In this conversation, Will Bricker, a venture capitalist at Hustle Fund, shares insights into early-stage investing, the philosophy behind Hustle Fund, and the complexities of valuation in the startup ecosystem. He discusses the balance between art and science in valuation, the role of accelerators, and the importance of understanding market dynamics. Will emphasizes the need for flexibility in valuation and the significance of aligning incentives between investors and founders. In this conversation, Will Bricker discusses the importance of accountability between founders and their customers, the dynamics of startup valuation in a volatile market, and the significance of revenue quality in investment decisions. He emphasizes the need for founders to understand market corrections and the implications for their fundraising strategies. The discussion also covers the challenges of portfolio management and the role of benchmarking in evaluating startup health, ultimately highlighting the art of fundraising and the importance of ROI in decision-making.
Listen on Spotify
Listen on Apple Podcasts
Listen on SoundCloud
Takeaways
Will Bricker is a venture capitalist at Hustle Fund.
Hustle Fund focuses on early-stage investments in tech startups.
Valuation is both an art and a science, especially in early stages.
The ability to execute and iterate is crucial for startups.
Founders should understand the ROI of having investors on board.
Market dynamics play a significant role in valuation.
Flexibility in valuation is important for great opportunities.
Negotiation on valuation indicates a healthy relationship between founders and investors.
Understanding market size is essential but should not be overemphasized.
Aligning incentives between startups and investors leads to better outcomes. 100% of you are my founders as my customers.
Founders should walk away from pitches feeling valued.
Valuation becomes more scientific as companies mature.
Market corrections can be healthy for the startup ecosystem.
A premium for revenue is crucial in today’s market.
Not all revenue is created equal; quality matters.
Raising money just because you can is risky.
The ROI of incoming dollars is essential for founders.
Understanding market dynamics is key for fundraising.
This year is pivotal for startup fundraising trends.
Chapters
00:00 Introduction to Hustle Fund and Will Bricker
02:52 The Philosophy of Early-Stage Investing
05:54 Valuation: The Art and Science
08:53 Navigating Competition with Accelerators
12:08 Understanding Market Dynamics and Valuation
15:00 Evaluating Opportunities in a Frothy Market
17:58 Market Size and Its Importance
21:07 Negotiating Valuation with Founders
28:12 Founders and Customer Accountability
30:09 Valuation Dynamics in a Volatile Market
32:22 Market Corrections and Startup Viability
34:38 The Premium for Revenue
37:51 Evaluating Startup Health and Revenue Quality
41:30 Portfolio Dynamics and Valuation Challenges
45:42 Benchmarking and Portfolio Analytics
52:43 The Art of Fundraising and ROI
Transcript
Dan (00:02)
Okay, perfect. So just to begin with, if you give us like a little intro to you in your own words, and then we’ll spin that into our own intro later.
Will Bricker (00:09)
Okay, I’m Will, a data nerd and overall weird guy. Venture capitalist based out of New York working for House of Fun, which is a pre-seed venture firm. And I am pretty direct to the point, wrong about many things, but keep on trying and learning. Is the goal.
Daniel (00:33)
Awesome. And just before that, Will, do you wanna say anything about before hustle?
Dan (00:33)
Awesome.
Perfect.
Will Bricker (00:39)
Yeah, so House of Funds, a pre-seed venture capital firm investing in the United States, Southeast Asia, and Canada on software and or services. All partners who were former founders, we like to think that we did before we invest.
Although things are always changing, we have a bit of a different model. We have a first check 50 K follow on one 500 K. We’re looking for at the end of the day, basically what we call hustle, which is the ability to execute, understand, iterate, and do it all over again. Quickly, efficiently, ideally.
Daniel (01:17)
Awesome.
Dan (01:17)
Perfect.
Anything about your experience pre-hustle fun do you want to highlight? Anything particularly important there? Hahahaha
Will Bricker (01:25)
boring, boring finance background,
very generic finance background that I threw away when I realized it didn’t fulfill me, much to the chagrin of my father, almost had a heart attack, and decided that I wanted to work with founders because it gives you an opportunity to learn new things every day, feel like you’re genuinely helping people row in the boat, kind of aligning incentives and…
gives you energy in a way that you can’t really, I think, describe or find in a lot of other places in life.
Dan (02:03)
makes sense. Yeah, we’ll make sure to mention boring generic finance background.
Will Bricker (02:08)
Orange and Eric, like, you know, like, bang, that’s fun, New York, like very, very vanilla.
Daniel (02:10)
That’s the title of the episode.
Dan (02:12)
Oh, that’s a good one.
All right, perfect. Everybody ready? Kick this off. Okay, nice. Welcome back to the Equidam podcast. I’m joined as usual by Daniel Filippa, Equidam’s founder and CEO. Hi, Daniel.
Daniel (02:19)
Awesome.
Yeah, sure. Yeah.
Hey, done.
Dan (02:34)
Today is a landmark episode. We’re joined by our first guest, Will Brickert of Hustle Fund. Thanks for joining us, Will.
Will Bricker (02:42)
You didn’t tell me about that part. First guess, I’ll make the prototype. Oof, it can only go up from here. That’s the good news.
Daniel (02:45)
I did.
Dan (02:52)
Perfect. So I mean, to kick things off, maybe tell our listeners a little bit about Hustle Fund’s focus and philosophy and your role there. You know, obviously we’re particularly interested in how you kind of track and analyze the valuation data, but anything else you do as well would be interesting.
Will Bricker (03:11)
I can tell you a little bit about the Nature House Fund and how I got here. We are a rather large firm in terms of investments in portfolio companies. We have over 450 portfolio companies across three different funds. We write 10 or so checks a month. We have a rather unique set of challenges and goals when it comes to…
building and managing our fund, which is that we need to be able to make decisions quickly, understand a rather vast portfolio, and continue to kind of iterate and move as the market moves. And so when I approached Hustle Fund originally, many of my peers were approaching with, hey, this is what I think you should invest in. And my approach was, hi, I’m Will, and this is how I think I can help you invest.
And so I kind of have a data and as I’ve said, nerdy background and my vision was, look, I think that there’s a lot of things that you can do with data and logic and automations to help make your fund model scalable. And so from day one, basically that has been part of my charge in addition to being a full-time investor. So it’s kind of a fun balance.
And a lot of what I’ve done is basically tried to understand the various pieces that go into running and managing a venture capital firm, trying to separate out the different actions and information and automate and systemize them more possible. So that means either removing things from our plate, allowing us to kind of like programmatically do them or to help us when there is a human in the loop, do them better.
And so that really manifests itself in two areas. One is pipeline coming in deals. Right now we average about a thousand deals a month, so how are we able to parse those in a way that I get to sleep at night? And then we, like I said, we have over 450 portfolio companies, so how do we understand how they’re doing? How much they’re worth? How they’re changing, right?
really big task and challenge. And so we’ve worked a lot over the past several years to bring our capabilities up to a level that is not only required, but I think is over and above what a lot of other firms are doing in the space, but mostly because it’s really core to our ability to function as a fund.
Dan (05:54)
Fascinating, yeah. And given your hilariously early stage focus, to borrow words from the Hustle Fund homepage, how do you address the art versus science of early stage valuation? We are also very data and systems oriented, as it sounds you are as well. So there’s always a bit of pushback on that side. How much can you trust the numbers at pre-see, pre-revenue?
But obviously we both believe there is a lot to be learned there, there’s a lot of value there. So how do you kind of look at that? How do you approach that?
Will Bricker (06:29)
Yeah, so I think that, you know, valuation, I think, is both an art and a science, no matter what, but the earlier you get, the more and more of an art it is and the harder and harder the challenge is to bring in the science. And so what the way that we try to do it is basically kind of understand where the market is given the dimensions of a given company, right? We kind of create these different.
characteristics of any given company and based upon where all the companies we’ve seen are and this company we kind of try to benchmark the area of, okay, what do we think the realm of valuation is for this given startup? And that’s a great starting point, but the problem with that is that every startup is, I think, unique in a way that is hard to fully quantify. And so you kind of have to have principles, I think.
in the back of your head about how you work from a baseline to the actual valuation and investing, right? First is identifying opportunities that you want to invest in, right? Whether it be the people, the idea, the traction. With us, it’s a lot more the people and the vision because we are so early and numbers are scarce at times. Most of our companies have got a MVP of product and some early acquisition ideally, but not always.
And so, okay, how do I work from there? Well, I think it has to do in part with saying like, okay, what I think the viability is of this business, back of the hand, net present value type thing, right? What is the size of the opportunity to be? What part of the market can they capture? What is that worth? But also like, do I believe in this person? Do I wanna work with them? Because given our early stage, we’re really signing up to row in the boat.
with a given founder, right? And so that is super, super important. And so if I really wanna work with a founder, I think that, and I really am bored with an idea, I think that valuation is a little bit more flexible. What do I mean by that? Well, we’re pretty early, we’re writing very early checks and small checks, right? And so that means we’re gonna get diluted a lot. So actually, the valuation at which we get in matters a bunch because it’s
Daniel (08:29)
Do.
Will Bricker (08:53)
our percentages, you just watch it shrink down, right? Progressive, progressive, especially depending on the business model. However, I think there’s also like important thing to say, which is that, you know, getting a great valuation on a deal that goes to zero doesn’t matter much. And getting a bad valuation on a company that goes to the moon still can be a great outcome.
And so you have to kind of balance the making sure that you’re protecting the math of portfolio construction and the theory and execution of getting into opportunities that you think can return.
Daniel (09:32)
Maybe I have just a follow up on that. So do you think about competition with accelerators or you guys come in afterwards, do you see founders choosing between you and an accelerator or not really?
Will Bricker (09:51)
I don’t think between the two, I think it’s not like an or statement at times, it’s an and. I think that we have very different value propositions, right? Our valuation and entry is going to be a little bit more founder-friendly, right? We’re not going to take 10% of the company, right, at a $2 million valuation, whatever it is, right? And so, or 5%, whatever.
And we are not going to provide though, as well, like the in-depth kind of like fundamental training to the same level in Accelerator. We do have a bunch of scalable programs we use to try to help our companies address and learn about and get better at issues that are core to growing a business. But it’s not going to be the same level of intensity than Burt’s many accelerators. And so it’s a little bit of a different option.
Daniel (10:41)
Yeah, yeah.
Will Bricker (10:44)
We have companies that we invest in after they’ve been Accelerators. We’ve got companies that we’ve invested in before they’ve been into Accelerators. And we, majority of our companies have never been to an Accelerator or at least not one that takes an equity payment. Right. There’s a lot of different formats of Accelerators, like an umbrella term, just like venture capital firm, just like finance and everything else, right. And so, no, and also I think we’re great for some companies and I think Accelerators are great for some companies and there’s an overlap, but
Daniel (11:05)
Yeah, that goes into.
Will Bricker (11:13)
You know, there’s also areas where that idea is distinct.
Daniel (11:16)
Yeah. I know it kind of goes into our crusade of removing a lot of these labels from venture investing because, well, first of all, they don’t make much sense anymore, like for the past five years or 10 years. And second of all, it just puts everybody in these buckets and leaves outside a lot of people that don’t fit in this and a lot of opportunity that doesn’t fit in the buckets as well. Yeah. Super interesting. Yeah.
Will Bricker (11:41)
What’s a seed round? What’s a pre-seed
round? And then the things that people will call rounds make no sense to me. And they’re actually not really indicative of basically the hard numbers. How much money are they raising? At what valuation? And where are they at on the field? I’ve heard like series A, B, $5 million, $50 million, $100 million. Okay, that’s a pretty big spread.
Daniel (12:08)
Yeah, yeah, exactly. And for us, like, yeah, that’s the other thing. Like you have this, okay, this type of checklist, right? And they don’t make any sense anymore. Like, and they have this incredible, like from two to 12 million. Well, from two to 12 million is a 4X reduction of equity for investors and for founders as well. Yeah, 100%. Super.
Will Bricker (12:33)
Yeah, and one of the things that we also encourage companies to do, depending on their circumstances, is basically tranching, which is it’s the same round, but you break it into different pieces at different valuations so that you can get money in the bank more quickly, kind of prove milestones and inflection points, and get momentum to actually raise the full round. So there’s not even like one value for the round necessarily, right?
Daniel (12:59)
So how do you set valuation in that case?
Will Bricker (13:03)
Um, so the way that I tell founders is I try to kind of dot home and get financing, uh, the dollar cost average into the valuation that they’re trying to target, right. Um, and so if it’s $10 million, right. And they want to raise, I’m just going to make the math easy because. But because we’re on a podcast here, they want to raise 600 K, right. Do 200 K at eight, 200 K at 10, 200 K at 12, right.
dollar cost averaging, you’re getting money quick, but you’re also rewarding people who are early believers. Maybe create a little bit of FOMO depending on the psychology you want to get into and it can be a really great and effective strategy.
Daniel (13:30)
Awesome.
We were saying we’d done the math today, it’s gonna like break somebody’s brain, but I think so far so good, so far so good.
Dan (13:49)
Heh.
Yeah, we’re keeping it simple. I got a quick question going back to what you said before about looking at valuation in the context of the market and where a venture fits in against other deals you may have seen. Let’s say it’s 2021, you’re looking at a Web3 company and you have a lot of conviction, but you also don’t really believe in all of the hype and you see the valuations getting a bit crazy.
Will Bricker (13:54)
I’ll do my best.
Dan (14:22)
So how then do you approach that? Because you recognize that there’s a lot of potential in this company, but the market it’s in is a bit silly.
Will Bricker (14:32)
Uh, okay. We could also do 2023 AI where I think actually the market is a little bit different, but you’re seeing the same thing of right, like big hype, both in the venture space and externally, lots of hot deals, right. Money flowing in. How do you handle it? Um, and so I’ll do your case for the sake of, uh, well, you’re the host. So what am I supposed to do? Uh, look, I think that.
Dan (14:36)
Yeah.
Will Bricker (15:00)
You need to kind of have a fundamental vision of these emerging technologies and how they can be applied and useful going forward to get in the first place, right? Just because a lot of people think it’s hot and there’s a lot of money flowing into the area and big valuations and up-rounds doesn’t mean that necessarily you believe like that it’s a great investment. It really depends on like your vision, right? And so there are web three applications that I think you want to start with three, I think there are web three applications that are more.
kind of fundamental infrastructure type ideas of, okay, how do you provide transparency, security and efficiency when it comes to transactions of all type versus like, I don’t know, a couple of weeks ago we had Pepe coin, right? Which is like, what is that doing? I don’t know, but it was making a bunch of money, right? And so there’s a lot of different ways actually to get into that market in terms of investment vehicles, whether it be equities.
tokens, warrants, et cetera, right? And then there’s a lot of different kind of sectors of the market that you can get into to try to get exposure. Generally, I think that when it comes to Web3, also gaming, right, parts of AI, we looked more to get into kind of what I call beta plays, picks and shovels.
infrastructure plays that have exposure to the entire market rather than a hits driven play where it’s like, hey, if this takes off, it’s going to be great, but damn, that’s gonna be hard. And God knows if it will. And there are a bunch of other ones. Um, and so this, like when you have a space that’s super frothy, I think that you have, you have to kind of step back on valuation in two ways. One is just because there’s a lot of people pouring money into this company does not mean that you should move your valuation targets just to get in. Right. You have to have like some type of fundamental belief. Um, but.
If you really do see this vision and it matches with your theory of how you believe this will play out in your portfolio theory, I think that you have to be somewhat flexible on valuation. It’s just, if it’s a great opportunity, it’s a great opportunity. It’s a question of, is it? And so, yep, right now with generative AI, you’re seeing things move real hot and fast. Some I think make sense, some do not. Also, God knows what I know. Well, like, let’s talk in…
five years and then you can be like, that was a stupid thing you thought made sense happens all the time. But it’s kind of the FOMO and momentum and volume plays and it just, I don’t think it’s going to work out, right? Especially with us when it’s not like there’s necessarily liquidity on your positions, right? You’re in it for a while. So you can’t kind of just kind of try to arm play and time your time.
Daniel (17:27)
Now it’s on record.
Will Bricker (17:51)
entry and exit you’re signing up to be on this journey with the company and
Daniel (17:58)
Do you sort of have an outlook on how big that market is going to be and then work valuations back from that and see whether they make at all sense? Even if…
Will Bricker (18:11)
Yeah. So what I think is interesting is like when you go to business school and they’re like, you know, I understand like Tams, Hamsom, and they spend so much time on it. And yet I think that it’s like one of the quickest back of the hand things I do, which is just basically understanding the market they’re going after.
carve off 5%, what do I think the ease and ability to do that is? And as long as it’s somewhat reasonable, right, we can continue the conversation. I think that like definitely, especially now, when you’re seeing less capital in the market, XAI, we’re thinking a lot more about like, okay, what is the market? What are the multiples? What are the comps, etc., to understand as companies progress later and later. The problem is that the comps on.
a company that has $5,000 worth of revenue, like that’s pretty hard, right? That’s not the way to do it. And so I think the other thing is not only the opportunity that they’re pursuing, but the applications and the ability to land and expand to other markets going forward are super important as well. And so, yeah, it’s depending on the company and the circumstance, I think you actually have to have different tactics in terms of how you come up with what is it worth, what is the value now.
Daniel (19:07)
Yeah.
Will Bricker (19:30)
And both when we’re getting in and later. There are questions also when it comes to portfolio construction. It’s like, look, this company is a fabulous company. It’s definitely gonna crush it. It’s at $200 million valuation for follow-on. Well, if that company returns 5X for a fund like ours, where we’re pretty early, the power law’s definitely, definitely taking hold. You need to make sure that like,
You’re getting way above 5X on your big hits. Otherwise, you’re not gonna return the fund. I’m not gonna get into the nitty-gritty portfolio construction. I’m sorry I mentioned power law. Dan, I apologize.
Daniel (20:12)
No, no, but that makes sense. And I think just that we also hear this question a lot, like how do you physics, PhD your way into understanding the perfect market size, but then as long as it’s large enough. And there is also a lot of arguments towards the fact that some markets didn’t even exist. Like for example, Airbnb, if you try to calculate how many people were renting out their second bedroom before Airbnb.
It was zero, right? So yeah, we kind of downplayed the… It seems like it’s one of those things that is very hyped in early stage investing. Like you need to show that your market size is incredibly large. And you need to show it with a lot of very precise data that nobody has and nobody cares about. And then everybody’s like, look, you’re in advertising. Like it’s fine. You know, it’s big enough. You don’t need to calculate much out of that.
Dan (21:07)
It’s one of the…
Will Bricker (21:07)
Yeah.
It’s hate. It hit a certain level and anything above is gravy, right? It’s a rounding error. Otherwise, like you’re going to figure it out markets change. They come they go they expand the right. And so yeah, like there’s I think diminishing returns over a certain point to actually digging into the nitty-gritty of
the market size. However, I do also appreciate how they came to their estimate of a market size, regardless of what it is. I think that’s super important. Are they defining the markets well? Are they doing a best efforts job to articulate it? Or is it like, look, cars, there’s a lot of them. We’re going to sell stuff to people with cars. It’s going to be great.
Dan (21:52)
Ha ha ha.
Daniel (21:56)
Yeah, that is true.
Dan (21:57)
It reminds me of a friend of mine interviewed at a Rocket Internet many years ago. One of the questions they asked him was, how many planes fly in and out of Dubai every day? Of course, they didn’t care about the answer. They just wanted to see that he could come up with a rational way of approaching it. It was an interesting question. One of the many bits of wisdom from Elizabeth Yin I’ve seen is advising founders, yes, sell the idea that you have an excitingly large market.
It’s certainly a pre-seed. What investors are going to care about way more is that you’ve figured out your go-to-market, you can articulate it well. That’s probably where you should spend most of your time when you’re talking to investors.
Will Bricker (22:43)
Yeah, yeah, there are many big markets. If you like, there are many big markets, depending on your ability to get into them, right? They matter or not.
Daniel (22:44)
Yeah, I think from the… Yeah.
I think it almost matters more to the investor to make sure that something can come out of that industry. For example, AI right now, what percentage of the GDP or what percentage of consumer goods or software is going to be AI, just to make sure there is a market that can justify a certain number of companies worth north of 100 billion.
But then yeah, for founders, I mean, yeah, you need to, you brought it up, the power law, you need to abide by that. But other than that, I mean, yeah, the market size is fine.
Dan (23:37)
I’m speaking of-
Will Bricker (23:37)
Yeah, there’s like,
sorry, let me just finish on that point. We agree there’s accessibility, right? There’s capital intensity. There is like a multitude of different factors that go into, Hey, am I willing to make the bet of a person getting into that market and what do I think the opportunity size will be down the line that are far greater and above the, you know, the three circles on a slide.
Dan (24:05)
percent. Definitely. And you know, kind of following on from the question of how founders come to you and present the opportunity, I’m curious, you know, how many approach you with evaluation in mind? You know, how do you feel about that when founders come to you with evaluation? What role does that play in the negotiation for you?
Will Bricker (24:27)
I actually, so there’s like two approaches we see, right? Or three. One is they come with like a pretty hard target in terms of the amount they wanna raise in the valuation. The second is they’ll give you, I wanna give up X percentage of ownership, right? And then the third is you tell me everything, right? And we’ll start from there. So there are three different approaches to founders.
Depending on the circumstance, I think one and three can be very effective, which is testing out the market and understanding what an investor is thinking. That being said, I think that you have to have some idea of what you’re looking to do. And as somebody who just like personal preference likes being direct, just tell me what you want, right? And we can work from there. I think the most important thing is the discussion around the valuation.
right, and the flexibility about both the investment and the valuation, right? Like, hey, like what is the value proposition that I’m going to give you as an investor? So you should definitely dig into and understand because given the stage at which I’m investing, it will be some of the most dilutive capital that you will ideally raise in your journey. So you should understand kind of the ROI of having me on board at any given price.
Daniel (25:52)
Yeah. As long as both parties are like dealing with that, you know, attitude in mind and with that successful, like, let’s try to make the company successful. Let’s try to make everybody have the right incentives and have a good partnership. I think, you know, things go forward fairly easily. But it’s not always the case. Like, it’s not always the case that both parties have that in mind.
Will Bricker (26:16)
Oh yeah, no, no. Sometimes whatever, I’m not gonna go into negotiation theory either, but like the difference of where people are, their initial targets are way too wide, right? But I think that part of the thing is to make sure that you have the right conversation around it, even if a deal doesn’t get made, that’s okay, right? That works. I’ve had many people where we couldn’t get to agreement, but we had a great discussion around it, and I-
I’ve gone back to them, they’ve come back to me later and said, hey, let’s talk again, let’s keep going, right? It’s not necessary. Once you’re getting to a negotiation on evaluation, I think that the most important thing is to walk away with everybody happy. And you’ve done pretty well. And so as long as you kind of maintain the bridges, there will be opportunity going forward. Ideally, there’s decent.
Daniel (27:08)
Yeah. And there
are so many things before that, right? Like once you get to that, like it means you’ve already passed like so many, so many checkpoints.
Will Bricker (27:12)
Yeah.
You’re negotiating on valuation. You’re in a good spot.
Daniel (27:20)
Yeah.
Dan (27:22)
I think one of the ways to think about this, you know, the whole idea of aligning incentives is something we talk about a lot. And it was actually a friend of yours, Brian Nichols, who talked to me about this, the idea of looking at the VC startup relationship as the startups as the customer, the VC as the service provider, you know, essentially providing like a financial product. And if you look at the relationship like that,
then it’s just a conversation about the terms of the product being offered. It’s a much less intense feeling discussion rather than the kind of typical perceptions of how that relationship works. It’s way healthier. Like I don’t know why more people don’t think about it like that. And certainly, you know, Brian should be shouting about that idea from the rooftops. I think it’s a great frame.
Will Bricker (28:12)
100% of you
are my founders as my customers, and I want them also to hold me accountable, right? There are times I think when life can be chaotic and my customer service isn’t great, please tell me and put me on blast, right? I think it’s super important. And I think that a startup, like a pitch, is just the beginning of that kind of customer relationship and it’s super important.
for a founder to walk away, even if they don’t get the money or the deal that they wanted, walk away being like that was worth it of an experience. And I think that it’s also really important for founders, wow, even if they do get the terms in the discussion, the discussion go in a way that makes them wanna work with this person going forward. And so that’s what I kind of love about your product is,
Daniel (29:02)
Yeah, yeah.
Will Bricker (29:07)
you give a bit of a range of where the valuation could land. Because I don’t think it’s like a heart and stone, sure there’s a target, but you can kind of see the range. And so it allows you to say, for those which I again prefer, who are coming in with a target of what they want to raise and why, it’s great. But then also for those people who kind of have a broader scope of where they’re willing to raise.
and don’t want to set a hard and fast valuation, it gives them an idea of like, okay, this is the acceptable range for conversation. And if somebody comes in and is like, I’m gonna give you 10% of the median for a company at your size, right? That’s fabulous. I’m not gonna take that deal. Best of luck to you though, right?
Daniel (29:49)
Yeah, yeah. Yeah, I think like that’s what.
Will Bricker (29:52)
And especially
as we get later and later stage companies and as the market has a lot of volatility, things are changing, right? And so the $50 million, $100 million valuation of two years ago is very different than it is now. And so just kind of digging into that and understand having a pulse of the market, I think is super important.
Daniel (30:09)
Yeah. And fundamentally, nobody really knows, right? It’s such a difficult thing to determine. And all these companies are to some extent unique. And also there is so little data on all these things, which is partly, I think, what connected us, because you have an amazing Twitter feed every quarter where you publish a bunch of data on the market, and it’s super interesting.
But yeah, does your approach changes when you go towards later stage or when you do a follow-on round in terms of on the valuation side?
Will Bricker (30:50)
The later we get, the more scientific it gets. And the more that we are digging into, I think, the numbers and mechanics of a company and the market where it exists. Right now you’re having an issue with what we call kind of like fund-raise ability, which is that even if a company is great, a company that was going to be able to reliably raise money two years ago.
is not going to be, many of them are not going to be able to reliably raise money now. And so you need to kind of understand the market and the environment, setting evaluation that is good for the fund and also good for the founder, right? We’ve seen a lot of bridge rounds, a lot of down rounds. Those are hard discussions. If you think it’s hard to raise when it’s an evaluation going up, imagine what it’s like to raise.
at parity or down, it’s a very hard discussion, right? And so understanding kind of the fundraising environment as well as the circumstances of the company are super important right now and will be, I think, for the next six, 12 months at least.
Daniel (32:07)
Do you think it’s like sort of return to sanity or do you think it’s actually detrimental for like the future of let’s say startups and more broadly speaking, like innovation and the economy.
Will Bricker (32:22)
Yeah. So I think it’s just like any other financial market, there are ups and downs, there’s bubbles, there’s hype, right? There’s capital coming in, coming out. There’s macro factors, right? So I think it’s actually a good correction in many ways for the broader ecosystem, although it feels really hard right now. I totally get trust me, I hope to get it’s hard for me. Right. I can’t imagine what it’s like for a fountain out there. But markets correction is a part of most markets and.
Daniel (32:41)
Mm-hmm.
Will Bricker (32:51)
you need to kind of reestablish and mean revert every once in a while. And that’s what we’re going through right now. And I think that it’s by and large healthy going forward, but nonetheless, painful.
Daniel (33:07)
Yeah.
Dan (33:07)
Yeah, we noticed when we did our parameters update back in January or early February, even then we could see, it was like looking at the public market data that we use, it felt roughly like a return to like 2019-ish levels. And it’s been interesting to see a lot of venture activity drifting back in that direction as well. Obviously, there’s a bit of a lag. It’s not entirely connected, but there are some connections.
Dude, does that seem kind of rational to you?
Will Bricker (33:40)
Yeah, I’ll just tell you, very tangibly, what I’m seeing right now is basically a premium for revenue, even at the earliest stages. So if you look at the difference evaluations between companies that are just an idea or companies that are MVP, no revenue, versus companies with, based on my math, over $5,000 of MRR, the difference is huge. It’s almost a multiple of each step. And so…
And that has actually widened a bunch in the past 12 months versus what it was before. And so when I did my numbers the most recent quarter, I was like, this is weird. The overall median hasn’t gone down that much. What’s going on? And I dug it. Actually, I really dug in. And it was because you kind of saw this the different portions of the market actually moving away from each other, whereby the premium for revenue was going up slightly.
and the discount for a lack of revenue much larger. And so that is, I think, very interesting and important now. The profitability or just the ability to make money of a company is super important, even at the earliest stages. And that’s why demonstrating some initial acquisition, ideally a method that is somewhat scalable and not just
We acquire people, but it’s my uncle Ned, my cousin Todd, my sister Jane, right? Like things that are not just your friends and family supporting you are always helpful.
Daniel (35:09)
Thanks for watching!
Dan (35:17)
to bring back a phrase that I’m sure none of us really wants to bring back. Is there any chance that this leads us towards a slightly different adjustment in the power law, a preference for slightly more robust startups, but also which then have maybe a marginally lower exit potential?
Will Bricker (35:43)
Yeah, I think that you could see a bunch of companies in the midterm.
exit for less, right? A lot more M&A rather than IPO. God knows the IPO market. I don’t want to even dive into that. Sure. But I think that overall, like it’s just a question of degrees. I think that really when you look at the mechanics, the power law is a pretty established fact in venture. And that is because no matter how good you are, you’re going to fail at least 51% of the time in the bets you make. Right?
Whereas when I used to work at a hedge fund, all we need to do is to make 51% correct bets. That’s different for venture. You need to make a couple of bets that are really great because on average and by and large over time, that has been what has returned the biggest funds.
Daniel (36:31)
Yeah.
I think it’s interesting, like the sort of this, let’s say, disproportionate shift towards like revenue, right? It could either be because of a different risk appetite, right, from the investor community and like a lower risk appetite in terms of like what they want to invest and so does increasing that, like flattening that power law, right? Even though not to any extreme, obviously. Or it could be like
on the rational side where, well, another rational side, which would be, it’s going to be harder to fundraise. The world is going to grow slower. We need to find companies that can withstand this, you know, this period. And the revenue is a huge indication of that. And that’s why we’re paying this high premium. Whereas before, these type of companies, like, just had a much higher probability of success because they could raise…
in a much easier way and grow a lot faster because of, well, the party that everybody thought would continue forever, which clearly didn’t. Or a mix of the two.
Will Bricker (37:51)
Yeah, I think I’ll say a couple things. I think because of the dynamics where a lot of people start to fly in a market or aggregate towards in a market in terms of stage, the returns start to lower. Competition brings kind of a greater aggregation towards the median. And so it’s where you’re taking.
counter-intuitive or non-consentive bets in terms of the stage and types of companies that you’re investing in that many times will see these kind of big outsize returns. So there’s still a lot of opportunity even for these companies that are like pre-revenue, etc. And regardless of where you are, I think that this will be a great year for investing and it’s going to be a year that really will make or break a lot of investors.
Daniel (38:52)
Yeah, yeah, but also make like critically, I think as well. Yeah, I think, you know, like from outside the US, well, the US has it’s sort of had its swing between like, you know, we want revenue, we don’t want revenue. I think Facebook was the clearest indication and brought everybody to almost, you know, avoid revenue to some extent.
Will Bricker (38:54)
Yeah.
Daniel (39:19)
Europe started from the complete opposite. It’s like, can you qualify for a bank loan? Yes. Okay. Then I’m going to invest like as an angel investor. And then slowly we started to increase the appetite for risk, which I think was a very good thing. And then I think even here it got kind of over the line of like, okay, now we’re probably taking in too much. We have…
too much weight of capital in the VC industry, we need to deploy it and then that drove valuations up, that drove a lot of things up. But I completely agree with you. Well, we started 10 years ago, so these things changed incredibly. And this year is gonna be definitely top three of the past 10 years in terms of fundraising.
Will Bricker (40:10)
Yeah, the one other thing I just want to say is it’s not just revenue. I think it’s the quality of current revenue. And I would say like the potential to monetize going forward. Right. And so I see people who may have a bunch of revenue. But the amount of dollars they have to put in to earn one dollar is a huge divide to actually try to.
get over going forward, right? And then the other thing is that, look, like even if you’re not making revenue now, if you’ve got a great set or foundation for distribution and a vision for how to monetize them in the, you know, short to midterm, that’s also important as well. It’s not just spending, you know, $10 to make $1. It’s look how
What are the kind of the unit economics of the revenue you’re getting now, the reliability, sustainability, stability, growth potential, et cetera, right? Not all revenue is created equal. I saw a company that was hiring tenant AEs last month, right? And the payback period is 16 months. It’s really tough.
Daniel (41:30)
Do you think about those things sort of like comparatively across the startups that you see? So like you sort of wait a week, you take all the startups, you see which ones are like the top 1% or do you think like, okay, we have some sort of minimums and they need to match these minimums and then we’re gonna evaluate the investment in that case.
Will Bricker (41:53)
Yeah.
So what do you mean? Well, so I don’t think that we have hard and fast rules. In most cases, because I don’t think that just like, you know, adhering to a rule for the rules sake is a great strategy. Well, in terms of how we evaluate companies before we invest in as for fall on once we’ve invested or just monitoring them going forward, there’s this idea of kind of trying to understand the dynamics of the company and what peers look like as well.
Daniel (41:59)
Yeah.
Will Bricker (42:23)
getting a general idea for benchmarks and measurements to think about when evaluating the health of a company, and then building up that over time. So we’ve just talked a little bit about generative AI. That’s actually one of the use cases in which we’re currently using it right now, is we get a lot of updates, a lot of information from companies. Can we take unstructured text and bring out structured data about the operations?
of a company, create that data set over time and use it to better understand, hey, what does good look like for burn, for burn ratios, revenue, revenue growth, churn, et cetera, right? More than just like the public alpha data sets, understanding like, look, like this is actually how these companies have changed over time.
Daniel (43:08)
Interesting.
Dan (43:19)
And that’s a real benefit of working at the stage. You do tons of small checks, lots of companies. I guess you can quite quickly pick a stat that’s become kind of sexy recently, like net dollar retention. You could build up a database of what that looks like across a bunch of companies very quickly and apply that to benchmarking in the future.
Daniel (43:19)
That’s super interesting.
No, and I think this is something that a lot of startups underestimate as value of having an investor. It’s like they could be your benchmark eyes and ears a little bit and just let you know if you’re doing something different and if you have the right reasons for that because you might be doing something different but for the wrong reasons.
Will Bricker (43:44)
Best of go.
Daniel (44:13)
all your peers and you are not aware of it. And you think you’re very lean and you think you’re very good in that. And then it’s very hard to find this data outside of, and it’s always somehow corrupted a little bit, you know, because the only people that share this stuff are the ones that look good when their data gets shared. So yeah, interesting.
Dan (44:35)
Yeah, it’s obviously like getting towards what we’re doing a little bit with our benchmarking data, like opening the black box about revenue forecasts, what they look like, the margins, all that kind of stuff. Because yeah, there’s no data. There’s no real way for a founder to project that kind of stuff with any confidence.
Daniel (45:02)
And then maybe if we go towards that side, I know we spoke about it a couple of times. Well, you guys do very interesting portfolio analytics and sort of think about your portfolio. It’s also a large portfolio in terms of numbers, so you probably need to. But I think it’s pretty interesting to know what’s the role of valuation in there.
Do you think about portfolio value and how it grows over time? Do you investigate those things at all? Especially at your scale in terms of number of companies.
Will Bricker (45:42)
Yeah, so in terms of like just like a portfolio, yeah, so modeling our portfolio is an interesting challenge. The dynamics are a little bit different, so we spent a bunch of time trying to understand that. I think that just like any other financial market, a lot of people have a lot of different opinions. There’s a lot of different kind of like tools, insights, numbers there. So rationalizing and coming up basically like sifting the wheat from the chaff and coming up with kind of the theory that you believe is salient across all this.
these channels and creating a portfolio based on that is a fun, fun challenge. I think that you’ll actually see more and more portfolio construction tools come about as people realize, wow, there’s a whole lot of data we have out there that can help people build portfolios in a better way. And yeah, understanding even with us, we’ve got three funds, kind of the nature of and dynamics of how portfolios have changed over time is a very…
fun experiment for us. Including, I think, you know, it’s not just a point in time thing, but it’s over time when you look at how they grow and change. I think that’s where you get some of the most interesting insights. And so whether it be at a company level, seeing kind of like their burn and revenue metrics become weird and then great and then weird, like you start to understand like, okay, over or under which point?
should I start to care and have a conversation. And then at the portfolio level, understanding that companies are gonna fail and trying to actually value a position in a way that you believe reflects the value of the company to the best of your ability is a super interesting challenge, especially with the variety of ways that companies raise money. And so we have put a bunch of thought into that. As we discussed before, this is something I’m working on.
doing our B2 of this. But yeah, I’ll tell you, in the past six months, we’ve seen the most company closures of the history of our fund. And at first, you’re like, ooh, that’s worrisome. But when you look at basically the type of companies that were left standing and the ones that went away and the overall impact of the portfolio, you’re like, wow.
This is just kind of the natural J curve life of a fund and the impact given the quality of some of our positions was thankfully pretty mitigated. So we feel good going forward betting on the companies that we have left standing. But if you were to look at it, I think at a point in time you’d be like, oh no, what just happened? But when you’re able to kind of…
Dan (48:33)
Thanks for watching!
Daniel (48:34)
Yeah.
Will Bricker (48:34)
Use the tools that are out there that are great and look at your own history. Okay, this happens And I think that we’re in good shape and you’re able to kind of contextualize a lot of what’s going on with your portfolio
Daniel (48:47)
Nice. Is there actually like data on that? Like is there is there data on other portfolios and like how they are doing, let’s say, and that you can benchmark yourself on?
Will Bricker (49:01)
Yeah, so if I were to say 12 months ago, I’d say yes. I think that the market has changed a bunch and that you’ve had a huge amount of write downs and so the benchmarks that are out there are not that fresh. But there are tools from, actually Angel has got some pretty good tools where you can benchmark your fund and see kind of where you lie. And I know that there are other ones that are coming out as well. And so just the ability to look based on a point in time, your age.
and return what like at that level you can do pretty well in terms of survival rates. Actually there we have not found many good resources to dive into like oh this is the survival rate you would expect to see at this time in your portfolio’s life right. This is the size of what the jay curve should look like etc.
Daniel (49:53)
Yeah, because I can imagine like, you know, it can be, it can be pretty difficult to look at and it lasts for a number of years and then it can change at any moment and it can be incredible or not. And, uh, awesome. That’s it. That’s, that’s what we do this for. Nice.
Will Bricker (50:06)
New product idea for you. New product idea, come on, go get it.
Dan (50:13)
Ha ha
Will Bricker (50:17)
events. Well, I love what y’all are doing and I love your product and I’m excited to see how this podcast continues going forward. Is there any other? Yeah, what else what else what’s gonna be like what else what else you got for me?
Dan (50:28)
It’s only episode 6, you know, a bright future ahead of us.
Daniel (50:37)
You want more questions?
Will Bricker (50:39)
Whatever it can be about venture or not. New York right now is a current haze of orange. There’s a bunch of smoke over it That’s kind of weird Yeah up to you or you can say this was terrible. Let’s just end this year and cut the pain
Daniel (50:47)
Oh yeah, we heard, yeah. Yeah.
I think it was great. I think what we were saying with Dan is we’re probably going to stop it if we get a bit tired because these are not easy topics and it’s not like the team fairies show. And I was like, well, you probably have a point, but let’s see how far we get. But I think we got a lot. And yeah, maybe we can do a part two at some point. But right, Dan, I don’t know. You decide.
Will Bricker (51:18)
Yeah. And if you have any other,
Dan (51:19)
Yeah, 100%.
Will Bricker (51:21)
anything else that you have like five questions on too, I’m happy to, I don’t know, sure. I was going to talk about this. I can send you like an audio note.
Daniel (51:25)
I think it’s super cool.
Dan (51:29)
Yeah.
Daniel (51:30)
Yeah, well, you know, that’s our plan. Like we really try to bring these things out into the public and very, very few people talk about these things, but the whole problem of valuation and trying to understand where startups go, where investors go, does it make any sense or are we just following each other for some reason and creating the next bubble is for me is very interesting. So hopefully we have, well, we are already queuing up some, well, more guests.
And on this topic is very, it’s fairly easy because, you know, nobody wants them to talk about this stuff in other podcasts. So, so, yeah, I mean, it’s going to be fun. Yeah.
Dan (52:13)
And maybe this is a good opportunity being the one podcast that is focused entirely on valuation. Is there anything about venture, and thinking more specifically about the valuation process or the negotiation process, that you think people don’t know or people have a misconception about that you would like to use this little platform to address? And if the answer is no, that’s completely fine.
Daniel (52:20)
Oh yeah.
Will Bricker (52:43)
Well, so I’m biased because I read about all this stuff all the time. Right. So like if you’re saying things other people have not said, there’s not a lot of that, right. Cause I read a decent amount that I’ve seen people say all different types of things, like I think that the most important thing to think about is kind of the ROI of the dollars that are coming in as a function of both the valuation and who’s giving you the dollars. Right. And that at the end of the day, that is the most important salient thing to think about. Um,
Dan (52:52)
I’m out.
As a founder, that is. Yeah.
Will Bricker (53:12)
a founder, 110%.
There’s nothing more important than that. And so even if it’s more or less dilutive depending on the value on the other side, it’s not an art. Sorry, it’s not a science. It’s an art and you got to be flexible. And also I think that there’s a thing where there’s an idea of like…
There is such thing as taking too much money, right? And taking money when you don’t need it, I think is a really bad strategy. And so raising money at a valuation that’s reasonable to do additive things for your company is super important. Raising money just because you can, at a valuation that you just, because you can get at, is I think a bad long-term strategy, especially when you see market volatility like now.
Daniel (54:07)
But it’s interesting that the ROI as a guiding principle would help a lot clarifying that question, I think, provided that founders know the perils of raising too much capital. Because a lot of the times it gets into so many different ways, like so many different theories, like I could raise, I could not raise, raising changes my strategy, my strategy changes my fundraise.
It creates all these questions, but I think the ROI is actually a great point. Is raising this capital additive to the pursuit of what you’re trying to do? And if it is, great, go ahead and raise it. But think about the perils of raising too much.
Will Bricker (54:53)
Yeah.
Dan (54:53)
And I suspect that the customer relationship, too, thinking about it as a customer, and this question of ROI, it’s going to encourage founders to really think about who they’re raising from and maybe look outside of the bigger, flashier, more attractive names, think about smaller firms, more specialist firms, where they might get that better ROI, even if it’s not obvious upfront.
Will Bricker (55:17)
Yeah, absolutely. And even if it’s at this thing, right?
who you’re getting money from and what valuation can vary. I’ll just say that, right? And sometimes it may be a better bet to take a lower valuation from an investor that you think is gonna add more value or take a higher valuation from somebody else because you don’t think that you need a lot of help. Although I would argue that, I think we all do it in some way or another, right? But depending on the needs of your company, like those trades are both fine.
That’s a controversial thing to think of as a venture capitalist, but screw me.
Dan (55:54)
Yeah, absolutely.
Ha ha ha.
Daniel (56:01)
Awesome.
Dan (56:03)
Well, I appreciate the, you know, the candid insights, Will. It’s been a real pleasure. I really enjoyed the conversation.
Will Bricker (56:04)
All right.
me as well. Thank you so much. All the best.
Daniel (56:11)
Thanks a lot. Thanks a lot, Will.
Dan (56:14)
Perfect.
Daniel (56:15)
Remember to wait for the thing to upload stuff. Yeah, I think we can…
Dan (56:15)
Hope to do it again in the future.