The state of VC within software and AI startups – with Peter Walker

25:18And if you're overpriced, that's not great because your investors might not want that. My question is, just first question is, why is there any incentive to raise at a high valuation? Like, would it not make sense to keep raising at a low valuation? Because that will give you a lot of exit options. And, you know, if you ever go public, you'll be worth whatever, you know, you're worth, right? Yeah. Yeah. I mean, you've laid out a very attractive pathway to some founders. However, it does miss a lot of the emotion that happens with early stage startups, which is it's kind of nice to sit around and say, I am a$50 million company.

25:52I am the founder of a$200 million company. And that whenever people say that it is referencing the post money valuation that is given to a startup by investors. So actually in times of exuberance, a lot of people will see valuations start to skyrocket because there's so much excitement about what this company could be in the future. So let me put a couple of numbers on this. At seed stage right now in the US, the median valuation on Carta is about$16 million pre-money. And pre-money means that? Pre-money means the valuation of the startup before the investment. Post-money is just that number plus however much money you raised.

26:33Because obviously the cash is still cash. So you can just use it as dollars. So if you raise a$3 million round on a$16 million pre-money valuation, that means your company is worth post-money 19 million bucks. Yeah. That's expensive. I mean, that is a pretty expensive seed stage company. It's actually more expensive than the seed stage companies even were in 2021. Not accounting for inflation. So there's some differences there. Because 2021 was the hottest market so far. 2021 was this confluence of things that made it incredibly frothy the way that we talk about it. that's zero interest rates for a decade, the pandemic surplus.

27:11You remember all those companies like Peloton, et cetera, where the digital pull forward, like no one was going to ever leave their homes again. So all the digital companies are going to make tons and tons of money. Zoom, great example. All that stuff was happening in 2021. It was also the best job market ever for software engineers. You could like double your compensation just by going out to interview. It was ridiculous. It's never been as good since. Exactly. Yes. Don't compare yourselves right now to your friends who got jobs in 2021 because there's probably fewer offer letters available to you, no doubt.

27:40So that was all the frothiness. And then we had 2022 where there was a downturn. 2023, another downturn. People got, you know, interest rates changed. All this stuff happened. And then in the middle of that downturn, the launch of ChatGPT. And so you had a downturn in venture plus a boom in AI. And so it's kind of, that's what's showing on this chart right now is AI companies in particular have caught this new hype wave and everyone is very excited about their prospects. And then non-AI companies are stuck kind of in the middle of a downturn. And so it can be really confusing depending on what company you're talking to.

28:17Venture has either never been hotter or feels really, really cold. Okay, this is really useful. And it's nice to see it in the data. Like I feel there's feelings. And I think there is this feeling in general that if you're for software engineering, If you are an AI engineer, which means you're a software engineer who has built LLM integrations and you're actually very much in demand. But if you're a full stack engineer who has never touched AI or and even though you're really good at your job, you just see a lot of your job offers, which I think it ties back to a lot of these things. Right. So it ties exactly back to that.

28:51And I would say for the engineers listening, like that pattern is mirrored across every part of startups. If you're a marketer, if you're a business person, if you're a salesperson, if you are in an AI company or you have AI experience, it just is a very different feeling right now in the job market, et cetera, than if you're not. So engineers shouldn't feel like they're being singled out here. It's kind of true across the board. We talked about raising things, raising rounds. Then there's this thing called bridge rounds. And I have heard bridge rounds. So some of my friends and people I knew in 2021, they started a non-AI startup, raised seed funding of, let's say, two to three million dollars.

29:30And what I started to hear from them about a year ago is we're not doing that great. We're hoping for a bridge round. What is a bridge round? So a bridge round is a bit more capital, typically given to startups by people that are already investors. So you raise the seed round, and then the same people that you raise that seed round from, you go back to them and say, look, we couldn't get to Series A the way that we thought we could. We need a little bit more cash today so that hopefully we can then eventually get to Series A. Maybe it'll take longer than we expected, but we still think we're a good bet.

30:03So that's a bridge. Bridges are really interesting. So, you know, in an ideal path, the startup goes from seed to A to B. They're crushing it. Everything's great. They don't need any bridge capital. On a bridge round, you kind of know, hey, this company didn't do exactly what I thought they would, but maybe I still love the founder. Maybe I still believe in the business. So I'm going to give them a little bit more capital. unfortunately our data shows pretty clearly that bridge rounds are not usually good bets uh you know they the the percentage of companies that make it from a seed to a series a that had to do a bridge in the middle is much lower than the ones that didn't have to do a bridge and that that's kind of obvious right you wouldn't be asking for more capital if everything was going great um but there's also distinctions within bridge rounds so there are sometimes bridges that are done just as a normal round, you get a new price per share, et cetera.

30:59And then there are some bridge rounds that are just done on safes or convertible notes, which are different funding instruments, which basically just kick the can down the road and nobody has to make hard choices. Early stage startups, I think this is potentially the biggest thing for engineers to keep in mind is you can kind of get lost in the excitement and a couple rounds of funding that look fantastic. the vast majority of early stage startups do not work out. It's still most likely to go to zero. So when you're thinking about the equity, when you're thinking about the job opportunity, you might look at these gigantic equity packages and get really excited about owning 1 % of this company.

31:41The likelihood that that 1 % ever becomes real cash is very low. So go into it with that expectation. This is not working for Google or Meta. that equity isn't necessarily going to be worth even one dollar in the future. Yeah. And then I see the data is really interesting here. If we look a little bit closer, if we go back to the bridge round in 2020, about 33 % of price bridge rounds worked out. So from seed, this company did get to series A after they got extended, but then this dropped in 2021 to 16 and then the 2022 to 8%, which means it drops like four times, which kind of suggests to me that in 2021 the market was probably pretty good to raise another round again but i guess the date what the data tells me is like it's just probably good to be realistic if you're at a company that raises a bridge round again it might change with if you're an ai startup and so on but you know like as per the latest data there might be a roughly eight percent chance that your company will make it to seed and probably 92 percent or 91 percent that it might fold.

32:44Again, these are just numbers, but if I was an engineer, that would be a cue for me if my company is reading a bridge round. Obviously, see how things could work out, but maybe take my optimistic hat on and just start networking a little bit to think about what next, in case, because as you say, startups are pretty risky, especially early stage. 100%. Look, there's a lot of signals around startups, and this is good and bad, right? So So in addition to a bridge round, there are these things called down rounds, which just mean any time a company raises at a lower valuation than what they raised that before.

33:21And instinctively, that shouldn't be that big of a deal, right? Like NVIDIA is worth X today and tomorrow it might be worth a little bit less. Like that's a public company. We know everything possible about NVIDIA and it moves up and down and up and down. So, of course, private companies with whom we know far less about those actual businesses, they would also probably move up and down. But culturally, it doesn't really work like that. Like taking a down round is oftentimes this quote unquote admission that things are not working well. And so much of startups is optics and like trying to look like the rocket ships and trying to manufacture excitement, not in a bad way, but just because there's so little information available.

34:03And so like a down round can be really challenging for founders because they got to go back to their employees, their engineers and say, we are worth less than we thought. And when they do that, a lot of the engineers might think, okay, well, maybe it's time for me to dust off my resume. Yeah. And I guess this kind of answers, we talked about how to price rounds and you were telling me it's really tempting as a founder to say, I own a$50 million company or$100 million company. But I guess as a founder, especially, you know, let's say a lot of founders, ex-software engineers, you want to keep in mind that you want to price it so you can go on without a down round, even let's say if you don't grow that fast.

34:40Because I can kind of see it like it kind of sucks as an engineer to say, we worked for a year on this, we have a lot more things, we've learned a lot more, our product is better, we have more customers, and how we're worth less? How does that make sense? How is that possible, right? And so two points at one, it brings up that classic scene in Silicon Valley, the HBO show where, you know, they're at the bar and one of the founders is talking about, wait, no one told me I could take less money or no one told me I could take a lower valuation. Oh, Silicon Valley is so good. It's a documentary. Like it's absolutely amazing.

35:11And the other thing in that is, yes, founders who are more realistic about their valuation jumps can often like keep moving forward in a way that's difficult, but the rest of the market is also moving. So this is why, you know, you look at the years 2020, 2021, 2022, you know, some of those companies were probably doing really well in 2020. And then 2021 hit and there were companies that were doing even better than them. So yeah, you're a good company. But if you're not the best company that that Series A investor saw that quarter or that year, then you still might not get funded even though your business is doing well, because it's always in comparison to the rest of the pool of startups.

35:52Yeah, I think in tech, there were a few years where it was easy to get comfortable, to get used to, you know, all the startups started to become a little bit the same. And I guess, you know, AI switches this up and it just reminds us that like, hey, you know, like it's a competition. It's fun and exciting. I mean, I think that's a good way to look at it because otherwise you're going to be depressed about all the things. And I'll make a little bit of a plug here. I think working at startups is absolutely like incredible. I couldn't imagine not working at a startup. Carta is the biggest place I've ever worked by a lot.

36:23So after Carta, I'm definitely going to go back to someplace smaller. But it's not necessarily I'm sitting there going, this is a compensation maximizing move. It's a responsibility maximizing move. You'll just have much more agency to build the things that you want at a place that is 200 people versus a place that's 2 ,000 or 20 ,000. Yeah, there's this really good quote of an anonymous VC called Startup L. Jackson about 10 years ago. and he wrote an article saying how to get rich in like I think two or three simple two or three simple steps and it was like step one get a job at a big tech step two work there for like 10 years and then he goes on to do the same thing and to say what you just said which is at a startup you're not going to maximize your compensation he said that you're you said responsibility he said you're going to maximize your learning and he set up you up for a lot of things including a really high paying job in the future, more responsibility or a spot on the next rocket ship.

37:24You know, like OpenAI, when they were small, I'm assuming they mostly hired people who worked at startups. Yes. Not big companies. And, you know, like that helps. Would have been nice to join, you know, five or six years ago at OpenAI. Definitely. Yes. That was a win. So we're in the middle of summer and you posted a very interesting thing just recently. Can you raise VC in the summer? You know, people go on holiday, at least at companies. What is it they to say? Because this is pretty timely for this summer and also for next summer. Yeah. So this is a funny one because, you know, there's a lot of, it's very easy to, you know, take shots at VCs because they're the ones with the capital.

38:02And if you're a founder and they're not being, you know, you're not having a good time raising deals, like it's an easy target, no problem. And then there's a stereotype, of course, that all VCs are incredibly wealthy. And then they spend July and August on yachts or at Burning Man. That's what they do in July and August. So like, don't even talk to me. Don't hit my email box in those two months. Our data shows that's not exactly true. You definitely can still raise rounds in the summer. And also, by the way, the vast majority of VCs are not these super wealthy people. They are emerging managers who have small funds and they're effectively building their own businesses, just like founders are building theirs.

38:35So respect to those emerging managers. The data shows that you can raise money in June, July, and August. I would definitely say, so this data that we're showing here is by the date that the deal was actually signed. So obviously - So that's not necessarily when it's announced, right? That can be different. Totally. It's not when it's announced, which is an advantage of Carta's data set because we have the actual documents, but it's also not when it was negotiated. So you're probably negotiating that deal for a month or two before it's signed, right? So if I were a founder, I would probably not kick off a fundraise and just announce that we are fundraising in late August.

39:13But if you're already in a deal cycle, if you're already talking to VCs as summer hits, it's not like they don't answer email, right? They will do those deals. They will start, they will keep signing deals. And then you can see it dips. Actually, the worst month for signed deals across the board almost always is January, which kind of makes sense. Like people want to get all this stuff done before the end of the year, then they kind of take January to recuperate. This episode was brought to you by Sonar, the creators of SonarQ, the industry standard for integrated code quality and code security that is trusted by over 7 million developers at 400 ,000 organizations around the world.

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40:21So join millions of developers from organizations like Microsoft, NVIDIA, Mercedes-Benz, Johnson & Johnson, and eBay, and supercharge your developers to build better, faster with Sonar. Visit sonarsource.com slash pragmatic security to learn more. And it's so interesting to look at this data. I'm just looking at 2023 and 2024 just because they're relevant, but just taking into mind that there is a negotiation leading up to this, you know, deals signed are super low in January, pretty low in February, and they're also pretty low in September, which suggests to me that in the previous month, you know, negotiations are not really happening, which, you know, if the deals are signed fewer in January, in December, there were fewer negotiations.

41:00In September, there's a drop because probably in August, there's not as many. And the other thing that stands out to me is in April and December, wow, those are like popping. And also in July, which kind of suggests that like in March, you know, in the spring, a bunch of deals come together. In November, there's this mad rush following to like close deals. And curiously, in June, beginning of the summer, there might also be. Really interesting to work backwards from this data. Yeah. And it's, you know, the big question that comes out of this is how long does it take, right? How long should I expect to be negotiating?

41:33And that is highly variable. If you are, let's use the wild example. If you are Sam Altman, you can have a billion dollars at your door tomorrow morning, no problem. If you are not Sam Altman, what's happened, especially in the last year or two, is that due diligence in deals, the actual research that the VC does to make themselves feel comfortable about giving your company money, that does seem to be taking longer and longer. So they're asking more questions, they're interviewing customers, they're going through your financials in a more close quarters way. So the diligence, I think, has increased from VCs as the number of rounds has decreased.

42:11So it does take a little bit longer than it used to. Again, just thinking as an employee or as an engineer working at a startup, especially at early stage, I guess it could be smart to ask questions or keep the tabs on how much money your company has and know when the company might and figure out what the burn is, basically how much it's spending per month. I guess in smaller companies, this should be open at least. And then work your way backwards. Again, you can get some red flags. A famous example is Fast, which went bankrupt, unfortunately. It's a one-click checkout. A lot of staff was really caught off guard by suddenly the company shutting down operations because it ran out of money.

42:49but if you would have had access to this information or i think that company didn't disclose it for for some reason but but again uh they could have worked a bit backwards and again do these probably models of like hey you know this is a bit higher risk let me look around let me maybe answer some recruited messages from elsewhere totally that's a i mean it's an interesting concept which is how transparent is the founder with these sort of metrics i guess you could make a case for or against extreme transparency, depending on where you sit in the business, et cetera. But I think overall, one of the indications of a great founder is their willingness to educate and be transparent with their underlying employee base.

43:30So if you're at a company where it feels like everything is incredibly secret and there's all these rumors, but no one really knows what's going on, that's a cultural thing that comes from the top, generally speaking. I think this is also why it can be tempting to go to an early stage, startup where founders are more open, you can learn more about the business and you can figure out like, hey, do I want to be a founder one day? Or you can actually, hopefully you can get, you can be a bit closer to this. And by the way, at some of those startups as an engineer, if you become a lead, you might have a shot becoming head of engineering or CTO where you now sit in the board meetings and you actually understand how it works.

44:04And again, I have friends who are on boards, again, and CTOs. It's not as scary as it looks, but again, you need to get there first. You do need to get there. And, you know, there is nothing more valuable to a startup than an engineer who deeply understands the business as well. I think that's like a really, really important person. Yeah, we're starting to see a lot of this. So an interesting topic we talked about before, the podcast is how AI might or might not be changing startups because we know about two years ago or two and a half years ago, ChatGPT blew everything out of the water and And everything we see in VC has this impact.

44:38So what does the data say? AI has changed the way that startups are being built hands down. There's no denying that AI is making startups build in different ways with different kinds of teams. And it's a sea change in the way that startups are being built. We don't know yet if all of those startups are going to end up being as valuable as some of the VCs think. But certainly you have examples, OpenAI being the biggest one, of startups that are deeply embedded in the AI wave that are going to be generational companies. But at the very earliest part, this is a chart that we put out a while ago, which is, this is looking at all startups on Carta.

45:16So not just the ones that took VC capital, but both VC startups and non-VC startups. And one of the clearest findings is that solo founded companies, so literally just one founder, have become more and more common over time. They're taking greater and greater share of startups. And that is for, I'd hope, pretty obvious reasons, right? As the cost of creating a business comes down, as you can do more as a single person, well, maybe you just, you used to have to have a co-founder, but you just get started yourself. And so solo founded companies are more common today than they ever have been in the last 10 years.

45:50And there's been a big jump in 2023 and 2024, like way bigger than, especially in 2024. Yeah. So in 2024, it was over a third of startups that were founded that use Carta are solo founded startups, which is the highest it's ever been. Now, I do expect that number to come down a little bit because often what happens is by year two or three, that solo founder has decided, oh, I'm going to bring on a co-founder. Co-founder, yeah. So it'll probably modulate a bit, but the pattern is very, very clear. The flip side of that pattern, though, is VCs, and this is the chart we're showing now, VCs still have trouble funding solo founders.

46:31They don't love them. This is very different. Just between the two, we saw solo founders companies going up, but here, the funded companies for solo founders have stayed the same, pretty much. Yeah, it's about 35 % of companies on Carta are solo founded. But if you just look at those who have received VC funding, it's about 17 % in 2024. So that's a big gap. And when we talk to VCs, they have a lot of reasons why they don't love solo founders. The older reasons used to be, well, it's very important to have a technical lead and a business lead. That was a very archetype of a founding team. It also comes to the idea of key person risk.

47:12if, you know, I've invested in this founder and she gets hit by a bus. Oh, well, there goes my whole investment. Now, how often do they get hit by a bus? Very rarely. So we can maybe discount that a little bit. And then I think the hidden reason oftentimes is because there is this kind of unspoken idea that if you can't convince a co-founder to join you, you're really not going to be able to convince anyone else. So it's kind of an idea that one of your key roles as a founder is to attract talent. If you're unable to do that at the co-founding level, it's only going to get harder when you're offering less and less equity to the other employees.

47:50So that's an idea. We can debate whether or not that's true. But I think the data is very clear that VCs tend to not love solo founders. I think the fascinating thing for me is just how AI clearly is, or it likely is changing how businesses are now started solo. but the funding has not changed. So people risking their own money or, well, VCs risking, you know, their investors' money. This is really interesting. I think it's worth reflecting on things that might not change even with AI, right? Like, again, you know, like, there's some fundamental things, for example, the economy as a whole will have about the same disposable income and they will still spend it on stuff, right?

48:30Like, you're not going to magically have, like, twice as much income and so on. But one of these things is, like, yeah, Personal dynamics at a startup might still be really, really important. Totally. Or it could be the case that what we need, what we need more of is these resonant examples. So if, for instance, Cursor and Bolt or Lovable and all these places had been started by solo founders and were just skyrocketing, well, maybe VCs would go, oh, now that's the new thing and we got to get down on more solo founders. That really is a bit like we have to have a meme. We have to have something to look at in order to figure out what the next thing is, quote unquote.

49:07Interesting enough, by the way, speaking of Kurser, as I recall, they have three co-founders, so an unusually high number. And I personally found that observing them, I think they do better because of those three co-founders. They step in. A founder is always there. I remember they had a bit of embarrassing incident where an AI bot responded to people with wrong information. something went viral on Reddit and a founder appeared, one of the co-founders saying, I'm the co-founder. They took ownership of that situation and immediately resolved it and people moved on. And meanwhile, the other founders were working on new things.

49:42So, you know, like we see an example where actually the stereotype is at least with Cursor and they are the fastest growing DevTools startup and so on. So, yeah, interesting. You know, it can be nice to build with the team, no doubt. So let's talk a little bit about equity. So as an employee, when I join a startup, I mean, as a tech startup, you should be getting equity as a software engineer. Like, I know there's companies that don't give, but in the U.S. especially or U.S. companies and even European companies, they generally do because it's a great way to have you aligned with the outcome. Plus, these companies cannot pay as much as some of the big tech come.

50:22And this is seen as some of the, you know, way to compensate. When startups give you equity, they give you from a so-called equity employee options pool, which is the percentage of the company that they reserve for employees. Why is it important on how big this pool is? How is it changing? And can you explain what this graph is? Sure. So the startup employee option pool, or often referred to as ESOP or just the pool. ESOP, yep. Is this idea that we're going to say, say you had 100 % of this equity pie. so you can give out little slices to as many people as you want. Oftentimes what startups will do is they'll say, we're going to reserve a portion of that pie for employees because we know, one, we're going to hire employees, and two, we want to incentivize those employees with equity, and it's easier for us to do that if we have a bit of that pie that is just kind of cordoned off just for employees.

51:19Oftentimes in the last five or ten years, investors would say, well, you need to start that option pool at maybe 15 or even 20%, which is a lot of equity. These days, that's not the case. So option pools will start as low as 5 or even 10 % of the business. And then every time you fundraise, you expand the option pool. And this makes intuitive sense, right? You're going out for your series A. When you're in conversations with those investors, you'll say, in order to get to series B, we think we need another 5 or 10 people. Here's the kind of people we're going to go look to hire. And here's how much equity we're going to grant them.

51:55So by that, then the investors can go, good plan. We're going to expand the option pool a little bit so that you have enough equity. Which means you add more shares because you can always create shares in fundraising. And obviously the investors has to agree because their share might be a bit smaller. Exactly. So that's the concept of dilution, which is as you add more shares, as you literally create shares out of thin air, everybody else's shares are worth a little bit less in terms of the percentage of the pie. And this concept is deceptively simple, but it actually drives so much around startups.

52:28When I talk to people who are not in startups, oftentimes what they think is happening is somebody is given shares and then those shares are taken away from them and given to somebody else. That's not how it works. Your shares are yours. What happens is there's just more shares created. So your original 10 ,000 shares don't represent as big a portion of the pie as they used to because this pie is now just getting bigger and bigger. Yeah, and this is something, again, I guess it's a good problem or a rare problem to have, should I say. But there are some startup employees who have been early employees at a company, you know, one of the earliest employees, let's say.

53:04And then they left a few years later. And, you know, let's say they leave them five years later, that company gets acquired. They raise more rounds of funding. And on paper, this is a great company because, you know, when the employee was there, they raised$5 million. And then they raised another$40 million. And they got sold for, let's say,$60 million. So, you know, lots of money. And then the employee gets their check on how much their thing is worth. And as far as they know, last time they owned half a percent of the company, which would be a big number. And it's a really small number. And it's because of dilution, because of how, you know, preferences work.

53:37But I actually know someone personally who was like deeply disappointed because they really thought as an early employee that they would have that whatever percentage. They just didn't understand that dilution over several rounds can actually make a big difference. Dilution is really tough. I mean, it is why venture capital is so hard because of that preference stack that you just mentioned. So an easy way for employees to think about this is if your company was bought today, your investors who invested in that company get paid out first and they get paid out, generally speaking, at a 1x liquidation multiple, which means if I give this founder$10 million and they sell for$20 million, I get the first$10 million back.

54:18I get my initial stake back before anybody else gets any money. If you've raised a billion dollars and then the company gets bought for$1.2 billion, the sticker price, everyone is super excited on Twitter because it says$1.2 billion. How exciting. But of course, there's only 200 million of that that is shared amongst the employees and the founders. The investors take their initial stake back first. So there's a lot of examples of people with amazing big dollar values on the headline. And then it ends up that the employees didn't actually make very much from that acquisition. So in the startup employee option pool chart that we just see here, here we see blue is deep tech and orange is software companies.

55:00What does this chart tell us? I was looking into this data the other day, and one of the biggest questions around startups is, of course, startups cover a whole lot of different industries. So you've got software startups, which is oftentimes B2B SaaS. Cursor is a fantastic example of a software startup. They sell to developers, but all their product is digital code. Whereas deep tech startups are often building things in the physical world. So robotics is deep tech. Biotech, actual new drugs is deep tech. Energy, nuclear reactors, for instance, that would be deep tech. So you're building real physical things.

55:41And oftentimes what happens is that there's this idea that building deep tech startups is harder than building software ones because you actually have to make stuff in the real world. So we were looking at the option pools and you'd think, okay, if a company, if it's harder to build a deep tech startup, then maybe the option pools need to be a little bit bigger because you're attracting much more specialized talent. Yeah, like robotics engineers, hardware engineers. A hundred percent. There's just fewer of them than there are general software engineers. And that's kind of true at the very beginning, but actually the data shows that the option pool for deep tech sort of levels out a little bit more quickly than software.

56:18It's not gigantic differences. They're pretty much the same. What was interesting about this is there's a lot of stories that people tell themselves about deep tech startups that I think are starting to not be quite as true. So things like, it always takes way more money to build a deep tech startup. Well, I mean, look at OpenAI. That's a pretty money-hungry company that's building a not deep tech product, right? They're building a software product and they can gobble up as much cash as humanly possible. So a lot of times software companies can take more capital than you think. And sometimes deep tech companies can take a little bit less capital than you think.

56:57So there's a lot of cool investors around deep tech right now that are saying the best thing we can do for startups is to fund more companies that are building real physical things instead of focusing quite as much on SaaS companies in general. Yeah, well, hopefully we'll see more of that. But it's interesting that I guess the option pool size doesn't really meaningfully change. What about advisory? I'm really interested in this because I've had experienced software engineers who are either now leads or engineering managers or aspiring CTOs or even CTOs. They're asking me, how can I be an advisor at a startup?

57:33I'm an advisor at two startups. I get very, very small equity shares and I'm not as much of an active advisor myself. But what does the data say about being an advisor? And also, can you share some anecdotes on how you've seen people from software engineering background become advisors? Again, I feel stories kind of help here. Is it just knowing people? Is it hanging out with them? Is it being an expert and helping with them and so on? Absolutely. So let's start with the data and then we'll go to some stories that I think will illustrate what being an advisor is all about. So advising a startup oftentimes comes along with getting a little bit of equity in that startup.

58:18Not always. There are advisors that just work for cash and that's totally fair. But oftentimes you will get a little bit of equity if you become a startup advisor. And that's mostly because those startups, if they're very early, don't have a lot of cash. So they got to give you something for your time. Yeah, pretty much. So pre-seed, so let's focus on that. That is, you haven't raised basically any capital from VCs. You're a very young startup. Maybe it's just even just the founding team. Oftentimes, when I talk to advisors, they say, what we're looking for is about 1 % of the business as the equity package for advisors.

58:50That is very high. That is on the very high. That's nine out of 10 advisors get something less than 1%. So 1 % is a very big number. The median amount that is granted to advisors across, we had 5 ,000 advisors in this study in 2024, is 0.25%. So a quarter of 1%. And that, again, if you're an advisor, you might be sitting there going, that doesn't sound like very much. Why would I do the work for that? Well, let's put this in context with how much employees are given. So the first hire at a tech startup these days, which is, by the way, almost always an engineer. Yeah, they're called founding engineers, right?

59:31Exactly. Founding engineers. They typically receive on median 1.5 % of the business, sometimes as much as five, sometimes as little as a half, but generally 1.5. Yeah. And they're going to be working there full-time creating a lot of the fundamental products that will make or break the company. They're a hugely important person, no doubt. So in that context, an advisor getting 0.25 % makes a lot of sense because the advisor is not working here full-time. They are probably contributing a handful of hours a month or a quarter. So this makes more sense. Let's talk about the stories around advisors.

1:00:04There are certain kinds of advisors that are worth tons of money to startups. In my mind, there are two kinds. One is a technical advisor. So I have a friend who used to work at Uber and at Lyft and has deep, deep knowledge of how to run marketplace matching algorithms. If you are a startup and you have to build an algorithm that matches markets in a dynamic real-time way, he is a world expert at this thing. So you would have access to someone who has actively built this at scale for major, major companies. And so that might be worth more to you than the average software engineer advisor. The other kind of advisor that is really valuable to startups is someone who can actually introduce you to customers.

1:00:53So without them, you wouldn't be able to talk to these businesses, but with them in-house, you actually get meetings with really big potential customers. And then hopefully you close some of those customers. They are actively bringing in revenue to the business. Those are the two kinds of advisors, like very technical help or commercial help that are most common in startups. The advisor that sits down with you once a month or once a quarter and goes over a business plan or talks to you about your marketing website, I would generally say they're just not worth nearly as much as some of them think they are.

1:01:28Jumping to the life cycle of venture capital-funded or VC-funded startups, I remember in 2021 when, again, a lot of people who I knew, software engineers, they went and became first-hand founders. They raised their first seed round and they were telling me like, well, you know, the The idea is we spend this money in like 18 to 24 months, and in 18 months, we will raise a new round. And that was the law, almost like Moore's law. It was kind of a universal law for about 10 years that if you're a startup and you're doing well, in 18 months, either you raise your new round or you're going to die. But this data shows that something else is happening.

1:02:07What is happening? And what does this chart tell us? So this chart shows the median number of days between these rounds. So from seed to series A, from series A to series B, et cetera. And as you can see, the lines are just getting higher and higher, going up and to the right, but not in a good way. So it used to be that you would raise perfect advice. The 18 to 24 month period was the median for a long time, for many years. And now it might be two and a half years between seed and series A. It might be almost three years between series A and series B. So if you're a founder, the clear takeaway from this chart is you will probably have to make the money you have today last longer than you expected.

1:02:53And I think this goes back to leaner teams or generating more revenue, that kind of stuff. 100%. You're going to change some way about the way your business operates in order to get over the fact that you're probably not going to have as much cash coming into the business from investors as you expected. The other thing that's happening though, and this is the sort of good part of this chart, is some of this is reflective of companies that want to raise, but can't raise. And some of this is reflective of companies that are just choosing not to raise because they don't need to. What we talked about in the beginning, that that's kind of a good thing, honestly.

1:03:28100%. So, and this is tricky for VCs as well, because VCs obviously want to put more money into startups, usually. In their best companies. Into their best companies. And what if the best companies go, thank you so much for that initial capital, but we don't need any more. you know, it's kind of a tricky moment for VCs too. So everything is a little bit up in the air in a way that it hasn't been for a while. And one thing that I keep hearing is how difficult it is to get to Series A. I've covered this in the newsletter before because beforehand in 2021 and 2022, getting to Series A, it almost felt like, like you previously said, like a CSA startup had an idea and they kind of built a basic thing.

1:04:08They got some customers, they got a million dollars in revenue, which I know sounds a lot to some people, but actually if you're doing enterprise products, you can get it from a few deals who are maybe not even fully committed. And then a lot of companies just raise a Series A. And I was hearing people tell me at some point that the Series A became what old seed rounds used to be years before. But now we're seeing the opposite, right? We're seeing it's really hard for companies to go from a seed stage to a Series A, which is your first bigger investment and that shows that you're ready to scale.

1:04:41It has product market fit. Exactly right. The graduation rate is the thing that we talk about a lot with investors, which is what percent of seed stage startups ever raise a series A? And in the boom times in 2021 or so, it could be as high as half, which is very high, right? These are tricky, risky businesses. The fact that half of them were getting from seed to A probably means that there was too much capital available and it was too easy. Yeah. And I remember around that time, this narrative that, oh, you should join, you just join a startup. It's actually not that high risk. And people are saying that it should be high risk, but it wasn't.

1:05:17I didn't know many people who got let go because their startup went bankrupt. It almost felt that even if a startup is doing poorly, you'll be acquired by a bigger startup or by a big tech, that sort of thing. It was just a completely less risky environment for sure. And now that risk is definitely back. So on average, I would say that you should expect about 25, maybe 30 % of startups that raise seed rounds to end up raising a series A round. So that means more than half of them will not make it. And that's more standard that's after, you know, if you had gone back to 2008, 2010, et cetera, that was kind of the framework that most people were working off of.

1:05:58But again, that Zerp era, the zero interest rates at 2019, 2020, early 2021, they just kind of boosted all of these stats. So if you're an engineer thinking about joining a startup, that startup raised a seed round four years ago, the likelihood that they are ever going to make it past seed is pretty low. Yeah, this is really good to just like get a check. And also, I guess, if you're a company that just raised a seed round or recently know that you are in the top quarter of all companies. And, you know, a bit of a celebration might be due. I know it's business as usual, but maybe, you know, like don't take it for granted.

1:06:34I think a night of champagne is worthwhile. Right. Yeah, totally. And then back to business. Yeah. And what are we seeing for startups being stuck in certain stages? This is maybe a tricky topic that most founders and VCs don't talk about that much. But we should talk about it more. And I think it's actually incumbent on the best investors to have these hard conversations. And here's what I'm talking about. There are a lot of startups that raised a seed round in 2021 or earlier that are still live businesses, but are basically just not going anywhere. And the question really becomes, should those people shut the business down or not?

1:07:19That's a really difficult question. It's an emotional question for a founder, no doubt. But oftentimes what happens, I think we have all of these stories around startups of people who like Figma is a great example where it said, oh, it took them four years to build their initial product. Everyone gave up on them. And now look, they're going to IPO this year and they're such a success. And I think there was also Slack, which like they almost ran out of money. They try it out. I don't know how many different things. They were a gaming company first. Yeah, they were a gaming company, then gaming chat, and then chat, and then boom.

1:07:50You know, like, look at them. They were$26 billion or so when Salesforce bought them. Exactly. And that's the story that's told around Silicon Valley, which is never quit. Quitting is bad. Always keep pivoting. Always keep trying. And for every single one of Slack or Figma as examples, there are hundreds of companies who did not make it. And so really what this chart shows to me is there's a founder talent example here where it's like, I want these talented founders, if they need to, to shut their businesses down and try the next idea. And, you know, in Silicon Valley, we do this weird thing where we praise never quitting, but we also are very excited by failure.

1:08:32We say failure is good. Failure is a great way to learn lessons. So both of those things are kind of a little bit in conflict with one another. And I think it shows very clearly in this data where there are founders who raised the seed round five years ago, six years ago, whose businesses probably aren't going to go anywhere, who are still chugging along in that business. When we say they probably won't go anywhere, that means that either they're making a slight loss or a small profit, but they're not going fast enough to raise the next round, to expand more, to focus on growth, which is what VC should be about instead of being a very stable business, which let's say a bootstrap company would be perfectly happy with.

1:09:08A hundred percent. And that gets back to your ambition as a founder. If what you want is to build a bootstrapped company where you get to dictate how fast you grow and you get to be as profitable as you need to be along the way, amazing. That is a fantastic way to build a business. But if you take money from VCs, you are committing to their growth rates. And so this is the tricky part. And I really hope that there are founders out there who are sitting and wondering, hey, what should I do with my company who know that if they end up having to shut down and return some capital to investors, those investors are still pretty likely if you did everything above board to want to back your next thing.

1:09:48Oftentimes, you know, there are founders, my CEO Henry is a fantastic example. Carta is not Henry's first business. Carta is Henry's second business and the first one did not go very well, but he learned a ton of lessons in it and that kind of built all this equity with investors so that when he started Carta, he had a much better idea of what he was doing. And I think that that's true for a lot of founders across VC. Yeah. And I guess as an employee, this is also a good reminder that you do want to, for example, when you're looking for a company, a VC funded company, look at when they last raised money and know that the longer it's been, the more likely that the founder might say the next day, say, you know what?

1:10:30I'm going to shut the company down because it's not going anywhere. So like if you're joining a company that last race five years ago and it doesn't have that amazing growth, it's probably more risky than joining a bootstrap company, which, again, has a similar growth. But that one is a bit more like, again, these are all statistics, right? But we're talking about data here. Yep. Yep. No, you're totally right. I mean, ask questions as an engineer coming into a startup company. Don't be afraid to ask questions that matter, right? The questions that matter might be, how much revenue does a business have?

1:11:01What are the growth rates for the business? How much capital did we take in and at what terms? And how long has it been since you fundraised? I think those are very fair questions to be asking in an interview. Now, it's not the case that every HR person that you're interviewing with will be able to tell you the answers to those questions. Depends on the company. But they're totally fair to ask. If I'm a software engineer or a tech lead or an engineering leader, how would you evaluate a VC-funded company to figure out, is this a good company to join at? Is it likely to be high growth? Could I have a great career here where the team grows and I get more and more responsibilities and we'll take on more and bigger and bigger challenges?

1:11:41100%. So this is a multi-variable question. But I think the framework and the mental model that you should be using as an engineer joining this company is the same as though you were an investor. So put yourself in the mind of a VC and say, what do I think of this company? An in-contradistinction to all the other companies in their space. How fast are they growing? Obviously important. What is their unique technological edge if there is one? so this is something that VCs talk about a lot which is what is your moat? What is your defensibility? Why in a world where AI can spin up product features in a weekend why are you the company that's going to win in this space?

1:12:21So they have a unique edge and sometimes that unique edge is very obvious it's a technical one sometimes it's this is the most relentless founder I've ever seen both are valid edges by the way like speed of execution is a valid edge but you want to have some sense of what is the edge of this company And then when you get in to the more like the deeper interview rounds, etc., you got to start back channeling with people at the company, with people who've worked with that founder before, etc. If you're joining a seed or series A firm, in many cases, what you're doing is you're betting on that founder.

1:12:53So the first thing that you need to be doing is being comfortable with the founder themselves and saying, this is the kind of person that I want to follow. And I believe in strongly will have the next great idea to keep us ahead of the pack. So if it's an early, early stage place, you're betting on the founders, first and foremost. As a software engineer or engineering leader, what do you think, what have you seen skills being important to thrive at a VC funded startup? Obviously, technical acumen matters no matter where you are. So there's no limit to how great an engineer you can be on the technical skills.

1:13:27I think the difference at a startup is there are different personal skills that come into play at startups versus big tech companies. For instance, at a startup, you are very likely to have a small or even non-existent team. So player coach comes into the idea here. If you're joining as an engineering leader at a FANG company, you might have 13 direct reports. At a startup, you might have one. So you're going to get in the weeds and actually build that code base a lot more at a startup. So being willing to do that and excited about it is very important. And the other thing about startups is it gets back to that idea that there's a Swiss army knife aspect to it.

1:14:04you're going to be asked to get involved in stuff that is not just pure code, right? You're going to be asked to talk to a bunch of customers. You're going to be asked to evaluate market maps to say, oh, we're building this product, but should we also try to build this adjacent product? Or should we think about buying a company that has an adjacent product? How do these worlds mix? So it's not just a pure technical exercise. You're going to have to start up leveling your ideas about the business. And that, I think, is the hidden magic of startups, where you would leave a startup after two years and look back and go, yeah, my coding skills got better.

1:14:39But wow, I upleveled so much of my knowledge on this space and the way that businesses grow and shrink and compete. Like, that's the stuff that really is exciting. And this is what I see a lot of engineers these days who become founders. They say, oh, I'm launching my new startup. I resist this much funding. oftentimes they're engineer number two, number two, or number three at this other startups four years ago, which grew really fast. And actually they're very open saying I've learned so many of these skills. So now I'm confident I'm doing my own thing, which is just amazing. It's awesome. And it also makes it very clear that doubling down on your network is like something that is so important.

1:15:15If you're at a fast growing, like you at Uber probably know a hundred people who tried to start businesses after Uber because they were just in such a deep talent pool while they were there. And that stuff really matters. Yeah. And I think that's one of the reasons people underrate. It is oftentimes worth joining the most hyped company around, even if they might not make it because there'll be such great people and they'll go everywhere. If it works out, people stay there like at Facebook and they'll be amazing. If not, they go elsewhere and a bunch of them will do amazing things and the other ones will keep trying until they do something amazing.

1:15:48There's a reason why there's this concept of Silicon Valley mafias, right? The PayPal mafia, the Airbnb mafia, et cetera, where people who work together at one point end up, their paths end up crossing at totally different companies down the road. Like that is super, super common. Let's close with some rapid questions. Does that sound good? Let's do it. So what are news sources that you use to stay up to date with the VC industry? Podcasts are fantastic in this case. So some of the ones I'm listening to lately, Sorcery from Molly O'Shea is wonderful. Uncapped by Jack Altman, Sam Altman's brother, also founder of Lattice.

1:16:21Wonderful podcast. You used to listen to All In, don't listen to it as much anymore. Sometimes you get tech news, sometimes you get a ton of politics, depends on what you want. So that's one great news source. And of course, Carta Data Minute, our podcast at Carta. The other, I think that tech press is sometimes a little bit behind the times, whereas tech newsletters are oftentimes ahead of the curve. So, I mean, obviously everyone's probably already reading Pragmatic Engineer, but if they're not, they should. And then the other one that is tech, but startups, but everything. I mean, if you don't read Ben Thompson, like you're just out of the loop.

1:17:00Stratechery is like a must have, I would say. I think for anyone wanting to build up their business muscle, it's amazing. I have to like plus one that one. Absolutely. What is a tool that you use and you love and why? And it can be a digital or a physical tool as well. I love Tableau. I know a lot of people don't like it. I know it's an older, older tool for everyone. It's a vintage tool. But like as someone who thinks in terms of charts and graphs, I have lived in Tableau for quite a while. And I just think it's the most wonderful way to get visual diversity in your charts. So I'm trialing all sorts of different chart makers, AI ones, et cetera, all the time.

1:17:40And I just keep coming back to Tableau. So I can't quit it yet, even though some people might disagree. What is a book that you'd recommend and why? I am reading a book right now, which I think is fascinating. Apple in China, very recently published. Candidly, if you're an Apple fan, it kind of makes you feel not so good. You get this huge history of how Apple came to be so deeply embedded in China for the manufacturing of all their products and what that means for the world, for global trade, for the competition between these two countries. I think it's a wonderful book that is company focused, but it gives you this lens on how to look at the way that the world has changed over the last, call it 10 or 15 years.

1:18:27So really, really have loved it. I think Ben Thompson called it the best book on Apple and the best book on China recently. Which is pretty hard to do. Those are two big areas. Yeah. Well, Peter, this was really interesting, really refreshing, and I think much needed. And as software engineers, you think a little bit more about how VC operates, what it means, and just the reality of working at VC Serpent and how it keeps changing and how the bar just keeps going higher. Yeah. Thank you so much for having me. And this is fantastic. And I'm excited to watch what engineers who listen to this show build as they become founders over the next couple of years.

1:19:06I hope you enjoyed this very data-driven episode where we went through a large number of data points and charts to get a sense of how VC funding and VC-funded startups are doing. To get more reports from Peter on this topic, follow him on social media. His links are in the show notes below. For more in-depth reading about startups and scale-ups and how to thrive in these environments, check out the Pragmatic Engine Deep Dives, also linked below. If you enjoyed this podcast, please do subscribe on your favorite podcast platform and on YouTube. This helps more people discover the podcast and a special thank you if you leave a rating.

1:19:35Thanks and see you in the next one.