It’s Actually A Great Time to Start a Business (No, Really)

0:00Our big bet is that the world is becoming more digital. There are more and more people that want to build digital tools, so there are more developers. There are a lot more people that see themselves as being half artist, half engineer.

0:21Hello and welcome to Shopify on Location, a special series from the podcast team here at Shopify. In-person interviews from across our ecosystem. I'm Benjamin Gottlieb, and today, as we've been for the past few Thursdays, we are in San Francisco. For decades, folks with big ideas have flocked right here to raise capital, and that remains true today. In fact, just last year, San Francisco made up more than a third of all venture capital investments in the U.S. That is the top market by far. But the current economic climate, some banking issues you might have heard about, it has some founders mowing their options.

0:58Are venture firms still willing to fund startups, especially at the same valuation points that we've seen just a few years ago? Well, for more on that, John Sakoda is here. He's worked in venture for nearly two decades and he is the founder of Decibel Partners. John, what a treat. Thank you for coming by. Thank you for having me. And may I say that I'm a huge Shopify fan, so I really appreciate you having me on the podcast and thank you for all the things that you guys do for founders. Okay, interview over. See you later. No, I'm just joking. we've already got what we need, right? In all seriousness, I can't think of many companies that have enabled so many new founders in the last decade.

1:39So it really is amazing. I think you have millions of merchants now and it's really just an incredible platform. Well, thank you so much. And yes, we do have millions of founders. There's no question about that. What you do is integral to many companies getting going, getting started. So I have to ask you to that question I just posed earlier. Is it still the time for venture to be investing in new companies? Thank you for asking this question. I feel like every five or 10 years, people always ask about when is the best time or when is the worst time to start a company? I should probably remind the audience that I myself am a recovering entrepreneur.

2:19So I started my career in 1999. So maybe half the reason why I'm sitting here with you in Silicon Valley is that I maybe grew up and started my career in the first internet bubble. I actually decided to start my own company in 2001. Now, you may remember that was not a great time to start a company. The internet bubble had just burst. I started my company in the summer of 2001. I don't think anybody thought that was a good idea. In the middle of my startup, we had 9-11. And actually, my startup sold software to financial services companies. So it's not a great time to sell to financial services companies.

2:54And, you know, over the course of the past two decades, I've seen maybe the best and worst of times for there to be innovation, for you to have a startup.

3:07I eventually was acquired by a company called Symantec in 2006. My company was a cybersecurity company and Symantec was one of the best homes for me back in the mid 2000s. After that, I became a venture capitalist and invested in software and internet companies between 2006 and 2018 at a firm called New Enterprise Associates. And again, invested in some of the best and worst times through a financial crisis and now through what has really been an amazing time to invest in companies. So I think with the fullness of time, most people would say that there really isn't a bad time to start a company.

3:44And the challenge is perhaps you have to maybe survive the short term in order to get to the long term. And I think like many people might have said on your show before, I listened to many of the episodes before coming here today. there are so many success stories that come from adversity and scarcity and people that have followed their dreams and their instincts or maybe out of necessity decided to create something at a time when it was maybe not obvious or not even rational to do so and I'm sure there are a lot of people right now who just have that ish to scratch right either because it's a passion or because it's necessity.

4:26They just feel compelled. And now's the time. Now's the time. So despite what we've been seeing with some of these, let's just call them macroeconomic forces, right? Rising inflation continues to be an issue, a volatile stock market, right? I mean, these are things that are not just realities for individuals, but for companies. interest rates remaining stubbornly high. Despite all these things, you would come and talk to anyone, it seems like on the street or at a cocktail party and say, start that idea right now? Well, and it's not just me. So this may be counterintuitive, but even in a time like this where people might think there's not much going on, the data would suggest otherwise.

5:11So there's still 1 ,000 active venture capital firms. I believe we committed to or made investments to 3 ,000 to 4 ,000 companies just in this last quarter alone. So there will probably be 12 ,000 to 15 ,000 companies that get venture capital dollars this year, even though it's a year where everyone perhaps feels like this is not as exciting a time to get going. So I do think maybe the press or media might be covering some of that activity in a less sensational way than they have in the past. So if I may, where does this sense of things not being friendly to entrepreneurship right now? Where does that come from?

5:49Well, I actually think we just have to compare it to an era where almost every day or every week, people were talking about how much money they were raising and how high the valuations were. You know, I think we spent years maybe sensationalizing every moment of being an entrepreneur. But then maybe times are not as rosy and your valuations are not as high. There's just a lot fewer people screaming at the top of their lungs how great things are going. And in general, I think people like to scream at the top of their lungs when things are going well and to talk about how great things are going.

6:18And when things are a little bit harder and a little bit tougher, people have a lot less to say. So some of the more negative sentiment starts to show up in the noise because there's maybe fewer people running around talking about all the things that they are doing behind the scenes. And I do think that that is the world that we're living in today. I think you see thousands of companies still persevering and succeeding and you're just not hearing about it. And every once in a while, I do think you do have news cycles where people tend to focus more on what's not going so well, as opposed to focusing on the people that are doing well.

6:54So we might not be hearing about it. I'm sure you are thinking about it, and I cannot wait to get into that. I'm chatting today with John Sakoda. He is the founder of Decibel Partners and has worked in venture for nearly two decades. Also reminding us he's a recovering entrepreneur, he says. Still recovering. So one of the things that I found really interesting, I came across your post on Medium, right? And you were writing about this concept called dry powder, which is a relatively new concept, if I'm not mistaken. And this has to do with how much money is waiting to be invested by VC. Is that right?

7:29So tell me how much money is there and how does it relate to other periods of time? So this is a number that if I can just maybe explain it to the audience, it's similar to maybe how founders think about cash on their balance sheet. So a founder obviously takes money in maybe from investors or takes money in from customers. And when you have enough of that money, you build up a balance sheet. And that's a good proxy for where you might spend money in the future, right? So the more cash you have on your balance sheet, the more likely you are to be aggressive about investing in growth. And venture capital firms are similar.

8:04We take in money from institutional investors and then we commit them to startups. And so you can measure inflows and outflows. And several years ago, I started tracking and then publishing metrics on the dry powder in the industry. And in general, the industry has just been growing a bigger and bigger and bigger and healthier balance sheet. So in general, the industry has been raising bigger funds and deploying them in a relatively aggressive way. I mean, usually we're investing about$50 billion a year in startups. And now the run rate is closer to about 100. Is that just in the U.S. or is that just in Silicon Valley?

8:43The way in which these numbers are captured are usually U.S. domiciled funds. Now, these funds obviously flow overseas, but I think it's generally speaking a good proxy for U.S.-based activity because many companies overseas that are successful also choose to re-domicile here in the U.S. So it's, I think overall, though, a good proxy for the entire global ecosystem of venture capital because a lot of the funds tend to originate here. So in other words, VC maybe is doing much better than it has been in the past. Your balance sheets are better. I mean, what do you attribute that to? Well, the balance sheets are certainly stronger than they've ever been.

9:22And I do attribute that similarly to the way that we look at the banking system and see that the banking system is much stronger today because we all had the opportunity to survive the financial crisis. So because the financial crisis reminded all of us of the importance of having strong balance sheets and liquidity, the venture capital ecosystem tends to make sure that it has enough allocatable capital to sustain its existing portfolio as well as to continue to make new investments. Because in general, in any given year, you don't know what the innovation cycle is going to be.

10:00This maybe ties back to the question that you asked about, is there a good or a bad time to invest capital? Which I'm sure many of our listeners are curious about as well. Yeah, we try not to pay attention to macroeconomic conditions when we're making new investments in new companies. So there's a lot of subtlety to that statement. So in general, nobody's doing better in, say, a pandemic or a recession. So nobody feels like they're crushing it in these times. But in general, the smaller you are, the more you're creating a company. and the macroeconomic conditions, in theory, don't affect you as much because you're relatively small, you are focusing usually on technology or product, and you're trying to capitalize on some form of innovation.

10:47At the very earliest stage of a company, we are creating something new, something that, in theory, hasn't existed before. And so because of that, in some ways, we're not really tethered to the economy, right? We're maybe creating a new market or creating a product that might disrupt the market. So if we were wholly tethered to macroeconomic conditions, you might wonder what the real advantage is of the startup, right? The startup really should have some other advantage that makes it possible for them to, years from now, have a real competitive advantage, which allows them to take market share away from incumbents.

11:23And the compounding effects of investing in those differentiated, innovative, unique, intellectual property that makes it possible for us all to someday wake up and say, wow, this is a really different company or a really different idea. That starts really small. And it really should not be affected by interest rates, geopolitical tension, how people feel about CPI. Like these are all things that they get into the psyche of everybody. But on the ground, the founders are building and they're creating. And so the headwinds are up there, but the companies are not quite big enough yet to feel them.

12:04You're using language and I'm hearing your parlance is very similar to our president, Harley Finkelstein, who I had a chance to interview earlier this year in Ottawa in person. And he was espousing the exact same idea that actually, in his mind, this is the year of the entrepreneur. Is that something that you think you would agree with? I did have a chance to listen to Harley's interview. And also, Harley, I am really interested in trying your green tea combination. I would agree with him that every year is really a great year to be an entrepreneur. And that might sound counterintuitive. But if you look back over history, nobody knew that in 2007, 2008, 2009, in the middle of a financial crisis, that at the same time we were inventing Amazon EC2, we were inventing the iPhone, we were inventing GitHub.

13:02All this was happening underneath our nose and nobody saw it. I believe Shopify also started around the same time. And so I don't know that anyone was checking the calendar to see if this was a great year to start a company. I think people just were compelled because they saw an opportunity or they had an itch to scratch. Or I did agree with Harley's point that sometimes it's just necessity. You lost your job at Google and therefore you always wanted to try that startup. And now you have every reason to do so. I think there's also something about the psychology of a founder. I don't think founders are wholly rational.

13:39I think that there is a part of you that really feels like even though maybe there's something safer to do, you still want to take the riskier path. There's an emotional element to it maybe? Entirely emotional element. I also think people sometimes look at downside as a part of the equation. And when you have nothing to lose, it often means that the calculation that you're making in your head to start a company suddenly becomes more rational because you really have nothing else to lose. And so a lot of people in retrospect will look back and tell me their founding story. And they'll say, you know, things are pretty tough.

14:16But I had nothing else to lose. So I started a company. And, you know, that necessity becomes the mother of invention, which eventually leads to success. So I think if you're the kind of person that wants to view entrepreneurship as an entirely rational decision, it's not. And I think when a founder is obsessing about the rational decisions or the spreadsheets or the calculations, they sometimes maybe are missing the moment, which is, you know, it's sometimes it's like the passion and the creativity of the moment that forces people to do something that maybe is a little irrational. And that is what leads them to success.

15:00Leads them to success. Hopefully also leads them to listening to this podcast today. And by the way, if you're listening right now, we really hope you're enjoying this conversation. If you have not already, please do us a favor. Leave us a comment wherever you get your podcasts. Thank you so much for your support. John, you mentioned this idea of having an itch to scratch, and that motivates many founders, and that often they're not thinking completely rationally about their decisions. This is something they love, an idea they've always had percolating in their mind. But for you and for other people working in VC, you do have to make some rational decisions, right?

15:39You're getting investment from people. You have to take millions, if not more, dollars and throw them behind, let's just say, the right horses at the horse track, right? So, John, how do you make those decisions and what are you looking at right now in terms of the types of businesses to support? Well, first, I would say that most venture capitalists are professionally trained to be optimists. So it's not to say that we're not aware of the risk and that we're not educated on all the things that could go wrong. If anything, I think we are professionally trained to know exactly what could go wrong and to try to anticipate all the things that could go wrong so that we can help people get through the journey that is to come.

16:28though this is an incredibly risky job and in in many ways people are betting against the odds there are ways to in some ways mitigate the risks along the way and i think that that is really our job as venture capitalists is not to be afraid about losing or failing but also not to be naive about how people might lose or how people might fail and to sort of help people through those moments of crisis that might kill others. So I really do think that that is the heart and soul of the job. And that is not just that we're investing in a company or investing in a person, but that we're also mitigating the risks and seizing the opportunities along the way to make the most of what can be a very turbulent and sometimes unpredictable journey.

17:16In some ways, the more change there is in any market, the more volatility that can be created, the more opportunity there is for founders. If everything was the same and the playing field was not level for everybody with all sorts of different opportunities to take advantage of, then it would be very difficult, I think, for founders and venture capitalists to effectively bet against the odds and navigate them. So the more change and dislocation that we see, the better. And I think it is one of the reasons why today a lot of entrepreneurs see opportunity. They see a lot of bigger companies maybe playing more defense, needing to pay more attention to their stock prices, needing to pay more attention to their investments, maybe pulling back on new, new things.

18:04and that creates way more opportunity for startups to therefore fill that space, right? A space that might have been filled by a big company. Maybe those investments are the first ones to be pulled back because in general, in a time like this, people start to focus on the core. So I seem to think today because you have had a decade of people really professionally trained in innovation and entrepreneurship coming to the table now using even new technologies like AI. they're really able to capitalize on a set of markets where maybe the incumbents are not as flexible and not as willing to take their precious capital and invest it in something that might be new and different.

18:45So, John, what are you betting on? So our fund at Decibel is an infrastructure software fund. That is a fancy way of saying that we invest in incredibly technical software that is used by developers, data scientists, data engineers, and cybersecurity. I don't expect everybody on your podcast to... To be starting a business like that. Well, or even want to build these kinds of companies. They tend to be started by technical builders, the engineers that build the digital products that we all know and love and use every day. I imagine that there are many people at Shopify today in your engineering team...

19:24Oh, yeah. Definitely. ...who recognize a lot of the wonderful software tools that make their lives easier every single day. And those are the kinds of companies that we invest in. I would say in general, these enable the next kinds of companies to be built. And so many of our companies, for example, are central to how products that use artificial intelligence or machine learning work, they're central to making sure that the world is a little bit safer as we use these new technologies. So our big bet is that the world is becoming more digital. Our big bet is that there are more and more people that want to build digital tools.

20:03So there are more developers, there are more software engineers, there are more entrepreneurs that are becoming facile with code, right? There's a lot more people that see themselves as being half artist, half engineer. and you know our vision is really to enable these people to build the next shopify's and other other great platforms that can be built as the world becomes even more digital than it is today what i didn't hear you mention and maybe you didn't mean to do this but i didn't hear you mention web3 and i feel like web3 and correct me if i'm wrong it's been somewhat swept up in what we saw with the volatility of some of the cryptocurrency i guess this was last year maybe late 2021.

20:45And also the emergence of AI, which is literally, I would imagine many companies here in San Francisco, that is top of mind right now. How can we use AI or how can we integrate into what we're already doing? Why not mention Web3? What's going on with Web3? You know, I saw a funny tweet yesterday and I am so sorry that I did not remember who actually shared it, but I'll repeat it. And the tweet said something on the lines of, I guess we were wrong about Web3. It's not crypto, it's AI. And I think there's some truth to that. I think we really gave Web3 a shot. I think many, many smart entrepreneurs applied themselves to try to figure out how to use the concepts of Web3.

21:28Many venture capitalists put a lot of money into exploring all the different applications and different protocols that could be used. And I think when all is said done, the killer app for Web3 is cryptocurrency. And I think also - Killer good or killer like Death Wish? Well, I think it's perhaps not surprising that most of the time, platforms are built on the back of a killer app. And you may remember the app, before there was the iPhone, there was the iPod, right? And so music was the killer app. I still have my original iPod, by the way. Everyone looks back and they're like, wow, they built a platform.

22:06But it really starts was something that is like special purpose built. And, you know, cryptocurrency was always the killer app for Web3 and continues to be the killer app for Web3. But we haven't yet seen other killer apps. And it's not for lack of trying. So, you know, I think the experiment in some ways may have been run. We may have tried it all. And we've been talking about some of these applications for quite some time and have been putting a lot of money and time and blood, sweat and tears towards trying to move towards these more decentralized protocols, which I think a lot of people, you know, deep down inside feel like that would be maybe a better world.

22:48But somehow the physics of our planet are not enabling this new world as quickly as we'd like. And, you know, at the same time, we have another new trend, which is these large language models and generative AI technologies, which are not necessarily new. I mean, it's decades of machine learning research and some of the biggest companies in the world spending billions of dollars to, in effect, give the world this technology for, you know, price points and accessibility that we've not really seen in a while. Oh, yeah. I mean, when you say this is nothing new, I mean, I'm old enough to remember the little paperclip in Microsoft Word.

23:27I mean, that guy or that little clip used to talk to me, right? Yeah, and I think what's different now is it was never accessible to everybody, right? It was always in the hands of, say, Microsoft in Clippy's case, right? That's the name, Clippy. Yeah, or, you know, or it's always lovely when I open up my messages and Apple tells me that the contact suggested to me, right, might be Ben. And that's great. It's magical. It just sort of shows up in my applications. But if we're being honest, all of this really great machine learning and AI science was, generally speaking, embedded into applications that were built by some of the largest tech companies in the world.

24:06I think over the last several months, you've seen what has been many, many, many, many, many years of research now being open sourced and shared and made widely available through APIs to everybody.

24:25And productized in ways that we have not yet seen. So I think part of the reason why maybe entrepreneurs are moving on to the next thing is not because they didn't give Web3 a shot, and they did, but I think maybe people also are compelled by a new opportunity that allows them to do things that in some ways are ubiquitous. I mean, Web3 and cryptocurrency certainly impacted a lot of people, but it does already feel like AI has been affecting a lot of people for quite some time and is going to continue to do so. So, you know, in some ways, this just seems like a more natural evolution because it's ubiquitous, right?

25:02Everywhere that there is software, can you imagine there being some AI assistance? And that wasn't always true, I think, of Web3 and crypto. It didn't always seem like you could make the square peg fit in the round hole. Well, it seems like, John, you and I could talk about Web3 AI for hours, but it's really fascinating. You referenced banking and just the role that crypto played in the last couple of years. I think it's really interesting to see kind of what's transpired with one of the most well-known banks here in Silicon Valley. I'm sure, if I'm a betting man, which I am, I'm sure you've done a lot of business or did a lot of business with Silicon Valley Bank.