Between his roles as co-leader of Mayfield Fund’s engineering biology practice and founder at IndieBio, Arvind Gupta reviewed approximately 470 startup pitches last year.
He characterizes his process as “simple,” but that is a bit reductive: after reviewing a deck and scheduling a meeting with the founders, he’ll spend many hours acquainting himself with both the underlying technology and the individuals on the team.
“For seed deals, I spend a maximum of 10 days so I can give an answer to a founder and I make it a pledge,” he said last week during a TechCrunch+ Twitter Space. “In 10 days, I can do the primary research and work with the founders to come to a conclusion there. For a larger Series A check. It could take a little bit longer than that, but not that much.”
I interviewed Gupta last month to find out more about the opportunities he’s looking for and get his advice for first-time founders, but last week’s Space was a chance to dive deeper. When I suggested that the downturn in the public markets might give startups a chance to focus on finding product-market fit instead of chasing growth, he gave me a personal market correction:
Recessions or downturns are always the hardest times to build businesses, always, for the entrepreneurs, for VCs, for everyone involved. Because no one cares if the market is terrible. It’s not like you get a buy: “forget it, we’ll just never mind that returns are terrible.”
Our conversation unearthed a lot of useful advice about fundraising in a down market, why he believes now is still a good time to start up, and how founders can avoid waving one big, red flag that discourages many investors:
“Just like [some] VCs are arrogant, I think it’s important to have a learning mindset for entrepreneurs.” Gupta said. “Entrepreneurs that believe they know everything had better be right, because it’s gonna be hard to learn on the fly if you already know everything.”
This transcript has been edited for space and clarity.
TechCrunch: The downturn in the public markets is impacting early-stage valuations, but seed-stage funding still seems pretty stable. Is this still a good time to start up?
Arvind Gupta: I think it is, especially in what I do, which is reversing climate change and curing disease. It’s always a good time to start up, because those things can’t wait.
What’s happened with the stock market is, as valuations have come down, multiples have compressed… So let’s say revenues are $100 million and if the IPO value of a company is $2 billion, that’s 10x sales. That has gone down considerably, about 30% from where it used to be. The private markets don’t get repriced every single day, so it takes some time for that to catch up.
Late-stage investing has definitely dried up quite a bit… It’s just a matter of time before it sort of trickles down, but there’s a lot of cash in the system right now. Most large VCs raise huge seed funds, there’s microfunds everywhere, and angels are extremely active. There’s a lot of optimism that technology can still create real solutions that can drive real value creation. So I haven’t seen a slowdown at all really, in the seed, pre-seed or Series A areas.
Seed-stage actually persists even during economic downturns because people still seem willing to make small bets. What’s your sense as far as why that is?
When you’re investing huge buckets of money, generally you’re not investing in a story and a hope and a dream, you’re investing in a business that’s showing traction. Now, there’s some extremely capital-intensive businesses where you need buckets of money before that traction is generated, and that becomes harder to finance in downturns.
You can still finance hopes and dreams, but just with smaller dollars, and you’re generally going to give up a little bit more of your company in terms of dilution. Arvind Gupta
You can still finance hopes and dreams, but just with smaller dollars, and you’re generally going to give up a little bit more of your company in terms of dilution during an economic downturn, so I expect that to start happening as well in the next year.
Who’s going to have a harder time in this new environment?
I’ve always said that the low-interest rate environment that we’ve had really since 2008 has generated an interest-free loan on risky startups.
So when you start looking at, “oh, it’s gonna be $150 million before we generate our first dollar of revenue,” that’s going to generate a deep breath in the meeting. After that $150 million is in, tell me about that next stage — that’s going to require more creative business models, different go-to-market strategies that generate revenues along the way. For good entrepreneurs, there’s always a path, right? It’s just different in different economic environments, it’s never shut, so to speak.
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You asked me for some categories? I think climate investing, what I do, is still extremely brisk. And there seems to be very little hesitation by investors to wonder about business models or downstream capex, I think for for other sectors, you know, with SaaS and things like that, those are traditional businesses, where you have the revenues, you have the metrics, there are multiples, it’s almost like an equation that people plug in: “Okay, this is what this company is worth.”
I think it depends on where the world goes in the next year: If the world stays kind of like this and goes laterally, everything will be fine. And there’ll be plenty of money to go around.
What sort of market conditions should we look for that would precede a rebound in late-stage startup funding?
What will happen is, as the IPO market opens back up, a lot of these IPOs that are underwater right now start to go back to the original IPO price and LPs that are writing down their portfolio start to see their portfolio come back up, that allocation for venture capital continues to grow, and then venture capital continues to deploy and redeploy the money that comes in.
The exit value is what drives it all. So seeing the technology sector and the NASDAQ start to rebound near its old highs, or even within 20% of its old highs, that’ll be the precipitating factor of the market staying open and money flowing.
From a founder perspective, it seems easier to hire during a correction, and it might be a little easier to retain employees. I’m getting the impression that founders are under less pressure to worship the god of growth, do I have that right? Or are investors still putting them under the microscope?
No, I think you’re always going to be under the microscope, growth is still important. Recessions or downturns are always the hardest times to build businesses, always, for the entrepreneurs, for VCs, for everyone involved. Because no one cares if the market is terrible. It’s not like you get a buy: “forget it, we’ll just never mind that returns are terrible.”
It all rolls kind of downhill from where the money is originating from, which is actually pension funds, retirement funds, and things like that, important endowments, and so that’s all of our money in general. It’s always a hard time, and anyone that thinks otherwise is deluded. And so growth is really important. Finding that product-market fit is really important, and doing that efficiently with the least amount of dollars is critical.
How much time do you spend reviewing each pitch?
Reviewing a pitch means sitting with the founders, hearing the pitch, asking questions and interacting with them. Generally, the process is pretty simple. You review a pitch deck, and if it’s in the strike zone of what you’re looking at, [investors] say, ‘yeah, this is something that I want to learn more about.”
And then you generally have a half an hour or an hour introductory call, or Zoom for the past two years, and now opening back up to in an office, or at their offices. And that’s a really great way to just get to know the founders and understand the technology and spend your time.
For seed deals, I spend a maximum of 10 days so I can give an answer to a founder and I make it a pledge. I’ve seen a lot of VCs waste a lot of founders’ time, because they’re just curious about stuff. In 10 days, I can do the primary research and work with founders to come to a conclusion there. For a larger Series A check. It could take a little bit longer than that, but not that much.
I think speed is really important. There’s a phrase I use, which is, “time kills all deals.” And so you want to push towards a resolution on a deal, whether you’re an investor or a founder, or an entrepreneur.
Approximately how many pitches did you look at yesterday?
Let’s say three founders today, and I reviewed probably two or three decks yesterday.
Do you have a sense of how many you looked at in 2021?
Yeah, 470, upper four hundreds. I keep track of every single company I’ve ever met. And I have a spreadsheet.
What’s getting better? And what’s getting worse, as far as the pitches you’re looking at?
I’m starting to see entrepreneurs figure out that you can stratify markets by looking at certain customers that have a high propensity to pay, but a smaller market. So they’ll say, “OK, I’ll address that one first, and then as we raise more money and scale, we’ll go to bigger markets where they will bear the lower cost of product.” Five or seven years ago, I had to explain that all the time to literally every single entrepreneur I invested in.
But the timeless arts of storytelling? That stuff can always be improved. The thing that I would love to see more of is: how does the world change if you’re successful? That’s something that I don’t hear often. Either the founder hasn’t thought about it, or the founder assumes everyone knows what they know about how the world will change.
The investor might think the world will change in one way and the founder is thinking another way. We call that the cake/souffle problem, because the same ingredients are required to bake a cake as to make a souffle, but they’re very different things.
A first-time founder has to figure out how much of a market they’re going to go after and how much it’s worth. How good are first-time founders at estimating TAM, SAM and SOM, and how important is it to you as an investor?
Founders often overestimate the TAM, this is the most common TAM issue. Founders will say, “our TAM is $30 billion,” and you’ll be like, “yeah, but you’re not doing all of healthcare, you’re doing this one slice of it.”
Being precise is a good proxy for thinking about the precision of the company and its founders. That’s probably a big part of the pitching process that I’m looking for, because it tells me about how they’re going to think in the future. My whole point in being an investor is to be a partner in helping founders do really difficult things. And so when you see someone that is precise, then you know that as things become extremely complex — which they always do — they’ll be in the habit of actually being precise.
Are you open to founders who don’t have direct experience doing the thing they want to build? “I have a great idea, I’ve done some research, I’m not a biotechnologist, but I’ve got an idea for a cell-cultured meat product I think is gonna do really well.”
What would it take to convince you that I had the goods to actually pull this off?
I’m an underdog and I’ve funded underdogs. Any buyer’s premise is to find people that are not-traditional scientists become entrepreneurs. I think there’s no problem with that. But you need expertise on the team. So this is the team approach, right? So if I have no experience, and I come to you [and say] “Hey, I’ve got a cure for cancer. You know, in my kitchen, just give me five million bucks, and I can scale it up?”
Whatever, dude.
That’s like getting pitched by Dr. Evil from “Austin Powers.”
Yeah, it’s just silly.
But if I say, “well, I have no experience in the space, but I have a lot of drive, a lot of energy and I’ve used it to bring some of the world’s best people in that space together. And we all believe that this is possible. And we all are willing to give up our day jobs and or give up our jobs and actually make this our real job to make this happen?” That’s exciting.
What are some of the most common red flags you see when you’re being pitched?
It’s important as an investor to be extremely humble, because we’re going to be wrong a lot. I have this phrase that I use all the time: knowledge competes with imagination.
Imagination is what is required to really understand and think about how, how can the world change? Can people eat meat that was grown in a lab? That’s imagination. And then there’s knowledge. Knowledge is like, “no.” So they compete all the time, which is why really deep experts in an area tend to think nothing works.
Great investors and great entrepreneurs often come orthogonally into a space because they aren’t encumbered by that deep, ingrained, often wrong knowledge. And one of my favorite books is Thomas Kuhns, The Structure of Scientific Revolutions, which talks about this in depth. That’s the premise before I dive into all this stuff, because these can be red flags for me and I could be wrong.
I think precision will show depth of thinking, depth of knowledge, and clarity. Clarity is also important. When I’m teaching all these companies to raise and pitch I always say, “clarity creates confidence.”
If you can clearly articulate what it is you’re doing and why it matters to the world and then clearly and with clarity explain the underlying technology and the moat, you’re gonna create a lot of confidence in the people around you, your employees, the people that want to write about you, your investors. Clarity creates confidence all around you. And that becomes a halo. And it’s a huge value.
Just like [some] VCs are arrogant, I think it’s important to have a learning mindset for entrepreneurs. Entrepreneurs that believe they know everything had better be right, because it’s gonna be hard to learn on the fly if you already know everything. Being open to learning and being open to having help is another quality that’s critically important, especially in deep science. A founder that isn’t open and humble about the complexity that actually exists in the world is one that’s tough to back, at least for me. It’s a style thing.
How important is confidence? Will you back someone who seems less than fully confident in their ability to pull off their idea?
There’s confidence, there’s bravado, and then there’s arrogance. I don’t really like the latter two. The CEO of the last company I funded at Mayfield is quiet, but she has an incredible sense of confidence about her, because of everything she’s done in her life and what she’s gone through. That’s awesome stuff.
It starts with the founder, because they’re the one driving it. But if the founder is overly confident or overlooks natural complexities and doesn’t regard them with respect, then I have a hard time funding that person, because a lot of things deserve respect in the world.
One of the most important things I look for are mission-driven people, because mission-driven people are going to naturally want help, they’re going to naturally look at the world as complex, because they’re actually there, they’re trying to solve a problem for something other than monetary gain, or seeing their name in TechCrunch or in The New York Times.
Do you have any advice at all for someone who’s on the fence about launching a startup? What’s one thing a first-time founder can do to boost their confidence?
I don’t invest in solutions, I invest in problems. That’s really important.
If you find a really amazing problem in the world… and [can explain] why if you can eliminate that problem, the world changes in a fundamental way, that opens the door all day for me. And then if you can follow that up with a plan to actually solve that problem, that creates a moat. Then, you have a barrier to entry for others, and that you have a team in place that can credibly execute against that plan.
That’s everything you need.
How do you prefer to be approached: a cold email or a warm intro?
It doesn’t matter to me. If you cold email someone, and they don’t reply, cold email them again, right? Make someone say, “stop emailing me!” If you’re on a mission, go solve for the mission, and find the right partners. If someone’s trying to reach me… that’s not a problem.
Would it be crazy if I asked you to share your email address right now? Right here?
Arvind@gmail.com? Pretty easy.
What kinds of investment opportunities are you looking for in Q3 2022?
I’m looking for companies that are controlling the distribution of carbon and companies that are able to do price discovery around carbon. I’m looking for platform therapeutics that have functional screens and ways of generating novel targets. I’m also looking for companies that are able to control consumer-facing supply of carbon-negative production methods, so vertically-integrated brands that are making new materials. I’ve been looking for fashion companies that have renewable materials, things like that.
Basically, it comes down to this: I’m looking for companies that are reversing climate change and curing disease. That’s it. If you have a company that does either of those two things. I’m interested in speaking to you.