Tech layoffs have been top of mind for many and a topic of conversation with my founder and investor friends this week. Anytime anyone loses their job as part of a big layoff, it’s distressing. I recognize the real pain of anyone in this situation and sympathize with them. Also, though, I’m a big believer in playing the hand you’ve been dealt instead of dwelling on the hand you didn’t get. I try to look at situations that don’t seem great on the surface and think about nonobvious silver linings.

One unintended positive from these layoffs is the creativity they’ll spur. When people have ample resources, they have less incentive to be creative. If you’ve got the budget for a project, you can spend your way to completing it. When resources are scarce, people get creative. When you don’t have the budget, you start thinking of scrappy ways to check the box at minimal or no cost.  

I think the layoffs will lead to more people solving problems in creative ways and those solutions turning into companies. Said differently, layoffs will lead to more entrepreneurship.

If you find yourself unexpectedly short on resources, don’t give up . . . keep going, and embrace creative ways to accomplish your goal. Creativity could lead to something life changing.

Earlier this week, I shared a story about a venture capital fund having LPs renege on their capital commitments after signing paperwork. That was the first time I’d heard this from a VC fund manager I know personally. I assumed it was an exception rather than the norm but decided to do some digging.

Yesterday, Forbes published an article about this exact topic and why it’s happening. You can read it here. The article alludes to more established and larger venture capital funds being safer bets for institutional LPs than emerging funds are. I don’t agree with the connection this article makes that institutional LPs are investing now in established funds instead of in emerging funds. Institutional LPs don’t usually invest directly in emerging funds. Rather, emerging funds’ investors are usually family offices, high-net-worth individuals, funds of funds, and maybe some endowments (depending on their size).

I suspect that the LPs that emerging mangers target are being affected by the macro environment more than established funds are. And I suspect they’re trying to avoid selling assets at depressed prices to meet their commitments to emerging funds, or venture capital now represents too big a share of their overall portfolio (given that other asset types are more depressed than venture), or they’re gun-shy because of a looming recession and want to conserve cash.  

LPs reneging might not be the norm in venture capital, but it’s happening more than I realized and likely disproportionately affecting emerging managers. Emerging managers play an important role in getting capital to founders outside the traditional venture capital network and providing alpha to their investors. I suspect the savvy LPs will take advantage of this period and back high-potential emerging managers who will back non-consensus founders who generate outsize returns.

Today marks the end of my one-hundred-thirty-seventh week of working from home (mostly). Here are my takeaways from week one hundred thirty-seven:

• Focus – In my downtime, I’ve been learning about society’s inability to focus. I read about a new habit that helps with focus and other things. I tried it this week, and the early results are good. I plan to keep up this habit for a month before committing to it for longer.
• Packed schedule – This week was packed with meetings, including a half-day one. I was intentional about scheduling time to focus, which worked out well.
• Paying it forward – I spent half a day this week learning more about three early-stage businesses and providing feedback. These types of feedback sessions can be life changing for entrepreneurs, which is why I enjoy doing them. I remember this phase well and want to do for others what was done for me.  
• Pitch – I’ve been honing my pitch with friendlies who are aware of the problem/industry. This week I pitched non-friendlies who don’t know the space. It went over well. Still some things to improve, but it’s getting better.
• Networks – This week was a reminder to share what you’re doing. You never know who knows whom.
• 2023 – I’m starting to think about next year and what habits I want to stop, start, or continue.  

Week one hundred thirty-seven was a busy week. Looking forward to next week!

Today I chatted with founders of a growing software company who are trying to land a big multiyear customer contract and raise capital from investors. They’re considering raising a $2 million round of venture capital.

They proposed a $2.8 million two-year deal to their potential customer. The customer pushed back, saying $1M per year would be easier to get board approval on. The founders have internally agreed that $1 million per year would be a great deal, but they haven’t communicated that to the customer. I saw an opportunity to kill two birds with one stone.  

I pointed out to the founders that this deal has the potential to provide them with the capital they would raise from venture investors. It will be important to negotiate favorable payment terms.

Here’s what I suggested: Write up the contract as a $2.8 million deal over two years paid in equal monthly installments. Offer a discount of about 29%—$800K—if the customer pays the entire two-year contract—$2M—up front. This deal gives the client a strong incentive to pay up front. If they do, the founders will have the $2 million in capital they’re seeking to grow the business without giving up any equity in the company. If the client doesn’t want to pay up front (or can’t), the founders get a premium for taking monthly payments. I’d imagine there would be some negotiation. If they negotiate a $2 million deal paid in two annual $1 million payments, that’s still a win for the founders. They’d get $1 million Jan 2023 and another $1 million Jan 2024 to fund growth for each of those years.

Customer revenue is always the best way to finance growth. Founders should be mindful of this when negotiating and consider offering major customers terms they won’t want to turn down—if they pay up front.

I chatted with a founder who’s building an interesting company. He’s crystal clear about what he wants. He realizes the market he’s going after is small and doesn’t aspire to building a $1 billion company. He’s looking to build one that does $10 million in recurring revenue.

Not all founders want to build a unicorn, and not all companies are solving problems big enough that they could become unicorns. This founder is realistic; he doesn’t have unicorn ambitions.

He raised a few million dollars from investors and accelerated hiring significantly in anticipation of revenue growth. Things haven’t gone according to plan, and they’ve missed revenue targets. Given the revenue and growth rate, the team is now too big. Translation: the company is burning cash too fast.

The founder said he plans to raise more capital if revenue growth doesn’t accelerate. I was surprised. He wants to build a $10 million company but is thinking about raising capital as if he were building a unicorn. Let’s assume he tries to raise another $2 million. A total of $5 million raised to build a $10 million business isn’t appealing to most investors, and his capital raise would likely be difficult. Especially in the macro environment we have now.

I hope this founder can figure out how to grow his revenue. If he can, his company will grow into his current team size. Otherwise, he likely won’t be able to raise capital and may have to reconsider what size team is appropriate for the stage and growth rate of his company.

I had a chat with an early-stage founder trying to figure out his next move. He built a service business to help small businesses. From his work with his clients, he realized that software could create massive value for his service business and other similar businesses. So, he built software and funded that effort with the cash flow from his service business. The beta of the software is now complete, and he sees a large opportunity for it.

This founder is in a spot that feels tough to him. He’s trying to figure out how to continue running the service business and at the same time grow the software business. The financial runway he gets from the service business is important now, absent other alternatives. It pays his personal expenses in addition to funding the software development.

I’ve seen other founder friends with a similar predicament. One specific case comes to mind. My friend’s solution was to hire someone full-time who was his intellectual equal. Both were strategic and self-starting, had an owner’s mindset, and could manage people. My friend put in place an incentive plan that created alignment and transitioned the service business over to the new person. My friend focused exclusively on the software business and never looked back. The software business has become a massive success and changed his life.

If my friend had tried to focus on both companies, the software company would never have become what it is today. He recognized which opportunity had the biggest upside and turned his attention to it instead of splitting his time and mental energy.

Over the last few months, I’ve talked with several VC fund managers who’ve experienced fundraising from limited partners taking longer than planned. These aren’t emerging managers. They’ve established themselves with previous funds that returned capital to their limited partners. But as the public market and other asset prices have come down, limited partners have been slower to commit to making new investments.

Today I heard another story: limited partners who’ve signed paperwork and committed to investing in a VC fund reneging. They will no longer provide any capital to the VC fund. Notably, these limited partners are individuals, not large institutions.

This is just one story from one fund manager. I imagine it’s the exception rather than the norm, but it’s something I plan to watch closely. If this starts happening more often, emerging managers and the founders they back will likely be hit hardest.

Yesterday I went to the Atlanta Hawks vs. New Orleans Pelicans basketball game. It was a great game that went to overtime. Congrats to the Hawks for pulling out the win. I don’t watch sports on TV often, but I enjoy attending sporting events. The atmosphere and energy at a game are amazing, and you don’t get that at home, but that’s not what I enjoy most.

Sports teams create commonalities. People who otherwise may not have much in common share a love for their team. Sporting events bring them together. Serendipity becomes possible. People can build connections with each other as they cheer for their team. After the sporting event is over, with those connections intact, people have conduits into networks they otherwise might not have been able to penetrate.

I think of each sports team as the center of a network that attracts people from various other networks. The thing that amazes me is the number of unrelated networks sports pulls people from, bringing them together. That’s powerful, and I’m not sure if people have thought about this or comprehend it.

The conversations I had at the game yesterday reinforced this to me and crystallized why I love sporting events. I enjoy getting to know and learning from people in different networks, and sporting events are amazing for this.

This past week, I had independent conversations with a few people about spotting talented people early. Their perspectives varied because they’re in different industries: music, technology, and sports. All three are industries where talented people can have outsize success.

I won’t dive into the conversations, but let me just say they had a common thread: identifying talent before there’s data, traction, or association with a credible brand is hard. For example, Justin Bieber put out YouTube videos before his career got off the ground. Recognizing his talent among a sea of YouTube videos was hard, but Scooter Braun did just that.

Identifying talented people and developing them is arduous work. Many avoid it because it’s so hard. Instead, they prefer to come in after the talent has traction or numbers that are undeniable. There’s nothing wrong with this as it mitigates risk, but it’s not my preferred approach. My view is that yes, it’s difficult, but it’s fulfilling and an opportunity to have an impact. Recognizing something special in someone and helping them reach their potential is incredibly rewarding to me. Especially if they wouldn’t otherwise have gotten an opportunity.

Today marks the end of my one-hundred-thirty-sixth week of working from home (mostly). Here are my takeaways from week one hundred thirty-six:

• Deal negotiating – A deal is good when neither party gets exactly what they want but both parties are good with the end result. This week was a reminder that keeping the spirit of the relationship in mind is important when negotiating deals. If you want a long-term partnership, the deal should reflect that goal. If it’s a one-time transaction, not so much.
• Fundraising – I’ve talked with a few companies beginning their fundraising efforts now. The macro environment is tough, and the holidays are approaching fast. Fundraising is taking longer than these founders anticipated, and some are reducing round size and valuations to get the rounds done.
• Low meeting bar – This week I had a few meetings that were the result of setting my meeting bar low. They had some unexpected positive outcomes. I like the idea of keeping my meeting bar low when time allows. It keeps me closer to ground level and allows for serendipity.

Week one hundred thirty-six was productive. I made some great unexpected connections. Looking forward to next week!