I have a very vivid memory of looking at my watch at 5:10pm. I was lying on my belly next to other soldiers in my platoon, and Shatyim Gimel was standing maybe 20 meters in front of us. We called him Shtayim Gimel, or 2c, because we were the second platoon in the 601st battalion’s incoming company, and he was in charge of the third squad, and we were not allowed to use commanders’ names in basic training. We were lying on top of thorny bushes doing push-ups on our fists and were then supposed to battle-crawl, M16s pointing forward, towards him.

I started sobbing. I don’t judge my younger self. I sobbed like an 18 year old geek who was sent to be a jarhead, instead of sitting in front of a computer like his friends did. Like a kid who thought he was going to get dinner a while ago, who was dirty and confused, who was going through what felt like senseless torture. The sobbing turned into anger. I sprang forward, crawling towards the target, 2c yelling in my ears “That’s right, Samet! That’s how you do it!”

Cool story, huh? I endured an act of hardship meant to break young recruits’ spirits and mold them into good soldiers. I persevered and here I am, a better person who knows better. Well, what if I told you that two years after this episode I was back on the same hill, a second lieutenant’s rank on my shoulders, doing the same to my platoon? Not just the same area, the same fucking hill. We were all wearing gas masks, and a squad was crawling while carrying a stretcher with a team member in it, playing wounded. My runner, Ian (not his real name), was yelling and reaching out to Dave (also not his real name) who was lying in the fetal position. I don’t even remember how it started or ended, I just know it’s etched on my mind forever.

What was my justification? Maybe that my platoon was remembered for years later as the legendary 2000 class of the 601st? That we went toe to toe with elite units we had no business running ops with? That I dragged 35 bewildered kids through a year of close-quarter fighting with zero fatalities or serious injury? My moral agency as a platoon commander was clear and well defined for the role I took on. I could have resisted the draft and sat in jail; I didn’t. I could have resisted going to officers’ course and maybe I’d have gotten away with it; I didn’t.

When I became a platoon commander I became an agent of the state with a specific mission. When I trained 35 young men to be taken into violent conflict I had the moral clarity of that end in sight. I did and could act as an individual moral agent, for example, when I refused to harass civilians in road blocks or the handful of times I didn’t take what I considered to be suicide missions. Nevertheless, my role and position were clear. This is the reason soldiers aren’t murderers when they kill enemy combatants but we still have the concept of war crimes.

The moral authority of founding CEOs

Founding CEOs should similarly grapple with moral authority and agency. We should do so because we, too, exercise power over our team and the ecosystem that surrounds our company. We define compensation guides, set the limits on entertainment options when closing deals, hire and fire, prevent, stay silent about, or even encourage harassment and bullying in the workplace. These are not secondary considerations in our search for profit but key tenets of how we carry ourselves in the world, and not considering them as such creates a lot of unnecessary pain, suffering, and corporate cultural decay. Unfortunately this isn’t something that’s taught or even paid special attention to. In fact, in many cases unethical behavior is tolerated, sometimes even encouraged, for the sake of “winning”. Founders who aren’t sociopaths should resist that urge.

Founding CEOs are unique among CEOs in their relationship to the corporation’s moral agency. Professional CEOs are hired “by the corporation” (its board of directors and often by vote) and can rationalize making ethically questionable decisions as a hired gun. Founders, however, do not have this luxury. Both de jure (since they incorporated the company and often control it through voting shares or board composition) and de facto (because of the reverence for and deference to the founder in the last 10+ years) their moral agency is inseparable from the corporation’s. Everything they do cascades down and becomes the organization’s ethical framework (part of “the culture”).

Two external counter-weights: the company and the mission

This moral responsibility is a heavy burden to bear, because it implies that everything that happens within a company is not only the founder’s responsibility but also a direct result of their deliberate actions. Most founders want to feel like ethical actors, and the burden of that desire is heavy. To resolve the tension, founders look for external sources of moral authority. The capitalist argument alone (“I started a company to make money”) creates problematic cultures and is generally not socially acceptable in startups, where talking about money is, surprisingly, considered gauche. (As a side note, some startup cultures are sociopathic, but that’s a topic for a different post).

More commonly, founders turn to two other external sources of moral authority: the “company” and the “mission”. Both serve as counterweights to the founder’s ego and help guide strategic and operating decisions in a way that relieves some of the tension founders (should) feel when making decisions that impact the lives of their employees.

The company is a separate entity that demands consideration when making business decisions. It can be a legal entity or an actual group of people (“the board” or “the investors” or “the shareholders”) who place expectations and requirements on the CEO. Both offer a counter-weight to the founder’s agency and ostensibly influence decisions in a way that’s sometimes opposite the will of the founder, forcing their hand.

I’m not sympathetic to this argument. Though the rise in startup factories has increased the number of companies that are merely exercises in risk transfer from future corporate acquirers to venture capitalists, most companies are run independently by the founders who are also among their largest shareholders. Again, by having both de jure and de facto control of the corporate entity as well as managing the business on a day to day basis, founders lose the privilege of putting the company (and by extension, themselves) before employees. 

The mission-centric argument says that the company was formed to achieve something other than its founder’s whims or enrichment: a tangible change in the world. Making a difference, disrupting, etc.; the mission provides this needed counterbalance and justifies many business decisions that would otherwise weigh heavy on the founder. Why fire employees when you’re at risk of running out of money, if your only reason to do so is sustaining your position as a founding CEO? Because we’re trying to achieve our mission, and both the existence of the company and the founder as its CEO are critical for that to happen.

I am obviously biased, but I’m sympathetic to this argument. It’s consistent with the Valley’s stated raison d’être and the reason people join startups, and even if the mission rings false (by being vacuous, or unattainable) it is something employees and other stakeholders can opt in to willingly, based on their personal preferences. You may not care about “changing the world, one dry cleaning delivery at a time” but if enough people do, they can start a company to achieve that mission.

A team, not a family

The mission reduces the moral tension for the founding CEO, but many take it too far by implying the social contract their company operates under: they describe their company as a family. This is incorrect, but not deliberately so. We spend the majority of our working hours at work, our sense of self worth is largely tied to professional success, and most employees are young and without strong family connections where the company is located. The extension into the “work family” idea seems natural, even acceptable.

My best guess is that founders themselves get confused by the same dynamics, and can’t resolve a different model for applying empathy at work. However a “family” offers a completely different source of moral authority and is at best confusing when trying to resolve ethical issues that arise from business needs. In other words, it’s not common to have to fire your cousin because the family’s cash reserves are dwindling. Most families don’t work towards a mission nor operate like a business enterprise; teams do. And while this is a topic for a longer and separate post, it’s an important call out when discussing the moral authority of founding CEOs and how to frame it.

Bottom line

Talking about business ethics doesn’t make you a saint. Not talking about it doesn’t free you from serious moral implications. Framing the social contract correctly won’t stop you from getting lit up in reviews when you make a tough business decision. Being ethical doesn’t improve your chances of success. This isn’t about money. This is about a life worth living. It’s about not having “some very sad news to share” while also announcing a huge funding round, about making decisions with moral clarity, even when they’re tough ones. I recommend giving the topic some thought.

Debt is Coming to Silicon Valley and some Startup Tailwinds Vanish. Startups are changing. What’s a founder to do? Having started a company in a tough, buyer-controlled, enterprise, regulated industry and grown it to VC scale and growth trajectory, this is my perspective. It’s not a covid-driven approach, even though the current environment makes it seem obvious; it’s the way I’ve approached building TrueAccord to be sustainable and make a meaningful difference while keeping investors and employees happy and well compensated.

Thank you to the people who reviewed drafts of this post in the past year (!) You know who you are.

This is where I started

2009 or 2010 was the first year I’d heard the phrase: “This is a bubble, and it can’t go on this way.” I had no idea whether it was true. It was a wild ride that I wanted to be a part of: 106 Miles had monthly meetups that founders of unicorns-to-be showed up to. Startups felt subversive and cool. Facebook had around 1000 employees and Jack Dorsey was pitching Square to fifty people at Yishan’s co-working space. The options felt limitless and money started pouring in. In May of 2009, DST invested in Facebook at a $10B valuation and people sniggered and thought they were insane. Startups were founded out of Palo Alto and Mountain View, and San Francisco seemed too far and too foggy to care about.

A decade later the startup world and its undisputed capital, the San Francisco Bay Area (“Silicon Valley” or “SV” from now on), are completely different beasts. The abundance of startups, the money invested in them, and the constant moving of goal posts for what it means to be successful have transformed expectations and dynamics. Money, its engineering, and the riches it can bring have overshadowed the area’s roots in technology and design, and are reflected in the ideas behind, and the tremendous growth of the behemoths of present days. 

We don’t often talk about this change. Tech companies’ early success and the narrative they propped up have changed SV into a distributed corporate world where middle and top management, VC fund managers, fund and encourage a production line of startups that grow and mostly flame out, chewing up and spitting out generations of would-be founders and employees in the process (also see Alex Danco’s excellent Twitter thread about VC as “production capital”). This production line was created to reduce risk and improve returns for portfolio-optimizing fund managers and corporate buyers. Facebook’s purchase of Instagram was seen as outrageous, but only two years later, its purchase of WhatsApp made complete sense. Big tech is still printing money, and its ability to buy market share, pay to block competition, or simply hire and retain top talent with golden handcuffs has never been stronger.

The production line of startups wasn’t created by some evil mastermind, but by alignment of incentives between many different players. However, while it’s arguably net good for the technological advances it brought to the world, it is both bad for the average founder and discourages innovation that doesn’t fit specific patterns. Yet startups that don’t fit this production pattern can be both profitable and incredibly world-positive, by solving problems that are acute and large, but don’t lend themselves well to blitz-scaling or turning into a unicorn in just a few years. To protect themselves and their ideas from being crushed by the machine, founders who must raise VC need to engage in planned and defensive fundraising.

I am not a tech skeptic. I started, helped start, and sold a few companies myself. I am running a VC-funded technology company right now, and I live among tech people and investors. My wife is a partner at a VC fund. This is my reference group. I think technology is a net-positive power that has changed the world for the better, even if I quibble with the definition of what that change is or should be. The positive effect of tech behemoths is clear even if they also need to be kept in check, and I hope to see most of the current crop of large companies persist and succeed. At the same time I find that the zeitgeist creates structural challenges for companies that try to make a difference without sticking to the acceptable growth playbook, whether by choice or by the limitations of the markets they operate in. No one is essentially a bad actor in this ecosystem; everyone has to respond to market dynamics and opportunities they are presented with, resulting in blind spots and inefficiencies that are important to recognize and, if you’re exposed to them, minimize the risk of their impact.

The rise of startup factories

The last recession led to historically low interest rates, and large pools of money were looking for returns, making money significantly cheaper and more risk-taking. That trend has only intensified in the past decade. Endowments, retirement funds managing an impossible task of showing at least some match between their future liabilities and growth in assets, and even high net worth individuals, are all looking for investments with high return profiles. VC funds sucked up a lot of that capital. The rate of new funds getting started quadrupled in the past decade, vastly outpacing the pace of creation of great investment opportunities. 

With the establishment of corporate VC arms and M&A activity by traditional companies looking to buy innovation, SV has become a solution for large cos’ innovator’s dilemma: outsource market and product risk to startups, funded by VCs, and buy them up when they mature for much less than the time, money, and pain involved in developing said products and markets in house. Flipping small engineering teams to Google and Facebook for $10-50m was a distinctly 2009-2011 phenomenon. Selling unprofitable companies’ stocks to public market investors at scale is a recent trend that may already be waning. Pushing risk down the hierarchy then selling whatever emerges back to corporate America is a profitable and effective value creation process. 

Markets are efficient, and SV is characterized by highly efficient if not overtly explicit information sharing. Simply follow VC twitter and read the blog posts: there is enough competition to squash any antitrust argument, but the VC twittersphere does an incredible job of reporting, repackaging, and enforcing trends in valuation, hot product segments, and financial management. VCs talk and deal with other money managers, leading to deals between firms. In addition to corporate buyers, secondary sales became much more structured: as Felix Salmon of Axios reports, 20% of VC returns in the past year have been to PE buyers, converting high growth into cash flow, while others sold to other VCs who had earmarked more late-stage capital. And so, faced with an influx of cheap capital and established exit mechanisms to buyers with clearly defined incentives, like any efficient market, SV responded. It did so in two ways: the rise of startup factories, and a valuation arms race.

Startup factories were a natural evolution, since the rest of the value chain was already professional and at-scale, and startup supply needed to catch up. Startup creation was never just a serendipitous event, but it has become significantly more specialized and commoditized in the past decade. SV’s long track record bred professionalism and structure in sourcing, attracting, and funding startups and founders, many of them still flock to SV to start their companies. Larger funds keep tabs on the market through smaller, stage-focused funds, external feeder funds, and through venture partners and scout programs. The larger, legacy ones even go back and manage their partners’ and successful founders’ personal wealth through specialized vehicles. It’s funds all the way down, staffed by incredibly ambitious and intelligent people, and they needed startups to fund. It’s not a surprise, then, that the most iconic VC ever, Sequoia Capital, has funded the most iconic startup factory ever, Y Combinator.

Startup factories evolved through the years to meet market requirements, and in the process have commoditized entrepreneurship. The most successful of them scaled to thousands of companies, many more alumni founders, and a support network like no other. They screen candidates, offer coaching and initial traction through cross selling to their network, and even imply higher valuations and better treatment from investors since the corporation has an iterative, multi-round game relationship with these investors that founders can’t develop. Their credentials are now being compared to Ivy league schools, and if one is focused on the signaling value of having attended a factory, that comparison makes complete sense. Being accepted into YC has a value in and of itself, and doesn’t imply anything about the value of the team, their idea, or what problems they’ve managed to solve for their current enterprise. In fact, many founders are encouraged to focus less on their initial idea, pivot through the program, and follow many truisms that create that type of companies that the factory knows how to market effectively to upstream investors.

When value is not as strongly coupled with product or company performance, stock prices and valuations become much more important metrics. Higher valuations serve many different purposes in SV, the least of them luring employees, uneducated about equity, with the promise of vast riches. What’s measured and rewarded gets optimized for, and private market valuations, not relying on any established formula, are very easy to optimize and increase through either simple hyperbole, VC FOMO, or structured rounds. Since valuations are shared without any discount for complex terms, even in VC reports to limited partners, they prop founder egos as well as fund markups. VCs rely on these markups to raise subsequent funds that pay 2+20, some founders run a private secondary round, and most win. 

The problem with this pattern is that it both creates and reinforces the power law distribution of VC returns, focusing VC and founders on a smaller number of ideas and companies that can demonstrate the traits that lend themselves to production line dynamics, rapid top line growth, and valuation manipulation. It creates a thin layer of successful founders, propped up by tech blogs who are rewarded with eyeballs for drumming up stories of success (and sometimes, the eventual fall from grace) of multi-millionaires and billionaires. Along the way it crushes companies that seemed, early on, like they fit the patterns, raised too much money and mismanaged it, and burned out or ended up as zombies with a preferred stack that no one wants to touch. Those companies could have a positive impact on the world, they could make their founders and early employees rich, and they could have a legacy. Instead, they’re another logo scrubbed from a fund’s portfolio page, their founders fired or feeling trapped in a role that doesn’t fit them anymore. I am not giving examples intentionally, because this isn’t about skewering a specific fund or company. It’s a market dynamic to pay attention to.

What if you still want to start a company?

What do you do if you’re a founder starting a business that requires venture capital to get started, but don’t want to get chewed up by the machine? What if you accept, as you should, that the high growth, high margin days or the Internet’s early expansion days are over? Many companies need external funding to exist, whether because they need to build meaningful technology, because of fierce competition or a tough market, or because its founders can’t take the financial risk of starting a company. One option is to sacrifice one go-around to the gods of the virtual corporation, prove yourself, get those Nouveau Ivy League creds, then do it again your way. One for them, one for me. The other option is, alas, more complex.

That is why I’m proud to announce Other Option Ventures, a $100m fund–

Just kidding!

Debt focused or revenue-based-financing funds argue against the power law-chasing VC funding, a futile effort that misses the point. The funding market is becoming more sophisticated and better segmented. The days of founders automatically being fired after series A are gone, but so are the days of complete founder control. To take that to the other extreme of solely profit-based funding is short sighted. The market offers multiple vehicles and structures, whether equity or debt based, to fund operations. Founders have to be smart about how, when, and who they take funding from, because there are more, not less, options. Therefore, my top advice for founders raising money is this: raise defensively.

Raising defensively means finding the right path between growth-at-all-costs mentality and the low stakes, low conviction world of lean startups. Companies need capital and (relatively) cheap capital is available; there’s nothing wrong with raising money to grow. However every company, even the most successful ones, runs into roadblocks and company threatening events. You can’t plan for them, especially if your market presents fundamental structural issues, you’re proven too early, or luck just isn’t on your side. A defensive fund raising strategy means protecting your future self, the one that has to deal with this company threatening event, more options. Less investors on the board to reduce board drama and conflicts, lower average valuations that keep everyone calmer, lower burn that lets you make adjustments without forcing a RIF, and a friendly equity holder base that won’t object to a 4-year re-up of your equity position to make sure you don’t get diluted to oblivion. Raising defensibly means prioritizing control over valuation, choosing your VC partners very carefully, and being as capital efficient as possible. 

Raising defensibly also means resisting market signaling and expectations around round size and valuation increases. Valuations should converge to reasonable multiples of revenue by your series B or C, and round sizes should decrease, not increase. 409A valuations will remain defensibly low, allowing you to compensate with equity, but you will need to continuously explain to employees why structured, inflated valuations hurt them. You will not conform to “traditional” round milestones and timing, often raising once a year in controlled valuation increments, using convertible note “bridges” between equity rounds to capture available funding without forcing a priced round too often. You’ll embrace the proven unhelpfulness of most money managers, opting to raise money from mostly uninvolved investors, punctuated by a small number of highly involved, high leverage ones. You’ll need to exercise tight financial control and pay close attention to margin. You may need to explain to employees why you can’t just hire to solve issues; you’ll need to let underperformers go instead of hiring above them. You may never publicly announce a round (gasp!). Generally speaking, the traditionally laissez-faire management approach many startups demonstrate cannot apply, because it will set you up to fail.

Building defensible businesses isn’t necessarily better than any other approach. It is probably the wrong approach in highly competitive markets that work well with blitzscaling and effectively convert investment dollars to top line growth. It is, however, an adjustment in management and fund raising practices that can increase your chances of long term financial success, better returns for patient investors, and an enabler for innovation that wouldn’t exist otherwise if we all focus on how to reach a $1B valuation as quickly as possible.