20VC Elad Gil on Startup Offense and Defence in a Recession, How The Venture Landscape Has Shifted & All Things Valuations, Secondaries and Layoffs

Summary Notes


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.

Summary Notes

Introduction to the 20 minutes VC Podcast Episode

  • Harry Stebbings introduces the podcast and expresses excitement for the episode.
  • The guest is praised for their impactful blog post on strategies for startups during a recession.
  • The guest is also acknowledged as a valuable advisor and a prominent figure in the startup ecosystem.

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.

Guest Introduction: Elad Gil

  • Elad Gil is introduced as one of Silicon Valley's most successful and prominent angel investors.
  • His investment portfolio includes major companies like Stripe, Square, Airbnb, Pinterest, Instacart, Coinbase, Flexport, and Brex.
  • Elad's background includes founding and CEO roles, as well as VP of corporate strategy at Twitter after the acquisition of his company, Mixer Labs.
  • Previously, Elad spent three years at Google, where he was involved with significant acquisitions, including Android.
  • The introduction also includes a mention of successful companies HelloSign and Headspin, highlighting the importance of user experience and mobile product development.

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.

Elad Gil's Journey into Startups and Angel Investing

  • Elad's career spans launching products, starting companies, and investing.
  • He moved to Silicon Valley during the dot-com bubble collapse and experienced the rapid downsizing of a startup.
  • At Google, he initiated mobile efforts and was involved in the acquisition of Android.
  • He founded Mixer Labs, which was acquired by Twitter, where he helped scale the company significantly.
  • As CEO of Color Genomics, he led the company before stepping down for his co-founder to take over.
  • Elad's investment success includes backing numerous companies valued at over a billion dollars.
  • He authored "The High Growth Handbook," a guide on scaling companies.

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.

Impact of COVID-19 on the Startup and Venture Landscape

  • COVID-19 has significantly altered the economy, work dynamics, and financing.
  • Unemployment rates and economic downturns in numerous sectors are juxtaposed with a relatively stable stock market.
  • Companies are adapting to remote work and reevaluating their financial strategies.
  • Elad anticipates a second wave of COVID-19 and advises companies to have two to three years of cash on hand or reach profitability.
  • He warns of the potential scarcity of capital and the need for companies to demonstrate growth before raising additional funds.

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.

Defensive Strategies for Startups

  • Companies need to assess their costs, burn rate, and revenue.
  • A recommended cash reserve of two and a half to three years is suggested due to the uncertainty of the pandemic.
  • Stress tests at the customer level and revenue level can help determine the company's financial health.
  • Companies should evaluate their top customers and revenue projections under various growth scenarios.

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.

Stress Test Models

  • Stress tests help founders understand the impact of economic changes on their customers and revenue.
  • For enterprise or SaaS companies, analyzing the top customers and predicting potential spending cuts is crucial.
  • Revenue stress tests involve modeling different growth scenarios and understanding their impact on the company's financials.

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.

Approaching Plans and Projections

  • There is an acknowledgment of the inherent uncertainty in business plans.
  • Companies may experience acceleration, decline, or mixed effects due to COVID-19.
  • Founders and investors should be flexible with plans and understand that the current environment is unpredictable.

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.

Business Planning Amidst COVID-19

  • Identifying which sectors are experiencing temporary growth and which are truly accelerating is crucial for planning.
  • CEOs should consider the sustainability of their business's current growth.
  • Companies must evaluate how long they can sustain operations with reduced revenue and decide on actions such as raising funds or cutting costs.
  • The most challenging assessments are for companies where the impact of COVID-19 is still uncertain.

"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.

Vulnerability and Sustainability in Different Sectors

  • The ability to pivot or reposition depends on the industry vertical.
  • SaaS companies that are non-essential are more vulnerable due to high churn rates.
  • For travel, corporate travel services like Trip Actions may be more sustainable than non-core services.
  • Companies that are marginal versus core to their customers are at higher risk.

"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.

Venture Capital Sentiment and Investment Strategies

  • VC sentiment on being "open for business" varies by firm and capital type.
  • Traditional VCs are still investing, especially in early stages, but valuations are adjusting.
  • Late-stage investing is more cautious, with VCs focusing on existing portfolio companies or well-known brands.
  • Nontraditional capital sources like hedge funds and family offices are shifting focus to public markets.

"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.

Impact of Nontraditional Tech Investors Exiting

  • The exit of nontraditional tech investors could be seen as positive or negative, depending on one's role in the ecosystem.
  • Founders benefit from more capital sources, while investors may prefer less competition.

"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.

Founder Advice on Valuation Sensitivity

  • Founders must weigh the need for capital against the amount of dilution they are willing to accept.
  • In the current environment, it might be prudent to accept slightly more dilution to secure funding quickly.

"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.

Macroeconomic Concerns and Fundraising Timing

  • The current optimistic sentiment may not last, and raising funds sooner rather than later could be strategic.
  • There is uncertainty about the effectiveness of government bailouts and the overall economic recovery.

"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.

Inflation Concerns and Market Dynamics

  • The current economic situation is creating deflationary pressure due to decreased demand.
  • There is uncertainty regarding long-term inflation or deflation trends.

"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.

Advising Founders on Deal Terms and Structures

  • Founders should aim for clean investment terms to avoid future complications.
  • Some structures are acceptable if they align with company milestones, while others can be detrimental even in success scenarios.

"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.

Inside Rounds and Reserve Allocations

  • Many VC firms are conducting inside rounds to support their best portfolio companies.
  • The shift in reserve allocations may affect the availability of funds for new investments.

"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.

Investment Strategies in Uncertain Economic Times

  • Venture capitalists are currently investing more in companies they are already familiar with.
  • Late-stage VCs are expected to shift their perspective back towards early-stage investments after a few months.
  • The approach for early-stage investments remains unchanged despite economic uncertainty.
  • Venture funds that have invested in problematic late-stage companies may struggle to raise new funds.
  • Limited partners may adjust their allocations away from venture capital if the stock market falls.

"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.

Impact of Economic Shifts on Fundraising

  • Venture capital is not disappearing, but the ability to raise funds will depend on the quality of investments.
  • Funds that made poor late-stage investments may have difficulty raising follow-on funds.
  • Fund sizes may shrink as limited partners reduce their investment amounts.

"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.

Effective Layoff Strategies

  • Significant layoffs should be done all at once to avoid repeated morale damage.
  • Default to cutting when uncertain about keeping certain employees.
  • Layoffs should be planned and executed quickly to minimize uncertainty.
  • Be generous with severance and help laid-off employees find new jobs.
  • Focus on the remaining employees, ensuring their stability and understanding the reasons behind the layoffs.

"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.

Transparency and Sustainability in Business

  • Transparency is crucial, but it must be balanced with the company's long-term survivability.
  • Treating laid-off employees well is important for morale and relationships.
  • Sustainability of growth is relative; some companies may experience a temporary surge due to external factors.

"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.

Growth and Market Opportunities in a Recession

  • Companies that adapt to the changing environment can thrive during a recession.
  • Some businesses will naturally benefit from shifts in consumer behavior due to external circumstances.
  • It's important to assess the sustainability of growth and avoid over-expansion based on temporary conditions.

"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.

M&A Market Dynamics

  • The M&A market is expected to see increased activity due to market volatility.
  • Companies enjoying a temporary surge should consider M&A opportunities seriously.

"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.

Late-Stage Company Planning

  • Late-stage companies should plan acquisitions ahead of time, considering potential targets and founder relationships.
  • Companies are advised to look 6 to 18 months ahead for potential M&A 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).

Impact of COVID on Enterprises

  • COVID-19 caused significant disruptions for enterprises, including figuring out remote work tools like Slack and Zoom.
  • Enterprises spent initial weeks understanding COVID, followed by a month of transition to remote work, and then financial planning and stress testing.

"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.

M&A as a Strategic Response to COVID

  • Companies may consider M&A as part of their strategic response to the pandemic.
  • Valuations dropping for certain companies present acquisition opportunities for enterprises with sufficient market cap or cash reserves.

"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.

Founder-VC Misalignment in M&A

  • There is a misalignment between founders and VCs when it comes to M&A, particularly in terms of the perceived value of an exit.
  • Founders may see a life-changing amount of money from a sale, while for VCs, the same amount may be inconsequential relative to their fund size.

"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.

Founders as Fiduciaries in M&A Decisions

  • Founders should consider their responsibilities to all shareholders, including themselves, when contemplating a sale.
  • Reasons for selling include exhaustion, financial need, competitive pressure, or a high-value offer.
  • Early exits can be the right decision, but hindsight may reveal missed opportunities for greater success.

"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.

Strategic Early Exits

  • Selling to a rapidly growing company can lead to greater financial outcomes and professional opportunities.
  • Founders may regret selling too early or not selling when they had the chance, depending on the future success of their company or the acquiring 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.

Quick Fire Round: Favorite Books and Board Members

  • Elad Gil prefers nonfiction and recommends "Master of the Senate" by Caro.
  • Sue Wagner is highlighted as a memorable board member due to her diverse experience.

"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.

Founder Secondary Sales

  • Secondary sales are appropriate when a company is stable, or there is a personal financial need.
  • Founders should balance taking money off the table with the potential for future appreciation.

"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.

Challenges of Angel Investing

  • The primary challenge for Elad Gil as an angel investor is balancing family obligations, especially during the COVID-19 pandemic.

"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.

Silicon Valley's Culture and Governance

  • Elad Gil observes a growing cynicism in Silicon Valley and concerns over city governance in San Francisco.
  • He advocates for optimism and using technology for positive change and criticizes the city's mismanagement despite its resources.

"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.

Investment Decisions

  • Elad Gil's investment in a company called Deal was driven by his belief in remote work trends and the team's capabilities.

"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.

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