In a dynamic episode of "20 Minutes VC," Harry Stebbings interviews Elad Gill, a renowned Silicon Valley angel investor and advisor with an impressive portfolio including Stripe, Airbnb, and Coinbase. Elad shares his journey from the dot-com bubble's burst to becoming a pivotal figure in tech, founding Mixer Labs and leading at Twitter post-acquisition. He discusses the impact of COVID-19 on startups, emphasizing the need for companies to adapt defensively by conserving cash for 2-3 years and offensively by seizing growth opportunities. Elad advises founders on navigating valuations, fundraising, and potential M&A in the volatile landscape, stressing the importance of treating laid-off employees well and maintaining transparency with remaining staff. Additionally, he touches on the role of venture funds and the future of remote work, with a nod to his recent investment in Deel.
This is the 20 minutes VC with me, Harry Stebbings, and I'm so pleased to bring you today's episode. This guest wrote an incredible blog post on defensive and offensive strategies startups can.
Harry Stebbings sets the stage for the episode, highlighting the guest's expertise in startup strategies, particularly in the context of a recession.
And prior to solely company investing, Aladd was an operator as founder and CEO at Cologneics for their first three years. Before color, Aladd was a vp of corporate strategy at Twitter following their acquisition of his company that he founded, Mixer Labs.
This quote outlines Elad Gil's extensive experience as both an operator and an investor, setting the stage for his insights throughout the podcast.
So my career has been split between launching product starting companies and investing.
Elad Gil summarizes his career path, emphasizing his dual role in both creating and funding successful ventures.
Covid has obviously been changing everything, and I think it's really shifted three things for us.
Elad Gil discusses the three major shifts caused by COVID-19, which have profound implications for startups and investors.
In general, as a company, you want to have two and a half to three years of cash on hand, or the ability to get to that point or to be profitable.
Elad Gil explains the importance of having a significant cash reserve to weather the uncertainties brought by the pandemic.
I think there's two types of stress tests you can do. One is at the customer level and one is at the sort of broader, just financial modeling or revenue level.
Elad Gil emphasizes the need for both customer-specific and broader financial stress tests to gauge the company's resilience under different economic conditions.
Right now there's a lot of uncertainty in general in the environment.
Elad Gil highlights the current uncertainty in the business landscape, suggesting that both founders and investors need to adapt their expectations and strategies accordingly.
"So from a planning perspective, I think the easiest plans to make, in some sense, or the easiest forecasts are the things that are clearly accelerating."
This quote explains that it is easier to plan for sectors that are clearly growing due to the pandemic, as their trajectory can be more accurately predicted.
"For things that are clearly decimated, you basically have to ask, how long do I need to make cash last, and how do I do that, assuming my business is continuing to be affected?"
This quote emphasizes the importance for businesses in struggling sectors to focus on cash conservation and operational sustainability.
"And honestly, I think the hardest thing to assess are the companies in the middle, where it's still not quite clear what Covid is going to do to them."
The quote highlights the difficulty in planning for companies that are neither clearly benefiting nor suffering significantly from the pandemic's effects.
"And so it's really a waiting game. You basically have to ask how long before these things turn on?"
Elad Gil speaks about the necessity for companies in certain sectors, like corporate travel, to wait out the pandemic and assess when business might return to normal.
"So anything that's marginal versus core, I think is really going to get hurt."
This quote suggests that companies offering non-essential services are more likely to struggle compared to those providing core services.
"So traditional vcs are still doing a lot of investing on the early stage."
Elad Gil indicates that traditional venture capital firms continue to invest in early-stage companies despite the pandemic.
"Many of them are spending much more time on public markets right now because there's really big shifts in volatility and pricing in public markets."
This quote explains the shift in focus for nontraditional investors away from late-stage private investing towards public markets due to current opportunities.
"As somebody aligned with founders, I think it's good to have more sources of capital and more ways to fund a company."
Elad Gil expresses a positive view on having diverse capital sources for founders, suggesting it can be beneficial for company funding.
"It comes down, when all said and done, to how badly you need the money and also how much buffer you want and then how much dilution are you really taking?"
Elad Gil advises founders to consider their immediate need for capital and the long-term impact of dilution when negotiating valuations.
"So if I was raising money anytime in the next six months, I may just front load it to now and raise money while everybody's still very cheery and optimistic."
Elad Gil suggests that founders should consider accelerating their fundraising efforts to capitalize on the current positive sentiment.
"Right now we're in an OD situation where things are reasonably deflationary because demand is dropping."
This quote highlights the current deflationary trend resulting from a drop in consumer demand amidst the pandemic.
"The very best thing you can do is keep the round as clean as possible, which means non participating, preferred, and one x liquidation, preferences and things like that."
Elad Gil advises founders to strive for simple and clear investment terms to avoid potential issues in the future.
"I think a lot of inside rounds are happening right now, actually."
Elad Gil notes the current trend of venture capitalists investing additional funds into their existing portfolio companies rather than seeking new opportunities.
"I think that trend has another month or two on it. And then I think late stage vcs will start shifting their perspective for early stage investments." The quote explains the current trend of late-stage VCs focusing on familiar companies and suggests a timeline for when they might return to early-stage investments.
"There are going to be a handful of venture funds that are going to find it increasingly hard to raise their next venture fund sometime next year if the economy shifts to bad in terms of the stock markets and other things." This quote emphasizes the potential difficulty for venture funds to raise capital if the economy worsens, particularly if the stock market declines.
"If you made a lot of late stage investments and things that are now having serious problems, it's going to be harder and harder for you to raise follow on funds." Elad Gil explains that poor investment choices, especially in late-stage companies, can negatively affect a venture fund's ability to raise more capital.
"The other way that you could see adjustments happening is people will say, well, before I wrote you a $50 million investment as a limited partner and your billion dollar event, your fund, now I can only write a $25 million investment." This quote indicates that limited partners may decrease their investments, leading to smaller fund sizes for venture funds.
"When cutting, you should cut more deeply than you think you should." Elad Gil advises on the importance of making significant cuts in one go to prevent the need for future layoffs.
"You should explain why this was done, that it was done to give the business stability, and therefore to give them and their family stability in terms of their job." This quote highlights the need to communicate with remaining employees about the purpose of layoffs to ensure their understanding and stability.
"This is about ensuring that everybody who spent four years, six years, ten years, however long it's been building the company, see that company survives, sees that their stock is worth something, but also that a lot of people are left with jobs versus nobody having a job." Elad Gil discusses the importance of transparency and the need to prioritize the company's long-term survival over short-term transparency that could backfire.
"You're trying to create a sustainable business." This quote reinforces the concept of focusing on sustainability and the long-term health of the business.
"How can I use this shift to my advantage?" Elad Gil suggests that companies should look for ways to leverage the current economic situation to their advantage.
"Sustainability is a little bit relative." This quote explains that while some companies may not sustain their peak growth post-crisis, the accelerated growth they experienced can still significantly benefit them in the long run.
"I think there will definitely be a number of buyers coming into the market." Elad Gil predicts an increase in M&A activity, suggesting that companies should be open to such opportunities.
"If you're late stage is you can start planning ahead in terms of what are the companies you want to buy and how do you want to start thinking about which founders to get to know or who to pursue with an eye towards six to 18 months ahead of time."
This quote emphasizes the importance of strategic planning for late-stage companies, specifically in the context of mergers and acquisitions (M&A).
"Fundamentally, if you look at big enterprises in the time of COVID the first two weeks were spent just figuring out what's Covid. The next month for a traditional enterprise was figuring out how to transition to work from home."
This quote outlines the chronological response of enterprises to the COVID-19 pandemic, highlighting the challenges and adjustments faced during the initial phase.
"May also include an m and a in saying as valuations drop for certain types of companies, we're going to look aggressively at picking them up, because as a company we still have a big enough market cap to make interesting acquisitions, or we have the cash position to do it."
This quote discusses the strategic thinking behind pursuing M&A during economic downturns, such as during the COVID-19 pandemic, as a means to strengthen a company's position.
"Do you agree with that misalignment and how do you kind of advise founders to think about it when they get M A offers come through?"
This quote introduces the topic of differing perspectives on M&A outcomes between founders and venture capitalists.
"I think fundamentally the founders should be good fiduciaries for everyone, and everyone includes themselves because they're major shareholders of the company and usually people sell for one of three reasons."
This quote highlights the idea that founders should act in the best interest of all shareholders, including themselves, when considering whether to sell their company.
"So if you do sell, if you can sell to a company that's breaking out itself and has a clear ten x on it, that may actually be the smartest way to exit, all else being equal."
This quote discusses the potential benefits of selling to a company that is experiencing significant growth, suggesting it can lead to better financial and professional outcomes for the founders.
"Yeah, I think on the nonfiction side, I don't read a lot of business books, so maybe I'd say master of the Senate, which is about Lyndon Johnson by Caro."
This quote reveals Elad Gil's preference for nonfiction literature and provides a specific book recommendation.
"I think it depends a little bit on the stage of the company. I think there are two circumstances under which it makes sense to do it."
This quote discusses the conditions under which founders might consider secondary sales and the strategic considerations involved.
"Today it really is managing family obligations, because with schools closed and Covid, there's a lot of extra care burden."
This quote identifies the personal challenges faced by an angel investor in the context of the pandemic, emphasizing the importance of work-life balance.
"I think there's two things worth changing, and I think they're actually shifting."
This quote introduces Elad Gil's perspective on cultural and governance issues in Silicon Valley and San Francisco.
"So this morning, a company called deal announced that it raised a $14 million series a with Andreessen Horowitz. I had prior invested in their seed round as angel."
This quote explains Elad Gil's recent investment decision, highlighting the factors that influenced his choice to invest in a particular company.