On the podcast: VCs dust off their term sheets

PitchBook senior editor James Thorne sits down with Brad Feld, partner and co-founder of early-stage VC firm Foundry, to discuss how venture investors behave in a downturn, why entrepreneurs may want to steer clear of structured deals, and why so many good companies are born in such bad times. Plus, PitchBook senior analyst Kyle Stanford joins to discuss key takeaways from the Q3 2022 PitchBook-NVCA Venture Monitor and Quantitative Perspectives: Silver Linings on the Time Horizon.

In this episode of Sapphire Ventures' series "GameChangers," Sapphire partner and Head of Revenue Excellence Karan Singh speaks with Forter's Chief Revenue Officer Marcus Holm about unlocking seller productivity and repeatability through value realization methodologies.

Listen to all of Season 6, presented by Sapphire Ventures, and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com. Transcript James Thorne: Are you joining us from your house in Colorado?

Brad Feld: Yes. I am sitting in my backyard in Aspen today where we spend most of our time. We split our time between Aspen and Boulder.

James: I grew up in Vail, so bit of a rivalry there, Aspen and Vail.

Brad: Yes, well, that kind of sucks. It's like Dallas and Houston. I grew up in Dallas. Anytime somebody mentioned Houston, we just rolled our eyes. I feel like I have to do the same thing about Vail.

James: Yes, you got to.

Brad: I said that totally tongue-in-cheek. Vail is pretty epically beautiful, too.

James: Nice. Before we get started, do you want to just do a short little bio intro for yourself?

Brad: Sure. My name is Brad Feld. I'm a partner at Foundry. We're a venture capital firm that invests in early-stage tech companies all around the US. We also invest about 25% of our capital in early-stage venture funds. We've got almost 50 of them that we consider partner funds, that we're close partners with and investors in.

I also co-founded Techstars, and I'm on the board there. [I've] written a number of books. I run long-distance and love to get lost in the mountains for two or three hours at a time. I've been married for 29 years and together for 32 years with a magnificent woman named Amy Batchelor.

James: Wonderful. Brad, so happy you're here to join us on the podcast today. You literally wrote the book on venture deals. It's called "Venture Deals," co-authored with Jason Mendelson. It's become required reading for anyone raising VC money for the first time. In fact, it's been on my desk for the last month or so. I'm trying to get a better handle on all the term sheet terms. It's definitely a work in progress, but the book has been a huge help.

I think it's one of those things where I started covering venture full-time three years ago, and ever since, it's been boom times. No one's really talking about term sheet provisions anymore, and then, all of a sudden, this year, I'm reading Pro Rata, and he's dropping all sorts of phrases. I'm like, "I got to go look that one up in the glossary."

You've been an entrepreneur and an investor for several decades. You were an investor in the dot-com boom and bust cycle. I'm just wondering how you feel this moment in time compares to previous stock market downturns that you've seen.

Brad: I think this moment in time is more similar to the early 2000s and the dot-com or internet bubble and the subsequent collapse than it is to the financial crisis in 2007, 2008, 2009. I think two of the main differences are, in the financial crisis there were a whole bunch of structural things across the entire economy that then ended up happening, but in a way that, in some ways, was a parallel universe to entrepreneurs.

My own experience. We raised our first Foundry fund in 2007, so we invested in 2007, '08 and '09, and then raised our second fund in 2010. That fund ended up being extraordinarily successful. It was really very independent of the timeframe that we were investing because the entrepreneurial activity, especially at the early stages, but also throughout the whole life cycle, was incredibly vibrant.

It's useful to know, 2007 was a really seminal moment in time for the tech industry because it was when the iPhone came out. I'd also say it was the moment in time where, I think, AWS started to really become a thing that technology companies were relying on rather than having to procure infrastructure and procure servers and be in colocation spaces. There were some foundational shifts there.

In the 2001 timeframe, what happened was, there were a bunch of premises around the internet and how the internet would affect business and technology and society as a whole. Many of those premises have gone on to be true 20 years later, or even 10 years later, but at the time, the technology and the technology infrastructure wasn't there to support the use cases, to support the scale.

As the bubble inflated, and as more and more nonsense was created around financial metrics and the way that people rationalized valuation, the way the public market rationalized valuation, the demand-supply equation, and capital, the unwinding of that, when something changed in 2001-2002, was very similar to the unwinding that we've been going through for the last almost nine months now, if you really go back to Thanksgiving. My view is, middle of November was the very peak and the beginning of this happening. That's piece one.

Piece two is, there was a lot of theses in 2000 about the future of technology and what was going to happen, how it was going to be disruptive to wide swathes of the way things work. I remember it was the time period where every major company started putting a little "e" in front of everything, where the little "e" stood for e-commerce, and they put a ".com" at the end of everything. Again, that was a moment of the signal of nearing the peak of that phenomenon. By the way, many of those things have turned out to be true. I think we're going through a lot of that in certain categories right now again.

I would say, crypto, broadly, would be a good example of that where the experience of the last couple of months show that, yes, there might be this fundamental DeFi thing going on and distributive finance thing going on in crypto, but if you go back a couple of years, my understanding was crypto was supposed to be inflation-proof, that was one of the strong arguments for it. That turned out to be totally not true. Second, everybody was talking about how it was truly decentralized. If you look at what just played out with things like Luna and Celsius and Voyager and a few others, those were phenomena that had nothing to do with decentralized finance, those were traditional finance phenomenas of fundamentally overleveraged investing.

You have these things that were happening where the technology was disconnected from what people were raising money for and what people were promoting and selling. It accelerated very, very quickly, and then, once it started to hit some peak, it decelerated or deflated even more quickly. That's what that timeframe felt like in 2000-2001, and that's what it feels like again right now. By the way, if you were in the banking industry, broadly, globally, in 2007, '08, '09, it felt like that in the banking industry, but it didn't necessarily feel like that in all industries and all places. That's how I compare the two.

James: I think one of the things that has gone along with this bubbly atmosphere is just this trend toward founder-friendly provisions, founder-friendly deals. We see that most obviously in rising valuations. At PitchBook we try to measure this. We have our Dealmaking Indicator. We look at things like cumulative dividends, voting rights, liquidation preferences, and try to package it all into a nice line graph that shows, is it becoming more founder-friendly or less founder-friendly? I'm curious, from your perspective over the last, well, prior to 2022, but over the last several years, what drove the market toward being so founder-friendly?

Brad: Well, there was a lot of discussion and language that then turned into a philosophy and, ultimately, possibly, even religion around this that came out of the internet bubble starting with investing activity around when Web2.0 got coined 2004, '05, '06, that timeframe. Prior to that, I should say, there was a huge opacity, information opacity or information asymmetry, between investors and entrepreneurs. Some of it had to do with the way deals got done, some of it had to do with the supply-demand between capital and ideas and a lot of it had to do with the ability to communicate different kinds of information about what was going on.

I'll just use the "Venture Deals" book as an example. We came out with that book in 2010, but in 2004 I wrote about 30 blog posts with Jason on feld.com that deconstructed a term sheet. You're going back to 2004, and what we essentially did with that blog series, it was in English, if somebody read the blogs, all of a sudden you could understand what the terms were that you were negotiating in a financing.

Prior to that, the vast majority of entrepreneurs relied on, in some cases, their lawyer, but in a lot of cases, hearsay to understand what was important. There was this opacity that got in the way. One of the challenges with that in the 2001-2004 timeframe was that many of the financings that were done were very founder-hostile because they were being done into a down market, into a market that had just had massive accesses in terms of inflated valuations and huge amounts of capital thrown at things.

Now, all of a sudden, the balance of power shifted dramatically in terms of new capital because new capital was scarce, and your company could either go out of business, it could survive without additional capital, or, if it needed new capital, it didn't have the same kind of choice it had prior. There was a backlash against that in the 2005, '06, '07 timeframe, and there was a new generation of investor and a phenomena that was emergent with things like Techstars NYC, where there were many more people who, at the very early stages—pre-seed wasn't even a phrase then, it was just seed—were positioning themselves as, "We're the early investors, and we're going to be founder-friendly."

Even at the angel investment level, there historically have been two types of angels, and I like to call them angels and devils. An angel investor's supposed to be helpful to your company at the very early stages. They provide capital, but they really help you succeed. There's always been a category of those angel investors who really are devils, they care too much about control. They're worried about their downside. They take too long to make decisions. So there was this backlash, as you had this emergence of the next wave of early-stage investors and many of them were firms like First Round who were very vocal about being soft touch, lightweight, your first check.

I think at Foundry we had that kind of a culture where we tried to be very straightforward with terms. Then the organizations and the networks that got created, especially the communication between early-stage entrepreneurs, helped amplify the understanding of, "Hey, at the very early stages, yes, you could lose all your money. Why are we spending all this time negotiating all this downside protection and all this control provisions when really what we need is some money to get started to see if the thing that we have even has any merit or not."

I would say, that shift is something that evolved to a point where many things were not being paid attention to, or were just being hand-waved away for whatever reason. A lot of them had to do around in mid- and later-stage financings all around control and who gets to do what kinds of things and what kind of decisions, whether it's the founders, the investors, management. These sorts of things don't matter if everything's working, but the second things don't work, you have to start to at least deal with and rationalize these things in some way shape or form.

At the extreme of the last 12-18 months, there were numerous investors who were very proud about how they made investments in one phone call in 15 minutes and no diligence and absolutely no governance rights of any sort. I would say, if you also looked at some of the things that have gone wrong in profound ways in crypto, it has some of the same activity, [the] same dynamics where there's people who are moving really significant sums of money around, whether they're entrepreneurs or other parties, where there's just no semblance of control or understanding.

Interestingly, it doesn't take very many of those failures for a venture fund to change their behavior or for an investor to change their behavior and many of those things have just happened. That's part of why you see now the other version of the backlash, which doesn't necessarily mean that suddenly the investor community is less founder-friendly. It just means that, especially at mid- and later-stage financings, there's going to start to be a lot more focus on downside protection, on making sure that what you're investing in and what you're getting is actually what you think you're investing in and what you're getting, that there's well-defined ways to engage with each other on the investor-founder boundary.

I think these cycle in and out. From my frame of reference and from Foundry's frame of reference, we've always tried to keep things very straightforward and recognize that you have three scenarios: You have the significant positive scenario, where everything's working and many of the things around downside protection and control and rights don't matter; you have a sideways case, where things are working okay, but you decide you want to keep going, but you've got to make some adjustments and you've got to deal with that. It's difficult to get financing into those companies; then you have the downside case, where nothing's worth anything.

One thing for entrepreneurs in this moment to watch out for is the more complexity new money brings with it—especially around the downside case, versus just dealing with the reality and recapitalizing the company appropriately, in my own experience—the lower your probability for success. The more structure, the more complexity, the more people punt on things like what's the right valuation and who should own what portion of the company and what should be the roles and responsibilities of people going forward, when you're in one of those downside cases but you've decided to keep funding the company, the less people deal with things, the more complex stuff is, the lower your probability for success.

James: I think along those lines, one of the things I've heard you say before is talking about this idea of taking a down round, and how sometimes that's an okay thing to do. Sometimes that's the right thing to do versus the route you're talking about, which is to put a ton of structure on the deal, have a ton of downside protection, because oftentimes those terms follow the company then for the rest of its life and make it very difficult for follow-on investments. Can you talk about under what circumstances it's an appropriate moment for a company to just take a down round and move on in a clean way?

Brad: Yes. For some reason down round has become this horrific thing. "Oh my God, if we have to take a financing at a lower price than the previous financing, then that's just awful." If you think about a parallel universe, which is the public markets on a daily basis, stocks go up and down, and in financings for public companies at different points in time they might raise a financing when the stock price is at X and then several years later they might do another financing when the stock price is at 0.5X or 0.75X for whatever reason.

I think in general for private companies, minimizing the amount of structure you have in a financing is better. A lot of times structure is just an economic term and what it's doing is it's creating a misallocation or misalignment of incentives between the investors. We haven't had to talk about it a lot in the last five years or so, but a lot of structure introduces what's called a flat spot in the return curve where instead of the return curve having alignment with everybody that's an investor, so the more the value goes up the more everybody makes, there's these stretches of time where an investor might be completely indifferent to whether the company sells for $50 million or $150 million, they make the same amount of money. On that kind of a flat curve, that investor, if you get an offer for $50 million, they're just as motivated to sell as if you got a price of $150 million.

The more of those things you have in your capital structure, the more of those kinds of flat spots or situations where different investors really have fundamentally different motivations, the worse your life gets. Your point's right on the money, which is that it compounds because it's very hard once you've done a financing that has some structure to get rid of that structure in the future, certainly for that financing, but everybody new comes in and says, "Oh, well, they got that so I should get that too." Unless your business turns around in a profound way, you have to live with this stuff, that complexity creates misalignment.

So from my standpoint it's like, if you're willing to take money at price X with all this complexity, what's the price that you're willing to take X at without the complexity? And the answer's going to be less. Maybe you're willing to take money at 0.75X without the complexity, or maybe it's 0.6X without the complexity. Then you just run the math. In the downside case it probably doesn't matter because the new money's going to take all the company.
In the sideways case, it's probably not going to matter that much because nobody's going to make a lot of money. In the upside case, the bigger the upside case, in some ways, the less it's going to matter that you got rid of all this craziness. Yes, your ownership might be less, but now you're not fighting over all of the challenges in the other cases and you're much more aligned with where you're trying to go on the outcome.

James: Right. I think one of the reasons people might lean on structure is we're just at a point where it's really hard to price things. It's really not clear what fair prices look like. I'm just curious if you have any advice for how founders and investors can come to the table and negotiate when there is that amount of uncertainty over price, which obviously there is always that uncertainty in venture markets, but I think especially at a time when the markets are doing what they're doing.

Brad: I don't agree with the premise that it's hard to price companies. I think that there are relatively easy ways to understand what a fair value for a business is at any given point in time. In a world where the market is determining the price, if you have one investor who's willing to set price, then you have very little leverage. If you have a lot of investors who are willing to set price, then you have a lot of leverage.

The way I would say your statement in a way that I would agree with it is that the leverage has shifted away from the entrepreneurs in many cases because there are fewer investors who are willing to pay high prices for their business relative to the performance of the business. If you went back even five years and said, "Hey, would you pay a premium multiple on somebody's revenue three years from now as your current valuation?" The investor would look at you like you were from another planet. Whereas in the second half of 2021, regularly companies were being priced at a multiple off of 2024. The multiple that they're getting priced off of 2024 was a premium multiple to the market.

This dynamic of the leverage of whether you're the investor, the entrepreneur, sure, if the supply demand on one side is imbalanced then you're going to get a higher price or a lower price. I think the more interesting thing in this moment that entrepreneurs now have to live with is the quality of their existing investor base relative to new investors. If your existing investors are willing to put more money in your company at a valuation that you as the entrepreneur think is reasonable, you are in a pretty good position. Or if you have three years of cash in the bank, you're in a pretty good position. If your investors are not willing to do that, especially if your investors are at the top of the cap table and they've written a significant check, you have a problem because any new investor is not going to want that valuation to hold unless your business is doing stupendously well, and everybody's throwing money at you.

The dynamic of the quality of your investors, how much capital they actually have, combined with how well your business is performing is now going to determine what that valuation is versus the demand from a bunch of investors who are just trying to get capital into companies independent of price because their view is, "I want the option value on the future the company's going to grow into the valuation. As long as they perform, everything's going to be fine. If they don't perform, I still have a senior position in what looks like a company that's going to have some value, so I'll get my money back."

James: I think that really hits on one of the themes of "Venture Deals," which is that it's really about relationships. When you take money from someone, you're essentially committing to what could be a 10-year-long relationship with them. Do you think that some entrepreneurs might regret the sorts of investors that they struck deals with over the last two years when they were really maybe going for the highest price, but not really thinking about what that investor was going to be like, how they might behave through ups and downs of the market over the next five to 10 years?

Brad: Yes. If one believes that history is a guide, not that it repeats itself, but it's a guide that you can learn from history, the short answer is yes, absolutely. There will be a lot of that kind of disappointment. I think what will be most challenging to entrepreneurs are situations where their businesses are doing okay, or even their businesses are doing somewhere between OK and good where the belief is, "If you hang in there with me, oh, investors, we can get to a good place, but we need more money and we need more time," and suddenly they find that their existing investors have decided, "You know what, we're done." The existing investors have triaged their portfolios, and they've said, "We're not going to bother supporting these companies," or their existing investors, their fund has run out of money and they can't put money into the company because they're not going to cross-fund or whatever.

In those cases, the behavior of the investors is going to generally be very consistent with historical behavior, which is to say, the individual venture funds are going to behave like they have in the past, which is interesting because there are many new venture funds, so you don't have that history. In the early stages, you have a lot of venture funds who have been playing one of two games. One game is, we write one check and then we're done. We'll help you really be successful, but we're only writing one check and then we're done.

The other game is, "Hey, we want to buy our pro rata in every subsequent round," so they've been constantly increasing the amount of ownership that they've been buying or dollars that they've been buying to maintain their ownership, which for an early-stage fund strategy in up case where everything's working, is a great strategy, but in a downside case is a terrible strategy because you've got all this money that you could have invested in other companies that you've got now tied up in something that's not working. Then there's a bunch of venture funds that are multistage, so you have to understand what their strategies are.

I think the disappointment, the frustration will come from an entrepreneur when they don't actually understand how their investors are going to behave in the market that we're going to have for the foreseeable future. As a result, [they] haven't been proactive with those investors early before they reach the point where they run out of money to understand what the investor's proclivities are going to be.

Interestingly, and I think this is a positive in the industry in general, the prognostication from lots of investors I don't find terribly helpful, including myself. I try not to just prognosticate broadly about "You should. You should have three years of cash in the bank." It's a data point. It's an input. You have to understand it based on your specific situation as a company versus the endless prognostications.

The positive part of that is I think there are many more investors who are trying to be very proactive with the companies they're invested in to help those companies understand what their behaviors are going to be. In my own experience, while a lot of investors don't lay all their cards on the table 12 months before a financing or 18 months before a financing, I'm seeing a lot more conversation at this moment where people are saying, "Here's how I'm worried it's going to play out. If it plays out this way, we're screwed because I can't help you and if it plays out this way, then I can help you," or, "As long as we get to this period of time, if things are not working by this period of time, it doesn't matter anyway, because we didn't get-- like the length of time is long enough into the future."

If I simplified that I'd say, for anybody that has to raise money between now and the end of 2022, if you don't know exactly what your existing investors are going to do and you're already in process with them on that, you're way behind the curve. If you need money before the end of 2023, if you haven't already come up with plan A, B and C with your existing investors on what to do and modulated based on how your business is doing, you're way behind the curve. If you're in a position where you don't have to raise money till 2024, you're probably on track as long as you're adjusting things accordingly based on how your business is performing.

Those first two categories, for better or for worse, while we hear about a lot of the companies that have two, three or four years of cash because they raised a zillion dollars, I think on a percentage basis there's a huge number of companies that are in category A or B. They need money now or they need money within the next year and a half. If you don't know exactly what your existing investors are going to do and how you're going to play things out and what your alternative choices are, get on that yesterday.

James: On the subject of investor behavior and investor psychology, one of the things that's really weird about this moment is, especially at the largest VC funds, investors have raised a lot of money. They're sitting on tons and tons of commitments. They have it available, but in spite of this, they're slowing their role, they're proceeding with caution. Can you talk about why that behavior has shifted despite the fact that they have these funds, they have this capital they can call down, why investors have decided like, "Okay, we got to proceed more cautiously now"?

Brad: Yes. My sense is there's no uniform distribution of it, and some of it is a function of pace of investment. Historically, a VC fund typically got invested in three to four years. I would say, post the financial crisis, that became a two-and-a-half- to three-year cycle. Then that compressed again to a two- to three-year cycle. A two-year cycle is pretty fast, even if you have a big team, in terms of time diversity of the fund.

Then what happened ... around 2019 was the fund cycle shifted to a one-year cycle for many funds. It's very acute for us. We see it at Foundry because we've been on a three-year cycle since the beginning: 2007 fund, 2010 fund, 2013 fund. In fact, when we raised a fund in 2018, we told our LPs we wouldn't raise another fund until 2022.

If you're still putting money out in 2021 from a fund from 2018, the IRR math is very different than if you're on a one-year fund cycle and every year you're putting new money out because all of your cost-basis money is only one year old. Whereas you might be in year three of your fund and you're now just putting your first check into some things. We were very aware of it in the market, notwithstanding that, and the idea that we had a bunch of investments, about 50 funds, so we saw the cycle speed up with many of those funds coming back: We'll be back in three years, oops, we're back in two years, oops, we're back in a year and a half.

What that means is something that is not obvious yet to the market dynamic because of how the market settles. For 2022, the vast majority of LP funding is done and frankly, for many LPs it was done in the first three months of the year. Many of those LPs are now having to think about what their actual venture allocation exposure is, including all those commitments that they made in the last year or two, but most of the funds that they committed to prior to 2019 are fully invested. So those firms are either back in market or raised a fund in 2021 or 2022.

In 2023, it will be interesting to see how many existing funds that come back to market have to raise smaller amounts of money or have difficulty raising money even if their performance has been good because the LPs have much less money to put out. The reason they have less money to put out is their public market holdings are lower. Even though the private markets haven't hit, everybody on the LP side knows that the private markets lag the public markets and so the private markets are going to have significant write-downs over the next 12 months. Unless something dramatic changes in the market, that's going to happen.

Many of these companies that are funded for two or three years are not going to grow into their valuations and are going to need to raise more money at a lower price. You're going to continue to have some very high-profile flameouts, which we've already had a bunch of in the last nine months, but it'll continue as companies that were being held at some price just go to zero. As that starts to play into the capital, I think the timeframe for these funds, in terms of deploying capital, will stretch out again.

People will say, "We've been deploying it in one year. Let's deploy it in two years again," or, "Let's deploy it in three years again." Even if they have more capital, the pace at which that capital gets deployed will go down. That's a big one. There's a lot to unpack in that. There's speculation on my part around that. The public markets could reverse, the venture markets could reverse, all this stuff could change. If you assume same steady state or same course for 24 months, 36 months, as the world deals with what it's dealing with, that's going to be a factor.
The other is just human behavior. I've got a shitload of portfolio companies because I've been investing at a torrid pace. I've got all this money invested as a VC. All this money invested and I've grown my team. Now the public markets have gone down 50% to 75%. All the companies and venture firm holds as public companies are way down. We still hold that equity. We haven't necessarily distributed or realized that, but we just took a big loss on the public side. We are all of a sudden fearful about how easy or hard it will be to raise money for existing companies.

Number one, I want to make sure I've got more of my own money available for companies that I want to keep funding, so my reserves just went up. Second, I got a bunch of work to do to figure out which companies I want to spend time on and which I don't. The ones I want to spend time on need more of my time, so I have less time to run around looking at new stuff.

As a partnership, like every other partnership, the conversation then becomes, "What's our focus, what's our pacing, what's our strategy?" Again, human behavior just naturally slows way down because of the exogenous stimuli that just happened. That's independent of, I would say, the category of, pick your category, but growth-stage investing that while the dollars that's available may seem a lot, it's actually significantly less than it was 12 months ago, because when those companies raised, those firms raised a bunch of money, they spent it really quickly, or they invested it really quickly and they haven't necessarily been able to go out and reraise that same amount of money so those really big checks at those later stages that fund two or three years forward have slowed way down. That has a ripple effect all the way back through the system.

Maybe I'd add one more thing. I think we're two quarters away from having any clarity around the supply-demand dynamics. I don't think we're going to really know what's going on until Q1 of 2023 when venture funds that need to raise a '23 fund are back in the market and we really understand LP sentiment. In addition to tracking money that goes into companies, in addition to tracking funds that are raised, tracking what LPs are putting out as new dollars and new commitments relative to their outstanding commitments, that's a really important part of the calculus of the momentum and speed of the market.

James: Yes. I imagine the question of exits, and how much money is actually going to be returned over the next 12 years will play into that.

Brad: Look, if I'm an LP in your fund and you just gave me $100 million back in cash, I got to put that $100 million somewhere. That's a good thing for the system. However, if it's been 12 months and you haven't given me any money back, all of a sudden I've got $100 million or whatever it is of unrealized locked up, I have less to put back in. This extreme liquidity cycle, which has been really, really good for our industry as a whole—venture and entrepreneurship as a whole—in the last couple of years, it came to a stop.

It wasn't a slowdown. It just came to a stop. Public markets closed, huge amounts of public value vaporized. There's still transactions in the private markets with sales, but it's smaller dollars and much smaller transactions in general. A smaller number of transactions in terms of velocity, that's going to have an impact on the capital that people have in 2023 and 2024 to invest.

One more thing, which is a cliché, I guess. Clichés are interesting ... I like to separate them into two categories. One is, the cliché has some truth in it. There's something really good in the cliché and you get tired of hearing it over and over again, but there's some goodness in it. Then the other is clichés are just things that people are amplifying ad nauseam because somebody else said it.

The second category of clichés—there's a lot of them in the venture industry and a lot of in entrepreneurship. ... Anytime you hear a cliché, think of it as data and try to deconstruct the data for what's useful to you. The cliché that I find interesting and useful in this moment, and it's also my lived experience, is that many of the very successful companies that we've been investors in, our first investments in those companies happened, and those companies were formed in periods of real economic distress or economic downturn.

Companies that got started in 2000 or 2001, maybe at the tail end of the goodness or the beginning of the badness, companies that got started between 2007 and 2010. Some of them have been the most successful companies that I and we've been investors in. Personally, I started my first company in Massachusetts in 1987. For anybody that's old or studies history, 1987 in the fall was when the stock market crashed 25%, and a big recession ensued.

In Massachusetts, 1987 marked the end of this phenomena called the Massachusetts Miracle. If you don't know about the Massachusetts Miracle, I'm sure Wikipedia has lots of information on it. Massachusetts had had this incredible, economic miracle, that Michael Dukakis, the governor, had presided over, that all of a sudden completely collapsed in 1988 and 1999.

My first company was just getting started during that period of time. Did it affect my company? Sure. Was it the thing that I was focused on as an entrepreneur trying to build a company? Not really. It was pretty exogenous to what I needed to do, which was to build a product people cared about and get customers. It was harder to get customers then than it was in 1991 or 1992, when the economy started to improve again. That's part of the joy of being an entrepreneur, is you focus on those moments in time.

James: To apply your analysis of clichés, is the reason that we see so many good companies born in such bad times that it ... is it a clarifying thing for entrepreneurs, that they can really focus on what matters?

Brad: Yes. I think that's probably some of it. Resilience gets built when things are hard, not when things are easy. I think the entrepreneurs who start companies when it's more challenging to raise money, when it's more challenging to find customers, tend to have more resilience. I'd say that's halfway because I don't think that that's a determinant of resilience. It's just a thing that feeds into it.

By the way, I think some of it is just time. Most great companies don't get built in 24 months. Most great companies get built over a decade or 15 years or longer. Every now and then, something gets built that's really amazing over a short period of time. It takes a while and so you tend to be durable across cycles. One of the challenges with the cycle we've been in is that we've been in a very strong, positive cycle for many years.

Now, there have been a couple of bumps. I think it was 2013 or 2014 when B2B SaaS multiples got cut in half for a couple of quarters. Then they started climbing back up, and then at some point they became absurd. There have been moments in time where, for six months in certain subsegments of the tech industry, you saw different things change. There's a moment in time when everybody was investing in a mobile video thing. Then all of a sudden, none of those companies were successful. That went away as a category. You'd have a hype cycle like the beginning of VR, AR where you'd have a couple of billion dollars dumped into VR, AR stuff that almost none of it worked. Those things happened, but that's just part of the ecosystem of entrepreneurship and venture capital and high-growth tech companies.

I think that's different than, "I'm building a company in a situation that's really hard and so I'm being really thoughtful about how I allocate money, and I'm being really thoughtful about the team that I build. I'm being really thoughtful about how I engage and treat my customers. I'm prioritizing a set of things that are important versus getting wrapped up in a bunch of things that maybe seem exciting or seem important, but have no correlation with reality."

Maybe the last is it shifts back to people who are much more mission-driven than mercenary. I was talking to somebody earlier today about a company that is a sizable company that's got plenty of stress and all of the people at that company are mission-driven. They want to be at that company. There's nobody at that company that's currently there working that's saying, "I'm working here because I want to make a buck."

If they're successful, they'll all make a buck. If they're not successful, well, they cared a lot about the mission, the people they worked with, the thing the company was trying to do, and they were committed to. It didn't become that the priority or the driver was, "I'm taking this role because I think I can make the most money at this role." It's not saying that you shouldn't care about making money. I'm not suggesting that. It's that the priority in the entrepreneurial cycle, it's so challenging. There are plenty easier ways to make money. It has to be mission-driven. In more difficult environments, I think that tends to shine through.

James: Excellent, Brad. Well, thanks so much for joining us today.

Brad: My pleasure.
  In this episode

Brad Feld
Partner and Co-founder, Foundry

Brad Feld is a partner and co-founder of Foundry. He has been an early-stage investor and entrepreneur for over 35 years, since founding his first company, Feld Technologies, in college. Brad is also a co-founder of Techstars and, with his wife Amy Batchelor, runs the Anchor Point Foundation. Brad has written several books on entrepreneurship and venture capital and started blogging in 2004 before VC Twitter existed. Brad holds Bachelor of Science and Master of Science degrees in management science from the Massachusetts Institute of Technology. Brad is also an art collector and long-distance runner who enjoys wandering around alone in the mountains for hours at a time.

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Karan Singh: Welcome to our segment of the program that we're calling "Game Changers," where we'll explore how the best revenue leaders have transformed their company's growth trajectory. I'm your host, Karan Singh, partner and leader of the revenue excellence function at Sapphire Ventures. Joining me today is Marcus Holm, CRO at Forter, Cloud 100 company in the fraud protection and prevention space. Marcus, great to have you joining us.

Marcus Holm: Likewise Karan. Thanks for having me as part of your debut podcast. It's a distinct pleasure to be with you.

Karan: Let's jump right into it, Marcus. We've interacted in past lives. We worked together in the past and one of the things that I loved about you is, you can always smell and sense when somebody has revenue in their DNA. What was your aha moment?

Marcus: It's sort of in the DNA, Karan. I was shaped by my environment in childhood where I was part of a large family of 11 kids. My father was a professional sales trainer, part of Max Sachs International, doing track selling. So it was a seven-step process on how you find a prospect, build rapport, qualify and close a deal. And so ironically in middle and high school I would tag along to these seminars and learn about sales process end-to-end.

And my dad had a strong influence over me in terms of meritocracy and understanding human psychology. And through high school was selling electronics at Super Target, trying to convince people to buy Playstations and cameras and upsell the best I could. And then following my high school sales career, I went door to door in Eastern Europe. And so going through university I recognized, you know what, I have a real knack for this. I enjoy the human psychology of problem solving and solutions. And so that's kind of what put me on this trajectory to stay in sales.

Karan: That is amazing. I knew there was something unique about you. Now I know it's you were value-selling, following a structured sales process in your teenage years. So my goodness, it is absolutely a part of your DNA. What a journey. Let's get it in the meat of it. And I have a feeling I know what your game changer is going to be. If you had to boil it down to that one thing, that one initiative, that one best practice that changed the game for you, what would that be?

Marcus: I think the consistent theme throughout my sales career has been focusing on value realization. So it didn't matter if it was B2C sales in residential neighborhoods where the benefits were different for maybe a child versus an adult, a man versus a woman, an elderly, they all had different things that appealed to them. So doing proper discovery to then figure out the benefits of their situation was critical to landing a sale.

So I think when I finished the university and transitioned to business to business large enterprise sales, I quickly came to realize that the human psychology is consistent. Whether it's a CFO or CDO wanting to buy something, that's the same person who I was selling to prior on their couch as they want a TV service. And so you need to make sure that you understand who are the key stakeholders that are involved in the decision making process. Because sometimes it might just be a husband and wife because changing TV service is easy.

However, if I want to engage with a Fortune 500 retailer, I'm going to have to focus on a consensus sale where there's a lot of stakeholders with influence into the decision and then figure out how to quantify the impact and the perceived ROI of my solution to the individual areas, so that as they go through and you look at this popularity contest or the bandwagon effect of who are they mostly all going to nod at and it comes down to a vote more or less in these large enterprises, that you come outstanding differentiated.

Because most competitors and or salespeople tend to get single-threaded. But to do value realization effectively, you have to be very multi-threaded and ensure you have a comprehensive readout of what matters most to the whole organization. Because if you can solve multiple things simultaneously, you can demand a higher ticket price, you can have a faster sales cycle, and you can have a higher conversion rate.

Karan: Value realization is not a new concept. I mean heck, you were doing it in high school, right? So it's been around for a while. How have you translated what is a very, I think, very relevant concept to your teams? What have you done to disseminate that knowledge to everybody else because that's right, the trick of the trade? I'm curious what best practices have you used on the same?

Marcus: Hire a few rock stars and they can will their way to victory. They instinctively know what to do, they're creatures of habit and they can just play off of that to finding closed deals. I think as you scale to a later stage pre-IPO company like Forter, you come to recognize the importance of standardization because it's the lowest common denominator of how can I simplify the message and the sales plays to a place where now I can have it replicated across tens or hundreds of sales reps invest heavily into enablement both in the plays, so the content of who are the target personas, what are the sales plays we want to run at those different personas? What is the process from sales stage one to seven? What's the qualification framework that we want to standardize on? Really trying to take the learnings of your rockstar reps, package them up in a repeatable way and make them available for us as a security company.

There's a similar opportunity to decide whether you want to sell on fear of loss or desire for gain. If you sell based, if you sell based on fear of loss, you're typically going to be focused exclusively on a security persona or like a fraud prevention persona. In our case, when you're selling to a lot of retailers, however, if you also orient yourself towards what's there to gain, you get access to and relevance with the chief digital officer, chief financial officer, because you can focus more on revenue maximization, improve customer experience, how do you increase conversion rates and let as many shoppers as possible shop on your website?

And so I think it's important that you flush out the different value drivers of make them more money, save them money or keep them out of jail. And I think that as a security company, if you can do all of those, it gets you access to increasing or an additional number of buying centers. I can also get you a much more compelling ROI story because it's not just a bottom line savings play, but it's a top line growth story as well.

Karan: Makes a ton of sense. You know what I love about your statement, too, is it's clearly a company-wide initiative. This is not just a sales people sitting in the corner trying to go figure it out by themselves, although I think they are the tip of the spear, right? So you're starting with your best and brightest and learning from them, but then galvanizing the entire company together to change the messaging, change the perspective, all that. And then using that to drive, like you said, canonize us across the organization. I'm curious, did you see a change in your KPIs, in retention or I mean give me a sense, have you seen a change? And I'm also curious maybe a two-part question. How long do you think it takes before something like this actually really fits in the DNA of the organization so you will see that change? What do you think that looks like?

Marcus: So short answer is yes. We have seen improvements across our key KPIs. So as I look at the sales team, we're tracking things like ramp time to get on the board with the first deal, conversion rates. What X pipeline do they need for coverage to ensure that they can hit their quota? Cause it's pretty common in our industries to have three to five X. So if you can be closer to three X, that's great because that means you have a higher win rate, you don't have to have as much top line coverage, also average deal size. And so if we look at our key metrics there plus the critical rep productivity metric of you ideally want to get all least half your sales team achieving their regular quotas to limit attrition and turnover and then frankly also to control your costs because turnover is a super-expensive proposition as you ramp new people.

And so I think the investments we've made have paid off along those key metrics. Are we to where we want to be ultimately? Not yet. I mean we're still working tweaks out, which is to your second question, I think you knew the answer, your leading question, that it's a multi-year journey. I mean I think it is a company transformation in the early days of focusing on value realization because you're interviewing all the stakeholders across the company. The founders play a critical role in understanding what was the heritage of the solution, why are we doing it, how do we do it better than the alternatives?

You're interviewing the support team to understand what are customers challenged with. The product team, to understand what are we building for and what's our direction and our vision for the future. And so when you're doing a command of the message type framework that you now have gone through together, you look at some of these industry standard frameworks of really trying to hone in on the value drivers and the how we do its and how we do it betters and answer the three why's, all these things.

It is absolutely a cross-company collaboration and I think there's enough demonstrated evidence at this point based on the success of these IPOs, whether you're looking at the snowflakes of the world, the [inaudible 00:08:35] of the world, the Crowdstrikes of the world, they've all followed a similar recipe, I think, of success. And so we're not trying to reinvent the wheel but we're trying our hardest to remain rigorous and adherent to those best practices.

Karan: You brought up a couple of top points and I want you to just speak a little bit more to this. So it's a multi-year journey. I think we all understand that. I think conceptually there is a, and agree with it, and conceptually there's absolutely a need for something like this and you see the best and brightest companies, but you'll also find that there's a lot of, especially early stage founders that may not be ready or willing or interested just yet in that transition to value selling because they're beholden to the quarter, they're beholden to the current pipeline and this transition takes a little bit of pain and suffering as well. So give some counsel to our audience, assume that there's revenue leaders listening in and saying, "Hey, I want to go down this journey." How did you pitch this to your leadership in Forter and in past lives? What would you suggest they do as part of their pitch as well to cement this concept in their leadership's mind and get buy-in?

Marcus: Admittedly, I think this is the most important sale of revenue leader will make is the internal sale. I think there is a propensity for founders and early stage companies to under-invest and go to market, thinking that hey, if my product is super legit, it'll sell itself or the phone will just ring because this stuff is so amazing and we'll just hire some rainmaker, natural all star sales people and they can will their way to victory. It's a dangerous path to go down.

I think in the early days, like series A, series B and I've had the pleasure of being a part of some of those, too. It's really about AB testing. I would acknowledge look, you can't really define super-repeatable rigorous process when you don't even yet know how you're going to position yourself in the market. The early days are defined by pressure testing your message with your intended personas to see how it lands and you sort of take your learnings from your losses and ideally get better to a place where you can pivot and drive those rates up. Here at Forter, similar to other places I've been, one of my initial priorities was in making the request to invest in sales process, sales qualification frameworks, different tools.

Because as you know, given all your operational experience, the tool chain can be quite expensive as well as you add these fixed costs. Anytime you make an ask of the business, you have to be prepared to follow similar process as you do externally. Quarter over quarter, you go to board meetings as a revenue leader, you have to be able to show the broader board team, here's the starting place on those key metrics we mentioned earlier in this call, here's how they're trending quarter over quarter. And as you get positive leading indicators in early success, it begets more investment, because people are willing to further invest in places where they see some ROI coming.

They don't want to keep throwing bad money after bad results or good money after bad results. And so I think that's where here I've had to focus very heavily on trying to be data-driven, not emotionally driven. I think as long as you continue to educate founders in the journey and you show them it's paying off, they'd be silly not to invest, that the deals are getting bigger, you're closing more deals, the growth is accelerating. So that's my biggest counsel, is just treat it like a natural sales process and don't cut corners. Otherwise you won't get the answer you want.

Karan: Share a little bit, what would you articulate as those leading indicators?

Marcus: What matters both in a high-growth business is you want to have high velocity in new logo acquisition. So how many new customers are we bringing on? What's the average sales cycle length within our segmentation model? So for us, we have commercial mid-market, I have enterprise, I have strategic, so let's pay attention to how we can condense those. And one can argue that if I have better enablements and I have better tools and I have just-in-time manufacturing of the right content to the right persona at the right time, these will help accelerate the deals as well as make them larger.

We pay attention to win rates. Understanding any worthwhile space is going to have a lot of competition. So you got to pay close attention to who you're typically seeing in every deal. Who are you beating? Who are you losing to periodically and recalibrate that way.

Karan: Marcus, thank you. This is incredibly insightful. I know that our audience is going to get a ton of wisdom. I love to finish these conversations with a lightning round. Don't think too hard, just your gut reaction for each. Great leaders pick great companies. How did you pressure test at Forter was a company to go to?

Marcus: So for me specifically I look at who are the investors? Are these tier one venture capital firms? Are these successful board members? I look at how compelling the founder problem fit is. What's their origin story? Why are they trying to solve this problem? How's my chemistry with them as founders? I look at things like the total adjustable market. I like disruptive plays where you've got a well-established legacy solution and it's ripe for disruption. And I want to span verticals and market segments, not be overly niched. I look at Glassdoor reviews to get a sense for, is this a collaborative, enthusiastic, high-energy environment? As I looked at this particular opportunity at Forter, it checked all those boxes.

Karan: What would you share with others that are trying to make the transition to a leadership role from sales?

Marcus: It's one of those inherent desires you need to have to help other people and to extend beyond yourself as far as your impact. During the pandemic and now I guess supposed recession we're in, people are going through some hard personal problems and challenges, right? There's a lot of emotional distress, there's a lot of anxiety. As a leader, you got to be prepared to be a little bit of a therapist, show empathy for the adversity that your team is going through.

Karan: What's the biggest misconception about our discipline?

Marcus: I think there's commonly a perception of, it's all about relationships. No, that's part of it, but you better build a leak-proof enough business case that when it gets passed around 15 times, the people who don't know you still rubber stamp it. Because you can't possibly get access to all the relevant stakeholders. Sales people and revenue leaders have to be intelligent, they have to be thoughtful, they have to be analytical, they have to be prepared. You can't just ad hoc wing it all the time. And so that's what comes to mind for me.

Karan: What's your big prediction for the future of revenue?

Marcus: One of the quotes I really like from Carl Eschenbach at Sequoia, who I've gotten to know well over the years, he's sort of a career mentor and represents the trajectory I'm trying to follow myself. He talks a lot about how execution is a differentiator. Meaning we talk a lot about patents and IP and whose product is the best. And while that is important, there are common examples of tech history of an inferior product winning the market because they simply out-executed the competition.

And so I think when I think about revenue, IT leaders need to make sure that they recognize the potential impact execution can have. And that is, I think demonstrated by all the things we've talked about throughout this podcast. There's a lot that goes into that. There's a lot of things you have to build and operationalize and run with for your teams and if you fail to do that consistently, you'll get out-flanked, I think.

Karan: Last one, and we'll make this one a fun one. If you weren't in revenue, what would you be doing?

Marcus: An exotic car salesperson. Because I love sports cars and the thought of sitting in a Ferrari or an Aston Martin dealership and taking people for test drives all day feels pretty utopian to me.

Karan: Amazing. Count me in on the exotic car sales as well, by the way. So birds of the feather. Well, listen, Marcus, this was amazing. Really grateful to you for sharing your wisdom, your counsel on value selling and just in general getting a little bit more knowledge about your background. This was a fun conversation. Appreciate you.

Marcus: Yeah, likewise. This is by far my most ambitious media product to date, Karan. So thank you for luring me out of my shell into the public domain. Wish you the best of luck with your future episode and it was a pleasure.

Karan: First of many. I'm Karan Singh and this has been an excerpt of the "Game Changers" podcast. To listen to the complete episode, please be sure to follow Sapphire Ventures on LinkedIn and @SapphireVC on Twitter. To get all the latest trends, best practices and resources from revenue operations experts for startup growth, subscribe to our RevOps newsletter, info.sapphireventures.com/subscribe.

Nothing presented herein is intended to constitute investment advice, and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures, LLC ("Sapphire"). Information provided reflects Sapphires’ views as of a particular time. Such views are subject to change at any point and Sapphire shall not be obligated to provide notice of any change. For more information, please visit Sapphires’ website at www.sapphireventures.com.

This article originally appeared on PitchBook News