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 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.

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.

The founder’s journey is something the average person can’t relate to. It’s a roller coaster of high highs and low lows. It’s hard to describe, and if you don’t see it firsthand, you don’t really understand it.

Today I found a video that documents the journey of a founding team from the idea stage to the sale of their company. These two cofounders weren’t even sure what problem they wanted to solve at first. The video details their year-long process to identify the problem they want to solve, their fundraising and hiring, and a host of other things. I don’t know these founders or their story, but the video appears to do a good job of documenting their five-year journey.

If you’ve ever wondered what the founder journey might look like, consider watching this video.

I shared an unconventional view with a friend this week: I believe that desperation can be a superpower when it’s harnessed—and great founders know how to harness it. When people’s backs are against the wall, miracles can happen. But only if their energy is focused.

Why? I think it’s simple: focus. When you’re in a tough or painful situation and desperate to get out, you zero in on what’s important. You ignore everything else. You focus on the things that can get you out of the situation. You’re not thinking about what you’ll do after or what you did before. You’re locked into the current situation and trying to escape it.

Nobody wants to be in a desperate situation, but life happens. If it happens to you, don’t give up. Some of the most unlikely outcomes—outcomes we celebrate—arose from the ashes of a desperate situation because someone focused and refused to give up.

Today I had the privilege of attending an event where two early-stage founders pitched the cofounders of Tiger Global and partners from Bessemer Venture Partners, Charles River Ventures, and Alsop Louie Partners. The founders did a fantastic job. I was curious to hear what feedback they received—it’s not often you’re able to hear feedback from such accomplished investors regarding early-stage companies.

The comment that stood out most was about metrics. The investors were impressed by both pitches, but the founder who included detailed company metrics was phenomenal. Customer acquisition cost, lifetime value, gross margins, projected revenue, and a host of other metrics were included in her pitch. She spoke confidently and demonstrated that she had a great handle on the levers that matter most and that drive her business. The panel said it was rare to see an early-stage founder have such a great grasp on the metrics of their business so early. They praised her and asked her if they could follow up with her so they could learn more.

If you’re an early-stage founder with a product in the market, identify the metrics that matter most in your business and focus on moving them in the right direction. Understanding these metrics will help you both stand out at this stage and make better decisions.

I was communicating with Roy Bahat by email. I ended up asking him for an introduction to another person. Roy, who is great, quickly agreed, asking that I send him a “forward intro email”. I reviewed his format and loved it. I’m often asked to make email intros, and I agree with what Roy says in his post. Anyone wanting an email intro should consider using Roy’s format. It will make it easier for your contact to make the intro, which will likely lead to the intro being made faster.