20VC How Startup Valuations, Fund Deployment Cycles, M&A and IPO Markets Will All Change in This New Market, Where Will The Biggest Crunch Be, When Is The Right Time To Be Aggressive vs Conservative with Roger Ehrenberg, Founding Partner @ IA Ventures

In this episode of 20 VC, host Harry Stebings converses with Roger Ehrenberg, founding partner at IA Ventures, about the current market downturn and its impact on venture capital and startups. Ehrenberg, who has transitioned from day-to-day operations at IA Ventures to focus on sports investments and recently launched Eberg Capital with his sons, shares insights from his extensive experience in trading and investing through multiple market cycles. He emphasizes the importance of maintaining a level-headed approach during market volatility, the criticality of founder quality over product or market potential, and the necessity for startups to manage burn rates and extend runways in uncertain times. Ehrenberg also discusses the changing M&A landscape due to regulatory pressures and the potential shift in focus towards web3 and crypto by growth investors. Throughout the conversation, he offers personal reflections on his relationship with money, the evolution of his investment strategies, and the joy of embarking on investment ventures with his family.

• "20 VC" is hosted by Harry Stebings, who discusses venture capital and startups.
• Roger Ehrenberg is a founding partner at IA Ventures, a successful seed fund.
• IA Ventures has invested in companies like The Trade Desk, Datadog, DigitalOcean, Wise, and Recorded Future.
• Roger has recently shifted from day-to-day operations to focus on sports investments and Eberg Capital, a new venture focused on Web3, crypto, NFTs, and next-gen infrastructure.

This is 20 VC with me, Harry Stebings, and like everyone, I've been watching the markets crash over the last few weeks and thinking what is going on and how does this impact venture and startups?

The quote introduces the podcast's focus on the current market situation and its effects on venture capital and startups.

• Roger Ehrenberg had a 17-year career on Wall Street before transitioning to venture investing.
• His interest in seed-stage investing grew after angel investing while at Deutsche Bank.
• Mentored by industry veterans like Fred Wilson, Roger became deeply involved in the New York entrepreneurial community.
• Roger founded IA Ventures in 2009 after a period of active angel investing and board participation.

I had been on Wall street for 17 years in derivatives and trading with city and Deutsche, and then I literally quit in late four after having run a large quantitative trading business for Deutsche, just wanting a new start.

Roger describes his transition from a Wall Street career to venture investing, highlighting a desire for a new start.

• Roger has experienced multiple market cycles, starting with the 1987 crash.
• He emphasizes the importance of not taking on excessive leverage and maintaining a sober view of market highs and lows.
• Roger believes in the enduring "laws of nature" that govern markets, despite temporary appearances of new paradigms.

But I think what it's given me, Harry, is it's given me just kind of like a sober view of market highs and lows really coming back to where it is you feel you have an edge and just being able to be incredibly honest with yourself at all times.

This quote reflects Roger's approach to investing, focusing on areas of personal edge and self-honesty to navigate market volatility.

• Roger compares the current market to the dot-com bubble of 2001, with stretched valuations and excessive liquidity.
• The current situation is not a shock event but a gradual adjustment, similar to the Fed's actions in 1994.
• Growth valuations are challenging to support with traditional models in the current environment.

So I think the difference between this and, say, 87 and 97 with LTCM is that this is not a shock. This is not an episodic jolt. This is much more akin to one when you had valuations getting stretched to the point of just lacking reason.

Roger contrasts the current gradual market correction with the sudden shocks of past market crises.

• Roger emphasizes the importance of not being reactive and managing one's own psychology.
• Even experienced investors feel stress, but it's crucial to focus on first principles and assess the impact on one's day-to-day life.
• Good companies remain good despite short-term market fluctuations, and investors should avoid getting caught up in price action.

So I think number one is not being reactive and trying not to freak out.

Roger advises against reacting impulsively to market downturns and stresses the importance of staying calm.

• Focusing on data and self-assessment can help determine if market changes affect one's fundamental needs.
• Moving up Maslow's hierarchy allows investors to focus on controllable factors and self-talk.
• Sharing feelings with peers and engaging in cathartic activities like writing or tweeting can be beneficial.

So I think it's really, it's focusing on the data and it's answering that question, am I okay?

Roger suggests using data to self-evaluate one's financial security during market downturns.

• Investors should assess their portfolios' health and focus on the big things that matter.
• Companies with certain characteristics may be more fragile in the current environment.
• Market stress often creates a barbell effect, with some businesses becoming more concerning than others.

I'm very well known for saying that markets in general, they tend to look like barbells, especially in stress.

Roger notes that market stress often polarizes company performance, creating a barbell effect in the market.

• The venture capital market is experiencing a polarization, with high-quality teams and businesses still able to secure attractive funding terms.
• Companies that are not top-performing or do not have a "hot team" are finding it increasingly difficult to raise funds.
• The current market is reminiscent of the post-2008 financial crisis environment in terms of investment discrimination.
• Investment time horizons for non-crypto and non-web3 ventures are expected to extend as investors become more discerning.

"The super high quality teams and businesses will continue to be able to raise on very, very attractive terms." This quote highlights that despite a challenging market, top-tier companies and teams are still able to secure favorable investment conditions.

"Honestly, Harry, it's exactly the way it looked after eight, nine sitting there in New York doing my angel investing, seeing which of my portfolio companies were able to raise follow on financing even in the face of adverse market circumstances and those that weren't." Roger Ehrenberg draws a parallel between the current market and the period following the 2008 financial crisis, noting how investor selectivity has increased in tough times.

"I think you're going to see deployment cycles extended quite significantly as managers are more discerning as to which teams of businesses they're going to finance." Roger predicts that investment funds will take longer to deploy their capital as they exercise greater caution in selecting businesses to invest in.

• Early-stage managers must assess whether their startups have achieved product-market fit and understand the unit economics.
• In certain cases, leading an inside funding round may be appropriate if external investors are hesitant.
• Concentration of capital in a single company can be risky and should be managed carefully.

"So I think it really depends, Harry, on whether or not your startup has achieved product market fit and if it really is a issue purely of resource constraint." Roger advises that the decision to continue funding a startup should be based on its achievement of product-market fit and its growth potential.

"But that's also where some of the biggest money is made." Roger acknowledges that while investing during a market crunch is challenging, it can also lead to significant returns if done correctly.

"Well, it depends, right? So we colad seed and then leads into two small bridges." Roger discusses his own experience with capital concentration and the importance of managing investment size relative to the overall fund.

• The deployment timelines for seed investments may extend until there is a significant downturn in the market, which is expected to present the best investment opportunities.
• The current level of fear in the market has not yet reached its peak, indicating that the best time to invest has not arrived.
• Historical patterns from the global financial crisis suggest that investing during periods of maximum fear yields the best opportunities.

"I think it also depends on, are you talking about an early stage fund, a mid stage fund or a grow stage fund?" Roger differentiates between the impact of market conditions on funds at different stages of investment.

"I think you're going to see an extension of the timeline until there's true blood on the street." Roger predicts that investment timelines will extend until the market experiences a more severe downturn, at which point savvy investors will act quickly.

"When sequoia puts out rip good times volume two, then you'll know." Roger humorously suggests that significant market warnings from major players like Sequoia Capital could indicate peak fear levels in the market.

• Mid-stage funds face the greatest risk, with companies needing to demonstrate exceptional performance to attract growth investors or prepare for public markets.
• Companies that are not growing at a high rate may struggle to raise funds at desired valuations, leading to a potential price correction.
• There is less scarcity and more opportunity for mid-stage investors to be selective, reducing the influence of FOMO (fear of missing out).

"If you're talking about seed, I think that twelve to 18 month time horizons will be extended." Roger believes that the typical investment horizon for seed funds will lengthen in the current market.

"If you're a series B company and you're not growing 100% year on year, are new investors going to be throwing term sheets at you in this environment? I don't think so." Roger points out the challenges Series B companies face in raising funds if they are not demonstrating rapid growth.

"I think the FOMO aspect is going to abate." Roger anticipates a decrease in the FOMO-driven investment behavior that has characterized recent years in venture capital.

• The venture capital market is shifting, with a smaller number of top-performing or high-profile teams getting more time to prove their business models and unit economics.
• These select few might still manage to raise Series A and B funding rounds successfully, but this will not be the norm.

"And it really is just going to be that relatively small number of either ultra performers or super sexy teams been there, done that in a very exciting area that are given more time to prove out their models and their unit economics."

The quote discusses the trend of a limited number of high-performing startups being afforded extra time to develop their business models, which is becoming an exception rather than the rule in the venture capital market.

• Early-stage fund managers need to adjust their reserve strategy in a more cautious market environment.
• Instead of focusing on reserve strategy, the emphasis should be on advising portfolio companies to extend their runway and meet key metrics for the next stage of investment.
• The idea is to control burn rate and be more resourceful, as follow-on rounds are not guaranteed.

"So I actually think it's less an issue of reserve strategy, Harry, and more an issue of the advice that you give as it relates to burn rate."

Roger Ehrenberg suggests that the primary concern for early-stage fund managers should be advising their portfolio companies on managing their burn rate effectively rather than focusing solely on reserve strategy.

• Participating in pay-to-play rounds is generally not advisable for early-stage investors.
• Data indicates that if a company requires a pay-to-play, there may be fundamental issues with the company.
• Pay-to-play might work in recapitalization scenarios where the company admits to overvaluation and the founder proposes a more data-driven plan.
• Success in venture capital is about amplifying upside, not protecting downside.

"Being successful in venture is not protecting downside, it's amplifying upside and pay to plays are all about protecting downside."

Roger Ehrenberg emphasizes that venture capital success is about amplifying upside potential rather than protecting against downside, which is why pay-to-play scenarios are generally not aligned with the goals of early-stage investors.

• Growth stage investors like CO2 and Tiger will face significant markdowns but are expected to perform well over a cycle.
• These investors have raised large funds and will be selective, focusing on the best businesses.
• There is speculation about whether growth stage investors will shift their focus towards web 3.0 and crypto due to the innovation in these areas.

"My sense of CO2 and Tiger, I think over a long period, call it a cycle, they're going to do great."

Roger Ehrenberg predicts that despite short-term markdowns, growth stage investors like CO2 and Tiger are positioned to perform well over the long term due to their large funds and selective investment strategies.

• IPO markets will remain open but will be more challenging, with fewer companies meeting the performance requirements for successful public offerings.
• M&A activity is uncertain due to a restrictive regulatory environment, particularly with big tech companies facing antitrust scrutiny.
• There may be a rise in private equity firms like Vista and Insight stepping into roles traditionally filled by strategic acquisitions.

"So I think IPO markets are, they're open, they're going to be open. It's just going to be way harder."

Roger Ehrenberg acknowledges that while IPO markets are not closed, the criteria for a successful IPO have become more stringent, leading to a more challenging environment for companies seeking to go public.

• CEOs should focus on executing their plans and not be distracted by stock price fluctuations.
• They need to reassure employees about equity compensation and emphasize the company's long-term mission.
• The advice is to block out market noise and maintain focus on the company's core business and growth strategies.

"Block out the noise. Execute the plan. It's as simple as that."

Roger Ehrenberg advises CEOs of companies in the $5-25 billion range to ignore market volatility and concentrate on executing their business plans to navigate through challenging times.

• Roger Ehrenberg's relationship to money has evolved over time.
• The satisfaction from building a successful business and creating jobs is a significant aspect of his relationship to money.

"I think my relationship to money has changed over time along two dimensions. One is kind of what I've proven to myself professionally, and while money, it's only a piece of it kind of how I feel the pride and satisfaction for having started what's a really, really good business that's helped create tens of thousands of jobs."

Roger Ehrenberg reflects on how his relationship with money has changed, indicating that his sense of achievement comes from the success and impact of his business ventures rather than the financial aspect alone.

• Harry Stebings acknowledges the pride felt in building a successful team and achieving financial freedom.
• The ability to be generous with personal wealth towards meaningful causes is emphasized.
• The importance of family, particularly children's successes and shared interests, is highlighted.

where I brought in some incredible humans to work with me and now who have taken it over, I do allow myself to feel pride about that.

This quote signifies the speaker's sense of accomplishment in assembling and nurturing a capable team that has continued to thrive.

And then there is the financial aspect, which is I've achieved a level of economic success that I could never have conceived of and as a result, have the freedom of be very generous with people and causes that my wife and I, she's been with me through this whole journey.

The speaker reflects on the financial success achieved, which has allowed for philanthropy and generosity, emphasizing the shared journey with their spouse.

We've been together 35 years, things that we feel passionately about together. But Harry, probably the other big piece is the family piece, which is I've got two children, 24 and 21, very driven and accomplished in their own right.

The speaker highlights the importance of a long-term partnership and the pride in their children's individual accomplishments and shared family activities.

• The speaker, Roger Ehrenberg, shares insights into maintaining a successful marriage, emphasizing communication and trust.
• The desire to approach marriage differently from their parents' experiences is a driving factor.
• The role of professional expertise in psychology contributes to the couple's communication strategies.

Harry I think my wife and I met in university when we were 21, and I think we both had a keen sense of wanting to do it differently from the modeling we had both observed in our own households.

Roger Ehrenberg reflects on the mutual goal he and his wife had to create a marriage different from their parents', starting from when they met in university.

And my wife is her doctorate in clinical psychology. We actually had a psychology class together my senior year, her junior year, just before I graduated.

The speaker notes the relevance of his wife's expertise in clinical psychology to their effective communication within their marriage.

We've always been very mindful of communicating, not letting things well up, being willing to have the hard, uncomfortable conversations from earliest days and not being afraid, creating an environment of trust where we could be honest.

Roger emphasizes the significance of open communication and creating a trusting environment where honesty is valued, contributing to the success of their marriage.

• The speaker discusses the importance of managing conflict through empathy and avoiding the use of disclosures as weapons in future disputes.
• The recognition that not all issues are worth fighting over is key to maintaining harmony.
• The concept of self-esteem and ego strength is vital in prioritizing the relationship over individual victories.

part of it is trust that if we are disclosing with each other, that it's not going to be used against the other one down the road, that we each bring a level of empathy to the discussions.

Roger Ehrenberg stresses the importance of trust and empathy in conversations, ensuring disclosed information isn't used negatively later.

So we've laid this foundation of trust, openness and communication. But then know things will never be perfect. There are only certain fights worth having that sometimes you just have to let stuff go.

The speaker accepts imperfection in relationships and the necessity to choose battles wisely, letting go of minor issues for the sake of the relationship.

It's about having enough esteem and enough sense of self and enough ego strength to not need to win. That it's not about winning. It's about love and acceptance and understanding and empathy.

Roger conveys the idea that self-worth and ego strength allow individuals to prioritize the relationship over the need to win arguments, emphasizing love and empathy.

• The speaker explains that over time, the couple has learned to avoid major conflicts and focus on resolving smaller, more significant issues.
• The concept of "hills to die on" is dismissed, suggesting that no issue is worth jeopardizing a loving relationship.
• Understanding each other's triggers and sensitivities is part of their conflict resolution strategy.

Firstly, there's no hill worth dying on in a loving relationship, certainly hills, but at this point, honestly, they're more like bumps. They're not really hills.

Roger states that in their mature relationship, there are no issues significant enough to be considered "hills to die on," indicating that they've learned to manage conflicts effectively.

• The speaker, Roger Ehrenberg, shares his biggest investment mistake and the lesson learned about not overlooking founder concerns due to product and market potential.
• The importance of founder quality in venture capital investments is emphasized.
• The speaker reflects on his insecurities when working with exceptionally talented individuals and the value of embracing their contributions.

It's the notion of a great product and a great market does not compensate for a matte founder.

Roger acknowledges the critical mistake of underestimating the importance of a strong founder, even when the product and market seem promising.

It took me some time to feel secure enough in what I brought to the party, which was obviously very significant, not to mention founding the firm.

The speaker shares his journey towards recognizing his own value within a team of highly intelligent individuals, highlighting the importance of self-worth in a professional setting.

• Roger Ehrenberg expresses excitement about investing with his son through a newly established family partnership.
• The speaker is transparent about exploring future endeavors and maintaining a commitment to not-for-profit work.
• The creation of a family micro fund represents a new chapter in personal and family investment strategies.

I'm really excited to be doing that with them.

Roger shares his enthusiasm for embarking on investment ventures with his son, indicating a focus on family collaboration in his future plans.

It's like a $3 million family micro fund called Eberg Capital.

The establishment of Eberg Capital, a family micro fund, is a concrete step towards engaging in investment activities with his family.