
The general investing landscape
Danny: So obviously a huge amount of news, all kinds of stuff going on. What’s in your head right now? You’re sort of in the early-stage investing world, particularly seed and Series A. What are you thinking? What are you seeing other people respond to with the coronavirus outbreak?
Yeah. So what’s in my head right now? A few things.
First our portfolio companies, are they well-capitalized? Are they in the process of raising a round right now? Can we make sure that this financing is a successful financing? If for whatever reason we haven’t hit the milestone to raise a new round, what do we have to do in order to make sure that the company is going to extend the runway, in order to earn the right to live for another day?
So that’s what consumes about half of my day right now, working with a portfolio to make sure that they will survive and/or they will have successful financings.
And I have to say, it’s a little bit choppy. I’ve had portfolio companies that, as of last week, we thought we would have successful financings, and unfortunately some of the term sheets were pulled or they got recut. So that’s part of the new reality. And some of the companies obviously that I’m part of on behalf of GC, and we’re part of on behalf of GC, it’s pretty tricky times.
So if you’re a company that you’re dealing with hardware, you’re dealing with offline stuff, you have SMBs as customers, it’s really tricky times. Or if you have pretty heavy enterprise sales, a B2B component, it’s really tricky times. Assume that your budget and everything is going to get recut.
But some other companies, it’s the best of times. So spending time with these companies trying to figure out what are the opportunities ahead for them. And in an area that historically we haven’t seen much of in the last two, three months, consumer internet, media, online community stuff. Now that people have this new-found time, new online behaviors are emerging.
Just to give you an example. In the security space that my partner, Steve Herrod, is really active on because people have to sign on all the work-related products from home. How’d they do that? Some of the companies that they work for, they have not been fully set up for that. Just to give you a couple of examples.
So 50% of what’s going on is portfolio work, and then the other 50% is new related investment.
So where are the opportunities now? Think I gave you a quick glimpse of a couple of areas. We see companies that are getting a ton of usage over the last couple of weeks, with hundreds of millions of people not commuting, staying at home. It’s been a long time that a productivity app like Zoom was in the top of the App Store, a few days ago, right? That’s absolutely incredible news. And then some companies that thought they would be raising a round out, all of a sudden there has been capital flight. And these are real companies, very good opportunities. Then they’ve started coming our way.
So we have to decide, do we make a quick rush process? Because all of a sudden a really good company has a very good, attractive deal on the table for us, or not. So that’s what’s going on. It’s an interesting time.
I feel like we’re all working at GC harder than ever. We would argue that work from home at least because you don’t have to commute, and you don’t have to spend time at the office, maybe you could slack it off. But that’s not the case. Working from home is really tiring. Sitting in front of a computer screen for eight hours. I don’t know. It’s a new reality, I guess.
Thoughts on YC Demo Day
Danny: I’ve definitely burned my retinas the last couple days with coronavirus coverage. Let me ask you, I mean were you involved in any of the YC Demo Day stuff the last two days?
Absolutely.
Danny: What were your impressions from the batches here?
There are 200-plus companies. It’s interesting to see the continued global expansion. I do appreciate that there is also a renewed focus on consumer-facing stuff. Some of the companies are at later states, have real revenue. So it’s as diverse as it could ever be.
We’re making investments in a couple of companies so far. We did virtual handshakes just to make sure that the germs are going to stay far away from us. So good impressions. Really positive impressions.
And we know that every YC class is going to have one or two big winners. The question for us always is can we spot them at Demo Day, or are we going to spot them later on at the Series A, Series B, Series C rounds?
Alex Wilhelm: I want to go back a little bit to something you said a couple minutes ago about term sheets being pulled. This is something that we hear kind of talked about in times of uncertainty and downturns, and it’s kind of a very bad thing to do. I’m curious if you’re seeing more term sheets pulled than you have seen before in your career so far as a VC?
No, not yet. But it’s only one week, right? So if I were to forward project that, probably yes. But before term sheets were pulled or recut for different reasons. Meaning during the confirmatory diligence process, investors did not see what they were told, or the background checks did not turn out as they were supposed to.
Now it’s a new reality. Meaning, okay, your business is getting heavily, heavily, heavily impacted, or the investors are getting scared. So it’s a combo of these two things, right? Because if we made the decision like, let’s say 30 days ago to make an investment in a company that is now going to miss the revenue plan by 50%, that’s a new reality, right?
Alex: Yeah. And then on the YC front, going back to Danny’s question, I’m curious how much revenue does a YC company have to have to kind of stand out? Because I talked to FitnessAI and they were about a million dollars ARR, which for me seems like a lot. For a YC company, they’re supposed to be relatively modest. But you mentioned some having more revenue. How far does that go? How big do these companies get by Demo Day these days?
A good question. So a lot of them have been around for two, three, four years, right? Especially some international ones. So there are some companies that I saw over the last couple of days that are in the 7-10 million revenue run rate.
Alex: Wow.
Which is a fair amount, right? So they could even qualify for a Series A. But either because they’re out of geo or because the founders have never sought any capital before, they decided to come into YC and have better success in accelerating their business and fundraising after Demo Day.
Alex: Got it.
And I think over the last few years after every YC class, two, three companies raised a straight Series A after Demo Day. So that’s not new per se, just for the last class.
What does coronavirus mean for consumer investing?
Danny: So I asked this sort of open question what your thoughts are about what’s going on. But specifically when it comes to these opportunities… These new kinds of experiences. I mean, what’s particularly interesting to you? Are you just sort of open-ended looking around saying, “Gee, everyone’s working from home. What does that mean?” Or are there certain verticals that you’re particularly interested in seeing like, “Gee, I want the next exercise bike that’s going to compete with Peloton,” or something like that?
Yeah, so actually that’s a good space, right? For all the people who are gym rats, all of a sudden they cannot really workout at any gym unless they are really excited by aerobic exercise and they can still go out, where are they going to work out? All these companies, assuming they don’t have supply chain issues and they were smart to load up in their inventory for all the bits they needed to have a few weeks ago or a few months ago. Now they’re having a renaissance.
So sometimes obviously I have the imagination to predict which spaces are going to play out. Some other times I don’t. Like the same way that I couldn’t predict that the coronavirus a few months ago is going to be strict as it is now.
But I see opportunities in gaming and gaming infrastructure. Quite a few opportunities there. Because some of the existing tools like the YouTubes, the Twitchs of the world are showing their age a little bit.
I see opportunities when it comes to a ton of the remote work tools, they’re getting increased adoption that were not foreseen. And I think even after things normalize, a lot of people who tried this work from home thing, are going to be, “Hmm, it’s actually good for me.” It may not be for four or five days a week, but it could be for two days a week. And some of these tools would help accelerate.
Yeah, Zoom is a great business. It’s working, but it doesn’t mean that it solves all the problems, right? For example, in a world where you have your entire team suddenly work from home, how do you do the traditional management, project management, product management? How do you know that people are working? How do you motivate them? How do you stay in touch?
An anecdote of this from our portfolio companies, they’re doing a lot more costs for they are using some of their more nascent videoconferencing add-ons, products to increase serendipity. Some are even using Houseparty, which is now owned by gaming company Epic Games. To make sure that they’re in sync and have a good time. And then there are other tools like Krisp, that can remove all the background noise.
So what I see from talking to founders in our team, if you have especially young kids at home, oh my God, you’re doing like five jobs at the same time. You’re like the parent, you are the CEO or executive of your company, you’re the teacher, you’re the entertainer. It’s like really, really, really, really hard. And the amount of cooking you have to do is through the freaking roof.
And then all the delivery companies, Danny, they’re doing so well. The delivery companies are growing two to 10% week-over-week now.
Edtech and the effect of school closings
Danny: I know you’ve been in the edtech space for a long time with ClassDojo and others. School closings, what does that mean, particularly in the edtech space, where now the tool is the only thing connecting all of the students together?
Yeah, so ClassDojo’s doing a renaissance now. Normally that’s a company, it’s a behavior-management company helping teachers, parents and students with the character-building part of the education. And ClassDojo now is growing at a rate that normally they only see in September, October, August when the school year kicks off. And all of a sudden they are the pioneer in these virtual classrooms movement and how they can help teachers do classroom management and motivate the students. But it’s one of several. So other companies like Outschool, Numerade are also doing really interesting things. Because all of a sudden now, regardless if it was by choice or not, everybody’s homeschooling the kids more or less. And it’s a whole new set of challenges that has opened up.
The future of gaming
Alex: I want to go back to the gaming point you made about how Twitch is beginning to kind of show its age. That makes pretty good sense. Twitch has now been around for, my gosh. I don’t know, five, seven years. But in the world of gaming and sharing, especially since we’re all at home, I’m curious, what sort of innovations are you seeing from companies? What are they doing that extends Twitch or makes Twitch seem a bit out of date? I’m a gamer myself. So this is kind of a personal question, frankly.
For a lot of people now, gaming is the real life. And it’s not like before we thought, okay, there’s in real life and there is what we’re doing online. But if you’re somebody who, let’s say you’re like 16 years old, you’ve grown up in the beginning playing Minecraft and you graduated to Roblox. And then when you’re 12 you’re saying, “Oh, Roblox is for the young kids.” Graduating to the next one, which is Fortnite. And for you, in some of these games, this is your real life because you can play the game, you can hang out with others, you can meet strangers, you can flirt with folks, you can watch shows. So how do you share with your friends or with the world what’s going on in all of these games? There’s no tool that you can do that stuff.
How can you edit some of these experiences and be able to have better self-expression and communicate it with your friends? There is no tool that you can do that stuff. Because if you put it on Instagram, that’s not where this content fits well. If you put it on Snap, that’s again, not where this content sits well. Twitch, if you start streaming, unfortunately if you’re not one of the top 200, 300 streamers, nobody will pay attention. YouTube creation on mobile is not great. So for games like Fortnite that have a high entertainment value, this content can be really compelling.
In the same way that folks are utilizing the stories around Fortnite and they are editing their stories, videos with all these sophisticated apps that are out there. I am now seeing people spend half an hour to two hours a day trying to stitch together some of the experiences that they have in gaming. So I could see the beginnings of a new product that could catch fire there.
Alex: That’s a lot of time spent on editing together stories from video games per day.
Correct. Exactly.
More on edtech
Danny: I have a question from Alison about homeschooling. There’s been a couple of startups that have been focused on the homeschooling space. I think there’s one that’s particularly popular in Silicon Valley, or one that got a lot of attention maybe. I’m forgetting the name of it right now.
Are you referring to Outschool? To Junior Learning?
Danny: Yes. Yes.
There’s several out there.
Danny: And Alison says Outschool.
Okay. Terrific.
Danny: Oh no. Okay. I’m being yelled at. Sorry, Alison. So obviously there’s a couple of these different platforms focusing on education for kids and particularly in homeschooling. And I’m curious, post the pandemic, I mean there will be a period where we’re sort of past it and schools reopen. I mean, do you think that there’s going to be sort of permanent change in the way that education and technology work together to teach students? Or do you think that this is sort of a temporary, gee, we’re going to see a surge of attention and then we’re going to go back to normal?
So in times like now it is a case when new behaviors get adopted. And all these tools that now everybody is forced to use for lack of better alternative, are going to result in some people continuing to love using these tools and slowly it starts going back to normal. So I would anticipate that if I were to make a guess that some parents may end up liking homeschooling more than what they liked before.
And it’s a golden time for education technology companies now, that are direct-to-consumer businesses. Historically in the U.S., one of the reasons why education technology has not produced a ton of exits is because there has been an aversion of the parents to pay dollars for them.
If my young kid is doing poorly at math, it’s not her fault, it’s the teacher’s fault. The teacher is really bad. Whereas in places where I come from, Greece, or other places like maybe in Korea, if I were to be doing poorly at math, my parents would say, “you are really lazy, it’s not that you have a bad teacher.” So that’s a difference. And historically with education technology startups and companies in the U.S. to sell to schools, you had to figure out how to sell through these tricky states. But now the parents have the kids at home, they have to do something about it for their learning, for their entertainment. So it’s a golden time for products to pick up adoption.
International VC investing
Danny: Niko, I’m going to riff off of Josh’s question here. You had mentioned, obviously GC has offices in Boston, New York and San Francisco. What’s sort of your remit in terms of geographies? I mean do you invest only domestically? Do you invest internationally? Both personally and from the firm’s perspective?
At the firm we don’t care where the founders come from, how they look like, what they did before, where they went to school, we don’t check passports, we don’t care about that stuff. All we care is about their level of ambition and whether they can learn really quickly because we mostly invest in first-time founders to build the leading company in their space.
So over the last a few years we’ve been very actively investing in Europe, our amazing partner Adam Valkin has built a great practice for us investing in companies like Monzo, Deliveroo and Shift Insurance. So I would say about 20% to 30% of our founders were born overseas.
We’ve also recently started investing more in other deals as well in the developing world.
So overall, we’re open-minded. Wherever the best ideas come from, wherever the most ambitious founders come from, that’s great news to us. Obviously we want the businesses to go after a massive market opportunity, and most often these massive market opportunities tend to be the U.S., but the company could get started, I don’t know, in Israel. Right?
Danny: Absolutely. Josh’s specific question was around Africa. And his question was, “How do you make sense out of a market that seems huge but is also highly heterogeneous and complicated?” How do you sort of approach a new space? Like let’s say you want to do investments in Africa or India, what’s step one? How do you sort of grapple with a new market like that?
Yeah, so obviously India and Africa are very different, right? So in Africa one of the questions is, okay, which are the big markets? That if the team locally decides to go after an African market, which countries have a big market that can support a big outcome? And if you look into that, that’s probably South Africa, that’s probably Nigeria, maybe one, two more. Because if you go and win one of the smaller countries and then the process of selling the same product in one of the other smaller countries is not exactly the same, those are tricky times. So that’s number one.
Number two, in places like African countries, the follow-on financing is pretty tricky. Because there is not a very robust ecosystem that involve investment firms that are investing in like Series A, B, C, D rounds. So as a result, we are thoughtful about that. Do we have to invest a lot in this company just by ourselves or the next round may not be at the high valuations we thought it could be. So that’s number two.
Number three, there’s a lot of local risk that we need to take into consideration. What happens if the currency gets devalued? Obviously assuming we invest in USD, that’s good news, but in terms of revenue that the company has, it can get wiped out, right? If the currency gets devalued by 50%. Or the way that people do business in some of these local countries may not be the way that we historically have done business over here.
So sometimes in a lot of these countries either we would come in really early, at the seed stage, or later on, Series B, C, D stage, when it’s clear that the company’s a local leader, winner, it’s a well-run company and we don’t need to do a lot of the early handholding. But these are some of the considerations.
The future of robotics
Alex: I want to turn to a question from Florian in the chat, who has a question about robotics and specifically robots in places like distribution centers, retail stores, corporate campuses, farms. His point is that robots currently don’t need to socially distance. They’re kind of just on the site. And so he’s curious if you think that robotics-based startups are going to have a boost in the current market position that we find ourselves in today with COVID-19?
Again, assuming you have a product already in place and you can ramp up the production, yeah. I mean, you saw Amazon and a lot of the e-commerce companies that are in the food, pet supplies or similar supplies, or hospital supplies world, they’re seeing an unbelievable boom for their business. So assuming you have something that you can sell to them right now, it’s great news. But if it’s at like two, three, four years out? But probably it’s harder for you to be getting in front of all these clients today if you’re trying to sell to them something that they would buy in four or five years, right?
At the same time though, it’s also a tricky conversation because the labor market conditions are changing. And a lot of folks unfortunately will be underemployed or out of work, you’ve got to be thoughtful about how you navigate that topic. But in general, robots don’t fall sick. You could argue the same is true about self-driving cars, right? If you’re worried that your ridesharing driver is going to contaminate you. Oh my God! If only we had self-driving cars by now already.
Alex: Waymo needed like six more months I feel to get this in place. And they just missed the mark by a little bit.
Correct.
Restaurants, SMBs, and the post-pandemic future
Danny: Serge, are you on the audio here? You have a question about restaurants.
Serge: Yeah. So, in this unprecedented time where a lot people and organizations are thinking a lot about SMBs, particularly restaurants, and are donating or encouraging a lot of people to order takeouts regularly. Do you think that will carry over post-pandemic, in regards to technology?
Good question. So I’ve seen a few pitches literally over the last two days where it’s young companies that are trying to support your favorite local SMB. Obviously now with buying gift cards or just donating, or buying the inventory of foods that they have there instead of just going to the grocery store.
But at the same time, maybe one of these could evolve into eating up some of the use cases from products like Yelp, or OpenTable, or some CRM and local small business marketing functionalities. Who knows? Maybe some of them end up emerging as a hyper-local community like NextDoor. It’s very early to say. But I’m pleased to see the mobilization of nonprofit initiatives, as well as startup initiatives smaller and larger to help support our favorite local SMBs because they’re struggling really, really, really badly right now.
What’s changing at the growth stage of VC investing
Alex: So Niko, I have a question about kind of stages. I know you focus on the earlier stage of the market, but you probably have insight in kind of what’s going on in other stages because your companies that you’ve invested in before raise more money as time goes along. I know it’s only a couple of weeks into the disruption here in the North American market, but are you seeing any particular tranche or series level of the startup world slow down more than others? Maybe Series C or Series B. Or is the entire market kind of pushing the brakes gently at the same speed?
Yeah, I think at the moment there’s a lot of uncertainty, right? We don’t know yet when things are going to normalize and how long it’s going to take for them to normalize. So what’s going on is for anything that’s already in process, you are either trying to rationalize it in light of the new conditions, market conditions, or you also are being thoughtful about your pace of investment. If we’re really aggressive before we’d be less aggressive now.
I’ve heard anecdotally that other partnerships have frozen. Meaning, hey, pencils down. Not much for us to do over the next few weeks before we get our house in order, meaning our portfolio companies, and that’s not what our exposure is going to be there. So I’ve heard that anecdotally, but I can’t say that people are not taking meetings.
If anything with the work from home situation, people are taking a lot more meetings than before. Obviously with the markets being so volatile, especially for late-stage investing, this has a significantly higher impact there than what it has at the very early stage.
Because today, let’s say I lead your Series A round or your seed round, I’m not banking on you exiting this year, or next year, the year after. Obviously there’s risk for you to raise the next round. But at least my hypothesis is that you’re going to be exiting six, seven, eight years from today, but the market’s going to be different.
However, if I’m leading your Series C, D, E round, where this means that there’s an exit coming in the next one to, I don’t know, four years, and the market multiples have changed quite a bit, you’ve got to be more thoughtful than before because it’s a new reality.
Alex: That makes sense —
And whatever funds you have, that you’re investing out of, if you’re writing 50, 70, $100 million checks, you can spend that fund much faster, right?
Danny: We’re sort of hitting the time we had here. But Maxim has a question about institutional LPs and specifically whether you’re seeing not necessarily at GC but are hearing through the grapevine whether institutional LPs are pushing back on venture firms. You either slow down their capital calls, pump the brakes on deal volume, basically to calm the situation down. Are you seeing or hearing from other VCs any sort of pressure from LPs right now on that front?
I have not heard much from other VCs, other than there is anxiety for those that are going to be fundraising or they’ve just started fundraising for their next fund in hopes that they could close it over the summer or later this year. There is anxiety there. And if they thought that it would be easier six months ago, now they are not sure that this could happen. But for firms like ours, we have LPs and we’re very fortunate to have LPs that have been long-term partners of ours, who have been through crises again and again. And there are endowments and other institutions that have been in business for decades, if not hundreds of years. So they know how to advise us during these times.
What I’ve heard there, Danny, is that anybody who is in the syndicate SPV business, they’re struggling now. There is significant capital strife there because —
Danny: Why specifically SPVs? Just because of the flexibility and it’s not dedicated capital?
Correct. It’s not dedicated. It’s not already fully committed. And if you’re relying on folks who thought they were X wealthy, but given the market volatility, they’re 60-70% as wealthy as they were before. They’re rethinking how much they want to be investing in private and illiquid assets. So that’s what I’m seeing. And that’s something the founders also have in mind. If you thought that you could raise capital from a syndicate, from an SPV really quickly, now it’s less likely that this can happen to the same extent.
Danny: Well Niko, I think we’ve expired our time, but thank you so much for all of the coverage on robotics, and restaurants and fundraising and everything else. Niko is a managing director at General Catalyst, based in San Francisco. Focused on the early stages for all founders without checking their passports, so he’s not the TSA. And he’s particularly interested in the consumer. And would you call SMB as well a space you like?
Yeah, sure. To use buzzwords, future of work and whatever the cool kids are doing online.
Danny: There you go. Thank you so much everyone for joining, and thank you Niko for being our first experimental guest on these new EC conference calls. Appreciate it.
Thank you so much for having me. Everybody stay safe. We’ll survive this. Bye.