The world's richest man bought Twitter and started making changes. The "For You" tab was prioritized over the accounts users selected to follow. Blue checkmarks went on sale and no longer were a recognition of authenticity and notability. Users now need to pay to be seen. And then Elon Musk proclaimed users would be rate limited depending on how much money they coughed up.
This is a lot of change for the people who spent many years, in some instances well over a decade, building an audience on the service. The people who helped turn Twitter into the special place it always has been could no longer communicate with their followers to the degree they had in the past. A lot of users' feeds turned into clickbait threads, conspiracy theories, and other various assortments of garbage. This type of rapid sea change is unprecedented in the modern internet era. Open platforms have crippled their developer ecosystems in the past (e.g. Facebook and Zynga, Twitter and their various third-party clients, and Reddit as of late), but in this instance the very nature of the service changed so dramatically on a dime for all of its users, not just its third-party developers.
Like a knight in shining armor, Meta launched Threads last week as the antidote to the Twitter calamity. The most important piece of Thread news thus far is this post by Adam Mosseri, the Head of Instagram and Threads:
The ability to own your own audience and move it with you to another service is a profoundly important ideal that is diametrically opposed to every incentive of the incumbent platforms. It's both remarkable and encouraging to see Meta commit to this. It is also very much aligned with the ideals crypto believers have espoused: that applications should be built on open protocols with portability, composability, and transparency as defining characteristics. Fred Wilson wrote an excellent piece on the importance of this moment and how it can lead to a new, vibrant and open social media ecosystem.
For a long time people have thrown out hypothetical scenarios about what would happen if an important platform started to censor its users or changed so drastically that what was once a critical piece of digital communication infrastructure degraded or became obsolete. It could conceivably leave billions of people in the dark. Plenty of people have individually been de-platformed in the past, but the rapid changes at Twitter are the first time a global population (in the West) has simultaneously experienced such tangible change at a mass scale. The hypothetical is now real, and the aforementioned concept articulated by Mosseri is far and away what matters most for the future of social media. Let's hope Threads sees this commitment through and a new precedent is created.
Entertaining offers from VCs to preempt your next round is almost always a waste of time and sometimes dangerous. On three separate occasions at GroupMe and Fundera, I let excellent VCs that were interested in our company conduct diligence when we weren't actively fundraising. In every single instance we spent months getting excited that a top tier VC was going to make our lives easy by preempting our next round with a term sheet. And in every single instance they passed.
A preemptive financing is an extraordinarily compelling proposition for entrepreneurs: skip the formal and painstaking fundraising process and replace it with a painless gift from someone you like at a VC firm you admire. In the recent bull market when money was recklessly thrown around preemptive rounds happened aplenty. Capital allocators were incentivized to deploy their wares as quickly as possible and were increasingly diligence and valuation insensitive. That epoch is dead and now we are living in reality again, which means that it’s important for entrepreneurs to understand the motivations of a VC.
When a VC says they want to preempt your round, they are being savvy and doing their job. They are attempting to get a first look at your company and avoid competing to invest in a way that appeals to your sensibilities. It does not mean they are committed to investing. It simply means they will evaluate the company outside of your designated fundraising plan and then make an investment decision.
Frequently a lot of these processes kick off because an existing investor introduces you to one of their friends they say is a good VC and would be helpful for your company. It gets you excited because there’s social proof, you trust your existing investor, and you begin to hallucinate that there’s an easy fundraising path forward. There’s seldom an easy path.
Entrepreneurs need to be mindful of and for the most part avoid the “I want to preempt your next round!” trap for several reasons:
When you talk to one venture firm, even if you think you’re embarking on some clandestine operation, the clock starts on your fundraise whether you like it or not. Word gets around - VCs talk. They go to dinners and banter and gossip through a variety of channels. Some will say they passed even if they never got a look in the first place. Some will say the passed after issuing a term sheet you rejected. You don’t want to be tainted goods, and if there’s a cycle of “we passed” stories out there it makes any subsequent fundraise all the more difficult.
Fundraising mainly sucks for most entrepreneurs. It’s emotionally draining and almost always takes longer than you want. Engaging in a preemptive process has a real opportunity cost when it comes to focusing and executing on what matters most.
The preempting investor has no incentive to move fast, especially in this market. If they think they’re getting an exclusive look at your company, most of the time they’ll take their sweet ass time.
They will likely say No and that you should keep them updated on your progress. It will take weeks at a minimum, but likely months to get to this point. It’s the same probable ending that would happen during a more rigorous and standard go to market process.
Competition is important. Unfortunately (and fortunately for some I suppose), a lot of VCs have a herd mentality and nothing speeds up a process and gets to Yes like competition and FOMO. A preemptive process strips you of control of the narrative and dynamics of a proper fundraise.
I’ve been burned by entertaining preemptive rounds on multiple occasions. It’s like touching the hot stove repeatedly.
There are some compelling reasons to entertain the preemptive round on occasion. You get to learn why people you like and respect will say No. This is a gift when you decide to run a real process so you can get ahead of the curve. Letting an inside investor (someone who is already on your cap table) that you like and already knows the status of the business is a great reason to consider it. Especially if the Partner is someone you deeply trust. This is the ideal scenario - it saves you time and you know you’re not working with a wildcard. Same could be said for a new investor that you have a long-standing, deep, and trusting relationship with. If these things are true, then it's worth considering. Otherwise, in this market, be wary of someone trying to preempt your round.
Carrie (my wife) and I just finished binging season two of The Bear. The show is spectacular. It provides a unique and intense glimpse into the world of high-end hospitality. One of the really beautiful things it highlighted through the season was how much fellow chefs help each other. Different members of The Bear would shadow their counterparts at other restaurants and were greeted with open arms.
After we watched it Carrie asked me if I thought that chefs were actually that kind and supportive of one another in real life. I don’t know the answer, but I’m inclined to believe yes because I’ve seen similar dynamics amongst founders in the world of company building. Building things as an entrepreneur, regardless of your industry, is hard and lonely. What has continuously surprised me is how willing other founders and operators are to share their learnings and insights.
When we started Fundera I had this obsession with wanting to be able to visualize the mechanics of our business in a spreadsheet. I needed to know all of our levers and how every aspect of the funnel was performing across every relevant dimension. I didn’t know how to do this so I asked First Round if they had any suggestions. They connected me with Matt Salzberg who they said had this practice down to a science at Blue Apron. Similar to the chefs in The Bear, Matt welcomed me kindly. He hid nothing about how he managed and measured the progress of Blue Apron, and walked me through his daily/weekly dashboards line by line. He had a company to run but paid it forward and helped me learn - something that provided no immediate benefit to him or his business.
This type of support is commonplace. You just need to ask for it and occasionally know where to look for it. Another place it can be found is in CEO support groups. There are many different iterations of this, YPO being a common one. I did Venwise and met monthly with a group of fellow CEOs navigating similar problems to me. Everyone was open and honest. Nobody was peacocking. I’ve also participated in CEO Summits where the “I’m crushing it” veneers come down and everyone is vulnerable - both seeking and imparting wisdom.
Ecosystem support is a great enabler and accelerant for progress. Older generations help newer ones with wisdom and capital, and new generations inspire the older ones, pushing the boundaries of what’s imaginable with charmingly naive gusto. The Bear does an exceptional job capturing this phenomenon in hospitality and I loved it because it distinctly reminded me of what we have in the best of tech. It’s one of the things that motivates me to do and be better.
