20VC How Founders Can Gain Leverage in Fundraising Negotiations, The Metrics You Need To Raise Your Series A in Consumer & What We Have To Change About Cap Table Construction with Jana Messerschmidt, Partner @ Lightspeed Venture Partners

In this episode of "20 Minutes VC," host Harry Stebbings interviews Jana Messerschmidt, an investor at Lightspeed Venture Partners, who shares her journey from engineering to top-tier venture investing. Jana discusses her experience at Netflix, where she appreciated the company's high-performance culture and emphasis on freedom and responsibility, and at Twitter, where she led global strategic partnerships. She emphasizes the importance of founders knowing the metrics needed for their next funding round and advocates for a more rational fundraising cycle in the venture industry. Jana also highlights the significance of diversity on cap tables and praises Henry Ward of Carta for his efforts to address equity disparities. Additionally, she offers insights into leveraging angel investors, the challenges of quick deal-making in VC, and the need for founders to have clear fundraising goals.

• Harry Stebbings introduces the episode of "The 20 Minute VC" and invites listeners to suggest guests via Instagram.
• Jana Messerschmidt, investor at Lightspeed Venture Partners, is introduced as the guest.
• Jana's background includes co-founding #Angels and working at Twitter and Netflix.

"I am so excited to be back for another week of episodes on the 20 minutes vc with me, Harry Stebbings, and if you think there's an incredible guest who should be featured, message me on Instagram at H. Stebbings 1996 with two b's." "And so with that, I'm thrilled to welcome Jana Messerschmidt, investor at Lightspeed Venture Partners..."

The quotes introduce the podcast episode and the guest, emphasizing the interactive nature of the show and the distinguished background of the guest.

• Jana Messerschmidt's career journey from engineering to business.
• Her roles at Netflix and Twitter, and co-founding #Angels.
• The transition from engineering to venture capital and becoming a partner at Lightspeed.

"Prior to Lightspeed, Jana cofounded hashtag Angels in 2015, a first of its kind investment collective specifically designed to get more women on the cap tables of successful companies." "Finally, before Twitter, Jana spent two years at Netflix as director of business development."

These quotes outline Jana's career trajectory and her contributions to the tech industry, highlighting her focus on increasing women's representation in business.

• The founding of #Angels by a group of Twitter execs to increase deal flow and value to founders.
• Jana's approach to consumer investing and her connection to her hometown's market testing.
• The impact of #Angels on the industry and Jana's eventual move to Lightspeed Venture Partners.

"So now, nearly five years later, we've invested in more than 100 companies as a group." "So you'd better bet, when I'm doing consumer investing, I'm constantly pinging my friends from back home and asking them what products are they using or what products would they consider using."

These quotes highlight the success and strategy behind #Angels and Jana's personal investment philosophy, which values consumer insights from a broad demographic.

• Netflix's culture of high performance and the "keeper test" for employee retention.
• The importance of hiring top performers and providing generous severance for adequate performance.
• The influence of Netflix's culture on Jana's career and investment mindset.

"Netflix views the workplace as a professional sports team, not a little lake team." "So managers were frequently asked to perform what we called the keeper test..."

These quotes reveal the high-performance culture at Netflix and the management strategies that Jana experienced, which inform her perspective as an investor.

• The significance of company culture in achieving business goals.
• Culture Amp's guide to performance reviews and their role in employee development.
• The impact of company culture on employee performance and business success.

"Performance reviews are the cornerstone of high-performance work cultures." "Culture Amp's new guide to performance reviews shows you how to create a process that actually makes an impact..."

These quotes stress the critical role of effective performance reviews in cultivating a high-performance culture, which is essential for business growth and success.

• Airbase as a spend management platform for startups.
• The benefits of Airbase's virtual and physical cards, pre-approval system, and accounting automation.
• Culture Amp and Terminal as tools for managing teams and hiring engineers.

"It's a game changer for finance teams that need to keep up with company growth." "Terminal is your dedicated partner in quickly building skilled remote engineering teams."

The quotes discuss the advantages of using Airbase for financial management and Terminal for building remote engineering teams, emphasizing the importance of efficient tools for startup growth.

• Harry Stebbings expresses excitement to hand over to Jana Messerschmidt for the interview.
• A brief exchange of pleasantries between Harry and Jana, with Jana expressing her enthusiasm for participating in the podcast.

"So now I'm very excited to hand over to Jana Messeschmidt, investor at Lightspeed Venture Partners." "Thanks so much for having me. I've been a longtime fan and listener of 20 minutes vc, so it's really fun to be in the hot seat myself."

These quotes conclude the introduction and transition to the main interview with Jana Messerschmidt, setting the stage for an in-depth discussion on her experiences and insights.

• Netflix has a policy that does not tolerate "brilliant jerks," meaning individuals who may be high performers but are difficult to work with.
• This policy highlights the importance of team function over individual contribution.
• Netflix values high performance but not at the expense of team dynamics.

"thing that was really interesting about Netflix is they had a policy of, brilliant jerks aren't tolerated."

This quote emphasizes Netflix's commitment to a positive team culture, even if it means letting go of highly productive but disruptive individuals.

• High-performing individuals thrive on freedom, autonomy, and accountability.
• Growth in companies often leads to bureaucracy and processes which can stifle high performers.
• Netflix believes in maintaining a high talent bar to foster a culture of creativity, self-discipline, and freedom.

"So if you ask most high performing individuals, what gets them really excited? Why do they stay at companies for years upon years? It's that they thrive on freedom, autonomy, and accountability."

This quote underscores the motivational factors for high-performing individuals, which Netflix aims to support through its culture.

• As companies grow, complex problems and communication issues can lead to the introduction of unnecessary processes.
• A cycle of bureaucracy can drive away high performers and perpetuate itself.
• Netflix tries to balance the need for process with the trust in employees to act in the company's best interests.

"And so Netflix really felt like if you maintain a super high talent bar, you can have a culture that is one filled with creativity, self discipline, and freedom and responsibility."

The quote explains Netflix's approach to culture, which prioritizes minimal bureaucracy to encourage employee creativity and responsibility.

• Traditional companies often have strict expense policies requiring multiple levels of approval.
• Netflix's philosophy is to trust employees to make reasonable decisions regarding expenses, as they are trusted with critical parts of the business.

"But Netflix's philosophy was, hey, we hired all of these really amazing people who we're trusting to run the most mission critical parts of our business. Can't we just trust them that they'll do what's in our best interests and travel reasonably and make the right judgment call?"

This quote illustrates Netflix's trust-based approach to expense policies, reflecting its overall culture of empowering employees.

• Providing context allows team members to understand business goals and metrics, and empowers them to figure out the best ways to achieve those goals.
• Jana Messerschmidt believes that the responsibility for an employee's performance lies with their manager, either due to a lack of context or a mismatch of skills.

"So here's a really great example. When I first started at Netflix, I had negotiated my first deal with a partner, and I was getting ready to sign it, but I wasn't a c level executive at the company. And so I asked a colleague, I said, hey, like, who can sign agreements around, like, what level do I need to go to? And he looked at me and he said, well, you can."

This quote demonstrates Netflix's practice of empowering employees to make decisions and take responsibility for their work, which is part of Jana's leadership philosophy.

• Founders are always in a state of fundraising until their business becomes profitable.
• The top goal for founders should be to hit the metrics needed to raise their next round of capital.
• Founders often lack a clear sense of what it takes to be in a good position for future fundraising.

"So for me, the thing that I always encourage founders to think about is the absolute top level goal for every founder should be ensuring that they are on track to hit the metrics that they need to raise their next round of capital."

This quote highlights the importance for founders to focus on achieving the metrics necessary for securing their next round of funding.

• Founders who present clear milestones and metrics for future fundraising rounds in their pitches can impress investors.
• Aligning with investors on these metrics can help secure their support.

"It would absolutely impress me. I think also it's a great way to start the conversation with whoever it is that you're pitching as a founder to see if you're aligned on."

This quote from Jana reflects the value she sees in founders who have a strategic and clear vision for their fundraising goals.

• Metrics should be set immediately after raising a round and shared with the board and advisors for feedback.
• It is important to stay informed about market shifts to ensure the metrics are still relevant for future fundraising.

"So I think you should set those metrics immediately whenever you raise that round, and then you can use every single moment and resource that you have for the next, whether it's 12-24 months to hit those metrics and share them with your board or your close group of advisors immediately and get feedback."

Jana emphasizes the need for founders to establish and focus on their metrics right after securing funding to guide their efforts and validate their strategies with their support network.

• DTC brands looking to raise a Series A should show breakout revenue and approaching month rate.
• Growth should be driven by organic or word of mouth, and the velocity of growth is crucial.
• Investors prefer companies with rapid and sustainable growth over those with high revenue but slowing growth.

"So for d to C brand companies that are raising a series a, I have two partners, Nicole Quinn and Alex Tossig, who have backed quite a few d to c companies, daily harvest and goop, to name a few."

This quote provides context for the types of DTC brands and the experience of Jana's partners in investing in such companies.

• Monthly churn should be less than 4% and the LTV to CAC ratio should be around five to one.
• These metrics indicate a strong and sustainable consumer subscription business.

"Yeah, I'm so glad you asked this. So I would say for consumer subscription businesses, I really like to look for monthly churn being less than 4% a month and an LTV to CAC of around five to one."

Jana outlines the key performance indicators that make a consumer subscription business attractive to investors.

• Metrics depend on the intended business model, such as advertising revenue or in-app purchases.
• For advertising-driven businesses, time spent in the app and audience size are important.
• In gaming apps, social components and user spending are key metrics.

"If you're going to do something that's advertising, I'll have Facebook, Twitter, snap. You're really going to want to think about time spent in the app and how big of an audience you can grow."

This quote clarifies the different metrics that are important for consumer social and media businesses based on their revenue models.

• The cost of customer acquisition on platforms like Facebook has significantly increased.
• Companies need to find a differentiated distribution advantage to overcome this challenge.
• Examples of companies with a distribution advantage include Cameo, Goop, and Honest through celebrity networks, and Bird and Lime through physical products in public spaces.
• Historical strategies at Twitter involved integrating content into various media to drive signups.
• At Netflix, a cost-effective acquisition and retention channel was placing Netflix buttons on remote controls, providing years of daily impressions.

"For companies that we've backed, like cameo Goop and honest celebrity networks, is really that differentiated distribution advantage."

This quote emphasizes the importance of having a unique distribution method that sets a company apart from competitors, which can be a significant factor in customer acquisition.

"In the early days of Twitter, we worked closely with a bunch of partners to get Twitter content integrated into whether it was websites, search results, or displayed on air and broadcast programming."

This quote explains how Twitter used content integration across various media platforms as a strategy to increase user signups.

"We found a super inexpensive acquisition and retention channel, which was getting big Netflix buttons on remote controls."

This quote reveals an innovative and cost-effective strategy used by Netflix to acquire and retain customers through visibility on remote controls.

• Founders should actively inquire about the metrics investors are looking for.
• Investors interested in a business should be willing to specify these metrics, as they may vary depending on the nuances of the business.
• Founders with existing institutional investors should leverage their experience for insights.
• The willingness of investors to provide detailed metrics can be an indicator of their commitment and potential partnership value.

"Founders should constantly ask investors what those metrics are."

This quote suggests that founders must proactively seek clarity on the performance indicators that investors prioritize.

"Make your vcs do the work."

This quote implies that investors should be engaged and willing to invest effort in understanding the business they might invest in, which is beneficial for both parties.

• Having compelling metrics can give founders leverage in fundraising negotiations.
• If metrics aren't strong, founders need to present a clear plan for improvement and showcase their unique capabilities.
• A competitive fundraising process allows founders to set terms and choose their investors wisely.

"Your power in the negotiation, it's driven by the alternatives that you have."

This quote highlights the importance of having strong metrics and options, which empower founders in fundraising negotiations.

"I think the best way to be in a great position for a fundraise is that whatever metrics you kind of knew you had to hit, you're hitting them and hopefully you're blowing by them totally."

This quote advises founders to exceed expected metrics to strengthen their position in fundraising discussions.

• It is generally preferable to have a lead or co-lead institutional investor rather than a party round.
• Strategic angels or individual investors can add significant value.
• Angel investors can be involved in various stages, not just early rounds.
• Founders should consider the unique value each investor brings to the cap table, including networks, operating experience, and founder empathy.

"I found that these individual angel investors who are fellow founders or operators can be incredibly valuable."

This quote points out the importance of having angel investors with relevant experience and networks.

"What skills does your current cap table lack and are diverse points of view well represented?"

This quote encourages founders to assess the composition of their cap table for diverse skills and perspectives.

• Founders should communicate their expectations to potential angel investors.
• Due diligence and reference checks on potential investors are crucial.
• Regular investor updates with clear top asks can effectively leverage the investor base for introductions and support.

"For every angel investment that I make, I always explicitly ask the founder, what are you looking for out of your investors."

This quote emphasizes the importance of aligning investor contributions with the founder's needs.

"The best scalable way I've seen to leverage your cap table is sending out, whether it's monthly or quarterly updates, and putting your explicit top two or three asks at the beginning of that email."

This quote suggests a practical approach for founders to engage their investors and seek specific help.

• Measuring the diversity of a cap table is the first step toward improvement.
• Founders should actively seek to include women and underrepresented minorities as investors.

"So I think the first thing that you have to do is to actually measure the diversity on your cap table."

This quote implies that awareness and measurement are prerequisites for increasing diversity among investors.

• The focus on gender equity in tech began after noticing discrepancies in women's representation as employees versus owners.
• A blog post called "The Gap Table" was published to urge the industry to measure cap tables in addition to employee representation.
• A collaboration with Henry Ward from Carta involved analyzing over 6000 cap tables and 180,000 employees to understand equity allocation.
• Findings revealed that women make up 33% of the tech workforce but hold only 9% of the equity value, while men hold 91%.
• To address the inequity, efforts should be made to increase the number of women in key roles: founders, early employees, executives, and investors.
• Women currently receive only 2-3% of all venture funding, highlighting the need for more female founders and investors.

"And so we put out this blog post called the gap table, and it really was a call to action to the industry that they should start to measure their cap tables, not just measure the representation of their employee bases."

This quote emphasizes the initial step taken to address gender equity in tech by suggesting companies look beyond employee representation to ownership stakes.

"After going kind of months into the data, which is women make up roughly 33% of the workforce of tech companies, yet they hold just 9% of the equity value. Men hold the other 91%."

The quote presents a stark contrast between the percentage of women in the workforce and their share of equity, indicating a significant gender gap in ownership and wealth distribution within tech companies.

"We have to beef up the number of women in those roles. We have to get more female founders. So women today receive just two to 3% of all venture funding."

This quote underscores the need to increase the presence of women in influential positions and address the disproportionate amount of venture funding they receive.

• Henry Ward, CEO of Carta, responded to "The Gap Table" blog post by providing data for the study.
• After analyzing his own company's cap table, Ward discovered inequalities and took action by allocating over $8 million in equity to women.
• Ward also focused on hiring more women into executive and board roles, demonstrating a commitment to gender equity.

"And so what he did was he measured his own cap table and he realized that it was not equal. And so he took swift action and he allocated more than $8 million in additional equity awards to women to correct the inequalities."

This quote highlights Henry Ward's proactive approach to addressing gender equity within his own company, Carta, by redistributing equity to create a more balanced cap table.

• The transition from angel investing to venture capital involves different decision-making criteria and a longer-term commitment.
• Venture investors make fewer investments but are deeply involved for potentially a decade or more, unlike the more hands-off approach of angel investing after the initial stages.

"I think compare that to a venture investor and you make far fewer investments and you are committing to potentially spending a decade or more deeply involved in the company."

The quote contrasts the investment approaches and commitment levels between angel investing and venture capital, with the latter requiring a longer-term and more involved relationship with the companies.

• Jana's favorite books include "High Growth Handbook" by Elad Gil, "Dark Money" by Jane Mayer, and celebrity autobiographies for staying updated on pop culture.
• A significant surprise in the move to VC is the rapid pace of deal-making, which can feel like eloping in Vegas with someone just met.
• Jana frequently reverts to the motto "The answer is always no, unless you ask," encouraging proactive pursuit of goals.
• The biggest challenge in moving to investing full-time is the quick pace of decision-making with limited time for due diligence.
• Jana hopes for a return to more reasonable fundraising cycles in tech and venture, allowing for better founder-investor relationships.
• No new investments to disclose at Lightspeed yet, as announcements are pending founders' readiness to share their stories.

"The answer is always no, unless you ask. But why don't you just go ahead and ask and see if you can actually make progress towards getting something that you want?"

This quote reflects Jana's belief in the importance of taking initiative and asking for what you want rather than holding back due to fear or hesitation.

"So I would like to see it return to a more sane fundraising cycle."

Jana expresses a desire for a more balanced approach to fundraising in the tech and venture industry, which would benefit all parties involved.

• The discussion touches on the importance of spend management platforms like Airbase and employee performance platforms like Culture Amp.
• Terminal is mentioned as a solution for building skilled remote engineering teams, addressing the high demand for developers in the U.S.
• The conversation ends with anticipation for a second round to discuss more investments and topics like Love Island.

"And that's why the likes of Gusto front and segment all love airbase and head over to airbase.com to book a demo and find out how to get up to 1.5% cash back on your monthly spend."

This quote illustrates the benefits of Airbase, a spend management platform, and its popularity among successful companies.

"Performance reviews are the cornerstone of high performance work cultures, but 95% of leaders agree traditional performance reviews aren't working."

The quote from Culture Amp's guide to performance reviews suggests a need for improved processes that drive employee development and contribute to achieving business goals.