Jason Portnoy

Jason helps companies prepare for, and scale through, hyper-growth periods. He often works closely with CEOs to assist with raising capital, building/managing teams and navigating complex negotiations.

The Secret ‘Law’ Every Successful LP Understands

Originally published at www.pehub.com on December 7, 2015.

A significant event happened in early 2013: a new venture capital fund was born. This may not sound so significant to you, but it was significant to me and my partners at Subtraction Capital. We wanted to return to the origins of venture capital, a boutique tradecraft where successful entrepreneurs used their new-found wealth and experience to help launch the next generation of entrepreneurs.

We selected an irreverent name that spoke directly to founders, CEOs and executives of startups and who already know or have quickly realized that if they don’t aggressively work to shield themselves and their companies from distractions, their companies won’t survive.

We believed that helping teams identify and subtract distractions was an important way that we could leverage our operating experience to help our portfolio companies. We put 20 percent of our personal capital into our first fund, closed it fairly quickly and then got to work.

Fast forward almost three years and our model is clearly working. We have a thriving portfolio and we’ve had a chance to work with and learn from some amazing teams. But something else has happened during that time that I find interesting. We are now higher on the list of calls that entrepreneurs make when they start raising their seed or Series A rounds.

In a discussion about this a year ago, Paul Willard, my co-founding partner, commented that we were seeing “proverse selection.” It’s a term he used extensively in his years as an aerodynamicist at Boeing. In that context, the term refers to an aerodynamic effect that creates desirable “proverse yaw” rolling motion in an aircraft design as opposed to an undesirable “adverse yaw” rolling motion.

In the context of our venture capital work, we started to see that a powerful “law” was at play. This law appeared to be a six-step cycle that can be understood as follows:

  1. When we started, Subtraction Capital had no brand equity. Our past experience at companies like PayPal, NextCard, Palantir Technologies, Coupons.com and Atlassian gave us powerful networks, but we still did not have a brand that was associated with venture capital investing. As a result, we started by investing opportunistically in companies that were introduced to us through our then-existing networks or which we came across at conferences and then chased down on AngelList.
  2. We worked closely with those companies to help them as much as we could. This typically involved applying our operational experience to help them solve problems, or avoid certain common problems altogether, and providing introductions to individuals in our networks that could help them scale their businesses.
  3. As several of the Fund 1 portfolio companies have grown and scaled into more successful enterprises, their rising brand equity is inuring to the benefit of our brand.
  4. Because our firm is associated with more successful companies, teams are now approaching us earlier in their fundraising processes. They want our positive brand attributes to also benefit their company and brand. The logic here, which I think is mostly accurate, is that having high-quality investors helps you recruit better employees and raise money from other high-quality investors.
  5. Now that we see companies earlier in their fundraising processes, and see more of them in general, we have greater choice in our investment selection process.
  6. If we do a good job of identifying the best companies to invest in, and are able to help them, these investments will lead to quality outcomes with incremental brand equity for the company and our firm, and the cycle begins to reinforce itself.

To summarize, Higher quality outcomes leads to a larger pool of high-quality investment alternatives, which in turn lead to higher quality outcomes. We call this the “Law of the Proverse Selection Cycle,” as illustrated in the accompanying image.

 The-Proverse-Selection-Cycle

Benefits of the Proverse Selection Cycle

We realize that building an enduring venture capital brand is a multi-decade endeavor, and that we are just getting started. The Proverse Selection Cycle will have benefits that we only realize and appreciate many years from now. However, there is one benefit that we can already see, and which we are thoughtfully taking advantage of: time allocation.

Because of the quality of the teams and companies we get introduced to, we spend very little time sourcing deals. As a result, we have a lot of time which we can spend with our portfolio companies. This, hopefully, not only helps them be more successful, but allows us to build meaningful working relationships and also to learn from them. In addition, because we spend so much time with the companies, we get to know multiple layers and functional teams inside their companies, not just the CEOs. This operating exposure keeps our skill sets current and these new relationships expand our network, both of which will help all of our other portfolio companies, further reinforcing the cycle.

Why this ‘law’ matters to LPs

The Proverse Selection Cycle is powerful, and we believe it is a major reason that the best venture firms stay on top of the charts, and why their returns are so much better than their peers. If a VC firm honors the law, they become a magnet for the best teams and companies, which gives them such a large advantage that their competitors are constantly trying to play catch-up.

We are only just beginning to understand all of the ways that we ourselves need to cultivate the cycle. One hypothesis I have is that maintaining a disciplined fund size is one of the most important ways to maintain it. If a firm wants to raise a significantly larger fund yet still invest at a similar stage to where they were investing previously, I think this puts them in a dangerous position. Sitting on a large pile of capital that they have to deploy creates pressure to invest, even for the most mindful investor.

If a fund is too large, there may be a tendency to gradually invest in companies just for the sake of deploying capital, not because they are the best investments. If this happens and the quality of the investments degrades, the cycle will start to break. LPs should be sensitive to signals where firms are raising significantly larger pools of capital with the intention of deploying it in the same stages where they were investing previously.

I also believe that the power behind the Law of the Proverse Selection Cycle may be most exaggerated in venture capital. For example, I don’t believe you would experience this same cycle as the manager of a mutual fund. In that case, creating a brand for your firm would almost certainly translate to more asset gathering ability, but it would not necessarily translate to getting access to better investment opportunities for your fund. That investment class doesn’t appear to have a similar cycle dynamic where a better brand actually leads to better investment performance.

Institutional LPs already think about venture capital differently from other asset classes that they allocate capital to, but I want to emphasize how important this brand consideration should be in their venture capital allocation selection process.

Honoring the cycle

The Proverse Selection Cycle exists in venture capital, whereby the success of a venture capital firm’s portfolio companies leads to higher quality investment opportunities for the firm, which then leads to better portfolio company outcomes and a positive, self-reinforcing cycle. This cycle does not build momentum overnight, but if it is understood, honored and cultivated, it can be a valuable tool for a venture capital firm, creating powerful brand dynamics and value over the long term.

You might have noticed that I have not mentioned anything about investment returns. Our philosophy at Subtraction Capital is that if you understand and respect the underlying dynamics at play in a financial ecosystem and get them right, the returns will follow naturally.

The top venture firms have had the Law of the Proverse Selection Cycle working in their favor for many years, some of them for decades. I believe their dominant positions and stellar returns support our reasoning. If they continue to honor the cycle, they will consistently deliver results that far exceed the average return for the asset class.

5 Essential Habits Every Successful CEO Needs to Adopt Today

Originally published at Inc.com on October 29, 2015 by Bubba Page, Founder of QuotaDeck. 

I have loved getting to know venture capitalists from all over the country during my time fundraising for my company QuotaDeck and probably will be back at it again next year for our series A round. One thing I love when talking to VCs is hearing about their experiences and background.

I was able to dive in deep with one VC who I have become friends with, Jason Portnoy of Subtraction Capital who lead me down his path of experience of working with some amazing Chief Executive Officers as a senior team member (during his operating roles) or as a board member and/or advisor (during his tenure as an investor). Being a CEO is a unique role that very few people on the planet get to experience. Hopefully some of these tips will help you make the most of that experience while you lead yourself and your company toward success.

1. Don’t have all the answers

When you are building your company, there are a lot of decisions to be made. You do not need to have all of the answers. One of the most valuable things you can do as a leader is to create a culture where the right answers present themselves as quickly as possible and can be acted on as efficiently as possible. This means your business can’t be so cluttered with noise and distractions that your employees can’t hear the subtle signals the company is sending them about what it needs to scale and be successful. Be ruthless about subtracting things that are distractions for you and your top managers. Then have them use this approach with their direct reports, and so on. Done purposefully, your company will soon have very few distractions standing in the way of it’s inherent success.

2. Take good care of yourself physically and emotionally

Your job is demanding and your physical animal needs to be healthy for you to think clearly. Eat well. Get a lot of sleep. Get some exercise. Pulling all nighters doesn’t make you important, it makes you tired – and tired CEOs are not operating at peak mental capacity. For emotional health, Jason is a big advocate of hiring an Executive Coach or a Life Coach. CEOs bear enormous amounts of responsibility and pressure and typically have few people with whom they can share intimately enough to work through their thoughts. A trusted and objective outsider can help you process the normal emotional swings that come with starting your own company or leading a large organization.

3. Learn from The Five Dysfunctions of a Team

There are several key, yet subtle takeaways from this book that helped me immensely in my senior operating roles. One that seems to always come up in conversations and make an impression is just how short the list of responsibilities is for a CEO. These responsibilities are to:

  • Hire a great team,
  • Set the corporate vision, and
  • Lead and manage your team toward that vision

Jason says he typically advise CEOs to get themselves on a path where they aren’t doing anything at their company except those three things. To be clear, this is not an easy list. If you are only doing these three things exceptionally well, you will find that they will soak up almost all of your time.

4. Communicate with your stakeholders

Sharing information on a regular cadence is the best way to build strong relationships with your stakeholders (employees, investors, key business partners, etc.). Your constituents should be advocates for your company, helping you source deals, recruit new team members and think through business strategy, and they can’t do that if they don’t have information. These communications should not be novels. You don’t have time to write that and they don’t have time to read it. A short monthly email with the following items is usually enough:

  • Reporting on basic metrics/financials and progress toward goals,
  • Framing of key company initiatives and strategy thinking, and
  • Rough plans for the next few months.

There is high correlation in Jason’s venture portfolio between the quality, consistency and transparency (good news and bad) of company updates and the performance of the companies. They think there are several reasons for why this behavior is an indicator of success. One possible explanation is that writing updates forces CEOs to periodically take a step back and crystalize their thinking about their business more objectively, and holds them more accountable to goals which they’ve stated publicly.

5. Embrace your position as an inside-outsider

You are both an insider (as the chief executive) and an outsider (as a board member). You bridge the gap between the inside of the company and the outside world. Embrace this position. It is unique to you as CEO, so you have to take advantage of it. Get out of the office and circulate in the world. Not only does this increase the visibility of your company (you are the chief spokesperson), it takes you out of the day-to-day routine and helps you gain valuable knowledge and perspective that you can then assimilate into the company to help it learn, adapt and grow.

Tertiary Market?

Read time = < 2 minutes

What happens when primary and secondary buyers of late stage private companies want to start selling out of their positions? Many of them are sitting on huge unrealized gains. Unrealized gains are great, but eventually they need to be realized so that capital can be returned to investors or invested in other things that have prospects for a better IRR.

A lot of money has been invested in late stage private companies in the last 3-5 years by firms who are not traditional private market participants. They made these investments because it is hard to find growth in the public markets. They knew that they wouldn’t get liquidity right away, but hey that seems OK when everything is going up and to the right. When the stock market is going up, people shrug at a lack of liquidity. When the market is going sideways, they get uneasy and think about when they might want to sell. If the market starts going down, a lack of liquidity will cause a race for the door.  If this happens in the private secondary markets, it won’t be pretty.

Let’s say there is a late stage private company that is 10 years old with a valuation of $40bn. The VCs who invested at the beginning are starting to wonder when they will get liquidity to return to their LPs. The early employees are starting to wonder when they can sell so they can incorporate their new wealth into their lifestyles. Even the secondary market buyers who bought the stock 4 years ago at a $1bn, $2bn or $5bn valuation are thinking that the unrealized gains are looking juicy. Add all of these up on the cap table and the company could be sitting on billions of dollars of latent selling interest. And this is just one example company.

It seems like most of the biggest investors on the planet have already been buying private market shares for a while, and most haven’t gotten liquidity yet. Are there any left who have the combined balance sheet to absorb this kind of selling interest? Or to keep investing in new late stage private companies? Won’t the lack of liquidity start to fatigue their balance sheets at some point?

This late stage private market experiment has not been run before – at least not that I’m aware of. I’m not sure how all of this unwinds without companies making their shares available on an exchange of some sort that has the depth to absorb the selling interest and the transparency to ensure that participants are treated fairly. Does anyone think there is a way that this “private trade” unwinds gracefully?

Enabling the Future of Medical Transport

We love Enterprise Software. More specifically, we love investing in software solutions that help enterprises modernize their businesses and run them more effectively and efficiently. We also love investing in founding teams who have a deep personal passion for solving complicated problems in important industries. Fortunately for us, we found exactly this combination in Medlert (www.medlert.com).

David Emanuel, Medlert’s CEO and co-founder, started thinking about ways to modernize the ambulance industry when a relative of his was stranded after a car accident. He believed that there was a better way for emergency responders to leverage the proliferation of smartphones to drive faster response times and improve the quality of care. After a year of market research and experimentation with a few potential business models, he and CTO/co-founder Ernest Semerda realized that the best way to start modernizing the industry was to help the ambulance companies manage their non-emergency (aka non-emergent) transport ordering process.

There are over 40 million non-emergent medical transports each year in the USA alone, serviced by over 7000 independent ambulance companies. Assuming an average value of $1000 per transport (which is on the conservative side), that is $40 billion of economic activity spread across a broad base of providers. The market is big and fragmented, perfect for technology disruption.

Ernest had experience building robust and massively scalable systems at Coupons.com (IPO in 2014) and knew that he could develop the right system for this marketplace as well. The team got to work in late 2013 and worked closely with a few potential customers to develop an MVP of their first product, Medlert Connect.

Medlert Connect, is a secure, HIPAA-compliant, cloud-based platform for scheduling non-emergent medical transports from any smartphone, tablet, or a desktop. It helps ambulance companies improve patient care, efficiency, capacity planning and billing/collections. The Connect platform launched in the summer of 2014 and usage has been scaling rapidly ever since. It is now used by almost 200 medical facilities including Sutter, Dignity and Emory and transport volume in May 2015 will be up almost fivefold since January 2015.

Since Connect’s launch less than a year ago, Medlert has rolled out two additional new products to help ambulance companies. Earlier today, the team released Medlert Responder, a mobile app that offers the first all-in-one solution that allows ambulance crews to capture patient safety and quality measures, use voice-over navigation and real-time traffic routing, share accurate ETAs with healthcare facilities, provide speeding alerts and detect crashes.

The Responder release comes quickly after the team’s April 2015 release of Medlert Eligibility, a software tool that helps ambulance providers instantly verify customer demographics and billing information either up front or after an ambulance transport.

The development velocity that has enabled Medlert to continue enhancing the platform to support their growing customer needs is, we think, a testament to the passion and ingenuity of the team. And their commitment to their customers has allowed them to partner with some of the largest ambulance companies in the country in just a short period of time.

As Medlert continues to establish their place in the market, they will also be positioned to address a number of other shifts that we see happening in the healthcare technology industry. For example, as a HIPAA-compliant scheduling platform, Medlert Connect’s capacity to streamline scheduling, billing, eligibility and (soon) claims processing could be readily applied in a Mobile Integrated Health program. Particularly with high-risk patients, scheduling a follow-up home visit at discharge could avoid future readmissions.  

We are excited about the innovations that Medlert is bringing to the emergency transport industry, and for the ambulance companies who will use these new tools to improve the quality of care that millions of patients receive.  We see a bright future ahead for Medlert and we are proud to be partners with them.

IPO is not a Four Letter Word

In late December 2014 I was talking on the phone with the CEO of one of our promising portfolio companies. During that conversation I began to sense that he believed his company value would cap out in the several-hundred-million-dollars range, and that their most likely outcome would be to get acquired by a larger company. I started wondering why he was assuming that, and asking why he wasn’t thinking bigger and wasn’t thinking about an eventual IPO. Given the market opportunity ahead of them I certainly felt that his company had the potential to be a strong, stand-alone, publicly traded company.

His first response to my question was telling: “That’s a great question. I’m not sure I understand what an IPO really is.”

Then it dawned on me: He is part of an entire cohort of Founders/CEOs who have come of age professionally at a time of hostility toward the notion of taking a technology startup company public. Many of these CEOs aren’t sure what an IPO is. Maybe they understand it in broad conceptual strokes, but they may not understand it in detail. They aren’t sure how it works mechanically or what the pros and cons are for their business. Then they hear public figures who they respect telling them that going public is a bad idea, and it removes any motivation they may have had to try to understand it. As a result, they continue to assume that an acquisition is the only possible outcome for their company, and they set their sights to this (typically lower) outcome goal. I believe that this lowered goal-setting is very damaging for the CEO and their company’s potential to grow and scale successfully, because it creates a set of limiting beliefs in the mind of the CEO and management team that are subconscious and insidious, and therefore difficult to address head-on. As a result, the beliefs eventually manifest as reality and limit the growth potential of the company, and therefore it’s ultimate value. Our thesis at Subtraction Capital is that, regardless of what path they ultimately take (IPO, acquisition, stand-alone private), most Founders/CEOs should build their business as if they are eventually going to be a publicly traded company in order to drive to the best outcome.

What is an IPO?

[Readers who already know should skip this part.]

Let’s start by addressing the basics of an Initial Public Offering, or IPO.

At its core, an IPO is the same as other financing rounds for a company.  The company is selling shares of its stock to investors, with the intention of using the proceeds from that sale to fuel growth in its business.  Rather than call this financing round by a name like “Series X”, it is called an Initial Public Offering because it is the first time that the company is selling shares of its stock to investors on a publicly traded stock exchange like the NASDAQ or the New York Stock Exchange (NYSE).  These two exchanges have some differences, but for purposes of this discussion they behave almost exactly the same.  The first public purchasers of the company’s shares are typically mutual funds, who have large pools of capital and relationships with investment banks who introduce them to companies that are getting ready to sell shares on the public market.  This is one of the primary roles of investment bankers in the IPO process: To introduce the CEO to the investors who will initially buy the company’s publicly traded shares, and also to help the company tell the story in the way the public market investors want to hear it.  Note that the bankers are also referred to as “underwriters” because they are actually buying and selling shares of the company’s stock as part of the IPO process, and therefore taking some risk along the way.

Publicly traded stock exchanges are, by definition, available to the general public.  Because of this, the Securities and Exchange Commission (SEC) – the part of our Federal Government whose mission is “…to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” – requires the company to disclose a huge amount of information in public documents, so that public market investors have the information they need to make an informed decision about investing in the company.  These disclosures are first presented in a “prospectus”, which is often referred to as an “S1″, the technical document name code used by the SEC.  The prospectus contains, among other things, a description of the business, an analysis of the risks that the business faces, and a presentation of the audited financial results of the company for several prior years.  Generally speaking, other than a qualitative discussion about the business goals and objectives, the prospectus does not focus on predictions about what will happen in the future.  It mainly summarizes what has happened in the past.

One of the important technical things that happens during the IPO process is that the preferred stock the company issued to its private investors typically converts to common stock, and most convertible debt instruments and warrants to purchase shares are either converted or exercised into common stock.  This reduction in stock classes and contingent instruments has the effect of making the company’s capitalization table much simpler.  [Bill Gurley of Benchmark recently mentioned this decalcification of the cap table as an important benefit to companies that go public, which I tend to agree with].  Investors, employees and others who own shares in the company prior to the IPO have to sign a “lock-up” agreement where they agree not to sell their publicly tradeable shares for some time period after the IPO (typically 6 months).  This is usually a requirement of the underwriters so they can make sure that the stockholders who invested in the company as a private entity don’t flood the market with shares they want to sell until the stock price has stabilized.  Those investors have typically been invested in the company for years already by the time it goes public, and have substantial unrealized gains that they would like to get access to, so they are eager to sell when they have liquidity.  [If this topic interests you, Henry Ward of eShares has started a great discussion about how different investors on a cap table have different motivations and time horizons.]

Why don’t Founders/CEOs aspire to take their company public?

There are many reasons why a Founder/CEO may not be thinking about an IPO as an attractive long-term goal for their company.  This is not a comprehensive list, but I think sufficient to illustrate the point.

1) Not understanding what an IPO is

I addressed that above…

2) Fear that going public would create a lot of cost and overhead to running their business in the form of legal disclosures, financial reporting, Sarbanes Oxley rules, etc.

Unfortunately some of this is true, but it should not deter you.  Being a public company does subject you to an increased set of reporting requirements.  When Sarbanes-Oxley (or “SOX”) was enacted in mid 2002, it was a big incremental step in the level of reporting and scrutiny that a publicly traded company had to bear.  For companies that went public in and around this time (like PayPal), this created an enormous amount of work because the act was so new.  Lawyers, bankers, accountants, SEC reporting managers at companies, and even the SEC itself were not yet familiar with the new regulations, and it was extremely challenging to understand how they applied to specific circumstances.  But that was over 10 years ago.  Fast-forward to 2015 and everyone involved in the IPO process or SEC reporting for a public company knows what these rules are and how to apply them.  Yes it is still work to do it, but there are much more complicated things you’ll have to do if you want to build a company that is strong enough to go public, so you can handle this.

3) Fear that being a publicly traded company will force a focus on short term results at the expense of long-term, innovative thinking

I think the best way to address this is the way Keith Rabois addressed it in his recent conversation with StrictlyVC: Look at the counter-examples.  Apple, Google, Amazon, Intel.  The list could go on.  These are some of the most innovative companies on the planet.  Can you innovate and think long term when you are a public company?  Absolutely.  [Keith’s comments are great and he also addresses some of the advantages of being a public company in that same interview.]

4) The market turmoil of 2008-2009 spooked a lot of millennials

My sense is that this “No IPO” sentiment is strongest among CEOs in the millennial generation.  The financial market crisis of 2008-2009 may have had an interesting impact on them by causing them to shy away from focusing on what was happening in the stock market.  Maybe this was a positive thing, as I generally feel like people are overly fixated on (and therefore distracted by) daily gyrations in the public markets.  Whatever the reason, it feels like this generation is not as interested in what the public stock market has to offer them, so they haven’t invested much time in developing a good intuition about how it works.

5) Respected public figures say it is a bad idea

When an entrepreneur hears a successful and respected capitalist (venture or otherwise) say that going public is a sign that a company’s best days are behind it, they have a tendency to believe it.  But if there is one statement I would use to counter this sentiment, it is this: Think for yourself.  To say that going public is categorically a bad idea just can’t be right.  To be clear, I am not “Pro IPO”.  At Subtraction Capital we believe that venture capital is a boutique trade.  Innovations are, by definition, new.  Every market is different.  Every founding team has its own strengths and weaknesses.  In totality, all of those things intersect in a very unique way for every company.  To be dogmatic about anything in such a sea of nuance is dangerous.  At the very early stages of company formation venture capital can be more like a factory model.  At the late stages you pretty much just need capital to scale.  But in the Series A, B and C stages, where you are really doing the heavy lifting of company building, you need a highly nuanced approach to building your company and mapping its arc.  Every company should be evaluated differently.  Is IPO the right goal for your company?  I can’t answer that, but you should at least be asking yourself that question vs. just assuming that it is not.

Why not setting a goal of going public can be bad for your company

Regardless of why a Founder/CEO doesn’t think that an IPO is an attractive outcome to aim for, I think that this perception creates a set of limiting beliefs in the mind of the CEO and the management team.  These limiting beliefs manifest themselves in a variety of ways, many of which actually reduce the ability for the company to scale quickly and withstand the pressure it would have to endure to prepare for and become a publicly traded company.  Ultimately this can lead to a self-fulfilling reality that the company can’t scale toward going public, thus reducing the companies strategic alternatives and therefore it’s long term value.

I believe the most common manifestations of these limiting beliefs are:

1) Companies don’t hire a management team that is as strong as it should be

For many Founders/CEOs this one is difficult to calibrate, because realizing this may require they have worked with a team of people who have taken a company public.  I feel fortunate that I was lucky enough to have a front-row seat during PayPal’s IPO process.  Yes that was 13 years ago, but those memories are so vivid it feels like only yesterday.  PayPal’s leadership team was incredible and is perhaps on it’s way to being legendary.  Is is also a great example because many of them are now public figures so you can almost get a sense for what it might have been like.  Imagine yourself sitting in a conference room with Peter Thiel, Max Levchin, Roelof Botha, Reid Hoffman, and David Sacks having a discussion about preparing to go public.  Close your eyes and imagine what that might be like.  As individuals those guys are now some of the most powerful creators in Silicon Valley, yet at that time all of their collective energy was harnessed together.  PayPal’s IPO was incredibly difficult because of the shifting regulatory landscape I mentioned above (SOX), the disruption PayPal was causing in the banking system (which banks and regulators were fighting), eBay’s attempts to snuff out PayPal, investor’s memories of the then-recent dot com bust and, of course, the tragedy of September 11th 2001 (only five months before PayPal’s IPO).  I doubt that a lesser team could have prevailed against the same backdrop of circumstances.  I do believe that a lesser team can take a more typical company public in a more typical market environment, but let’s hold this team up as an example of a gold standard that we should try to aim for.  And to be fair, it wasn’t just the leadership team inside of the company either, it was also the team of investors who had assembled around the company to help support it.

Now think about the leadership and investment team that you are assembling around your company.  How does it compare?

If you really thought that going public was an option for your company, you would start constructing a team early on that can scale the company with the velocity and rigor required to go public.  I’m not suggesting that you have that team in place by the time you raise your Series A, but it should be taking shape by the time you raise your B and likely be fully formed by the time you raise a C.  If you don’t think you have the context to evaluate this, get out there and start meeting people of the appropriate caliber so you can see what they walk and talk like.  Introductions like these are one of the most important services we provide to our Founders/CEOs.  Your investors should do the same for you.

2) Companies don’t scrutinize their business model as thoroughly as they should

If you think that getting acquired is the only option for your company, you might be content to have a goal of “growing”.  That might be enough for you.  But if you are thinking about being a big, stand-alone, public company, you wouldn’t stop there.  Right now the current market sentiment seems to be that a company needs to have annual revenue in the $100m range, and profitable, in order to be around the right scale to go public.  Think hard about your business model and your market.  Can you chart a credible path to profitably generating that kind of revenue in the next 3-5 years?  [If it takes you 10 years to get there you are probably growing too slowly to go public.]  If not, are there things you want to start changing?

3) Companies don’t build a strong enough foundation early on that can support hyper-growth and scale

Everyone knows that a chain is only as strong as it’s weakest link.  The same adage holds for companies.  Early on it is important to invest heavily in product development and distribution, because those are the areas that get the company started.  Your product needs to be excellent, and your distribution strategy needs to be clever and highly scalable.  But if your product is good enough to get swept up in the vortex of hyper-growth, you will quickly have to start investing in infrastucture to support an organization that is growing fast.  If you don’t plan for this early enough, it can really hurt your ability to scale, thus limiting your potential outcome.

One of our CEOs whose company is experiencing this now recently shared a realization that “…the risk in the business has suddenly shifted from hiring too quickly and running out of cash, to hiring too slowly and getting crushed by the wave of customer demand (by delivering a poor customer experience).”

To draw an analogy, let’s say that product development (engineering, QA, product management) and distribution (marketing, sales) are the vital organs in the body.  In order for these vital organs to function well at a fast pace and at scale, they need a robust set of supporting systems to deliver the oxygen (capital) and nutrients (resources) they need to do their work effectively and efficiently.  We don’t want the vital organs to be distracted by poor infrastructure when we’re putting heavy demands on them – it is painful for them and it slows the entire organism down.  The supporting functions I’m referring to are things like Finance, Legal, Recruiting, HR, Building Operations, IT, etc.  To be clear, just because I’m calling these “supporting” functions, does not mean they are less important.  They are “supporting” because their customer tends to be someone who is inside of the company. To the extent that their roles help everyone in the company operate at peak performance, they are extremely important, especially when the company is scaling quickly.  At times I see companies hiring supporting functions later than they should, and as a result their vital teams go through periods of distraction that are caused by poor infrastructure, which slows the entire company down.  So look around your company and think about what things would start breaking if you were growing really quickly and wanted to head toward an IPO.  If you ultimately want to handle the velocity required to go public, you need to have strong foundational teams that support you.

4) Venture Capitalists want to invest in companies that they believe can go public

Venture Capitalists run a business, just like you.  They have a product (a financial service) and they have customers (their Limited Partners, or “LP”s).  Their customers want them to make as much money for them as possible, and then return their capital so they can redeploy it into other investments.  For them to use an IPO lens as a means of evaluating an investment makes sense in this context. If a VC thinks that a company can go public someday, it implies that they think the company can get very big and that they can eventually get liquidity to return to their LPs.  If you have a limiting belief that your company is not a candidate for going public, you are going to betray that belief in a broad manner of subtle ways, from the way you are building your company to the way you talk about it when you meet with a potential investor.  The best VCs (the ones you want to invest in your company) are experienced and will pick up on these clues, and they will not invest.  By not getting a strong investment partner to help provide the capital and advice you need, you start to limit your companies ability to scale quickly and therefore it’s outcome potential, and your limiting belief begins to manifest as reality. Our company has been on the market of custom research and academic writing services for more than 10 years.

In summary

I want to reiterate that I am not “Pro IPO”. I believe that every company is unique and it’s desired arc should be the one that is best suited to the specific team, product and market in question. What I am suggesting is that Founders/CEOs should be aware of the subconscious assumptions they are making about the potential future outcomes of their business, because in the long run they will manifest as reality. Weigh the pros and cons of being public in the context of yourself, your team, your company and the market you are playing in. Make a conscious and informed decision based on your unique set of circumstances. Don’t just believe what you hear and read. It is also worth noting that I don’t think you should focus on this until your company has achieved some amount of product/market fit and is starting to scale. But when that happens, I believe you should at least consider building toward an IPO as a desirable outcome for your business. Whether you ultimately decide to go public or get acquired doesn’t actually matter; by intentionally setting your company up with the team, business model and infrastructure that it would need to go public, you are likely to drive to a bigger outcome than if you had subconciously set your sights lower.

The Rising Tide

We’ve all heard the saying “A rising tide lifts all boats”.  What I’m thinking about lately is the rising tide of startups that are all competing with each other for scarce resources (talent and capital, mostly).  I’m seeing an interesting effect in the startup ecosystem that goes something like this:

Mid 2013: Your company raises a very nice round and is off to the races.  You, your investors and advisors all discuss the right milestones for you to raise your next round in the coming 12 to 18 months.

Mid 2014: Your company has been tracking very well.  You are not the next Snapchat, but you have scaled well and hit most (if not all) of the milestones you set out to hit since Series (X).  You are gearing up to raise your next round but all of the prospective investors are telling you that you aren’t ready yet and need to show more traction.

What happened?

What happened was that back in mid 2013 when you raised Series (X), a thousand other startups poured into Silicon Valley (or out of ABC Incubator in Somewhere, USA) and raised rounds as well.  And all of them have been gunning for their Series (X+1) right alongside of you.  So when you walk into a VC’s office now you are getting compared to all of the other startups from your chronological cohort, and unless you have been really breaking-out, you just aren’t rising above the noise.  What you and your trusted advisors thought would be “good enough” to raise the next round a year+ ago may have been true AT THAT TIME, but now the bar is higher, and it isn’t good enough.

This feels like a dynamic that may be unique to the current times, as the startups coming out of a glut of seed investment in the last few years make their way through the funding stack.  Whether or not that is true, it feels real and like something we should pay attention to.

I feel like this dynamic is similar to what happened to a lot of baby boomers saving for retirement; another case where a huge spike in a population moved it’s way through a system.  For 30-40 years they thought that if they saved $1m they would be wealthy in retirement.  But they didn’t think about the fact that by the time they got to retirement $1m wouldn’t be enough because their life expectancies would be much longer than they were decades ago.  The fact that a lot of educated people got hit with this phenomenon just shows how insidious it was…and how rarely people step back to consider the macro environment they are operating within.

I think a lot of startups are facing a similar dynamic when they go to fundraise, and it could be very dangerous for them.

So what should you do now?

If you are thinking about raising money in the next 6-12 months this would be my suggestion:

1. Take a hard look at what is required for a company to raise the round you want to raise in the current market environment.
2. Map those requirements to what your specific company/results need to look like in 6-12 months (basically whenever you want to raise) in order to get that financing.
3. Assume that everyone else who is planning to raise money in the same time period is doing the same thing.
4. Assume that your initial assumption for what would be required to get the financing you want is not good enough.  As a shorthand, try taking your original estimate and doubling it.  [We can debate specifics here, but you get the idea.]

In short, your baseline assumption should be that whatever you are planning to do, it isn’t good enough.  You need to grow faster.  Your product needs to be better.  Your team needs to level-up.  You aren’t just competing with companies in your space – you are competing with every other company that is seeking funding.  And as more and more capital seems to be consolidating in the hands of fewer big firms, your alternatives for funding may be shrinking (obviously this is also not good for you).

Basically you are about to get hit on this from both sides.  It feels like the best way out is to raise your expectations for yourself and your company.  Move faster.  Be more focused.  Hire better people.  Make these changes now, because if you wait until they are obviously necessary, it will be too late.