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Trae Nickelson: Welcome back to Starting Up & Right, conversations with a startup CFO. I am your co-host, Trae Nickelson. Joining me on-screen is your other co-host, Ryan Keating, and startup CFO. Hey, Ryan.
Ryan Keating: Trae, how are you?
Trae: Good, good. Doing good here. Today we've got a friend of ours. We've got a longtime friend of yours, Mr. Greg Ennis of Peninsula Ventures. Greg is a venture capitalist. Rather than me trying to describe Greg, you've known him for a long time. You guys were officemates for a long time way back in the day. Just give Greg a little intro from your perspective if you will.
Ryan: Yes, my pleasure. Geez, Greg and I first met probably 15 years ago where I was the CFO for one of Peninsula Ventures' portfolio companies. Really enjoyed my interactions with all of Peninsula Ventures, and we stayed pretty close. We actually ended up sharing an office space together at one point, and during that time I think my interest in what the venture side of the table looked like really expanded. I really started to pester Greg quite a bit. He won't probably admit this or he'll use more colorful words but I would come to him and ask him a lot about how it worked, and how fund economics worked, and really with the idea of-- I was really excited about a lot of the companies we were working with on the CFO side, and I was interested in how do we also invest in those companies.
I wore Greg down enough where he said, "Look, why don't we look at maybe raising a fund with the thesis of finding companies that you're working with matched with some other investment strategies and use this as a way to go out, I'd like to see if we have access to some interesting startups." Now, not only did Greg and I work together as I'm a CFO on startups and he's an investor and board member in several startups but we're also co-GPs on a couple of the Peninsula Venture funds.
I got to get to wear both hats. It's very valuable to me where I get to reach out to him and get his advice where, as you introduced him, he is truly a card-carrying venture capitalist. He's been one for probably going 25-30 years and really knows the ins and out of this industry. I'm really happy to have him on today and get some good tips and insights into how this works.
Trae: Cool. Greg, you're on-screen now, so welcome. Thanks for joining.
Greg Ennis: Thanks for having me.
Trae: Greg, a little bit about your background. Ryan got to tell his side of the story. How did you get into venture capital? Start way back in your Stanford days, if you don't mind, because you were a quarterback if I [crosstalk] heard from legend.
Greg: In my former life, yes. In fact, I like to tell everyone that I won the Heisman in '87 because no one remembers who actually won it so it always helps.
[laughter]
Greg: Ironically, that's how I got someone introduced to venture. I was going to school playing ball, and looking for summer jobs, and met a guy who basically allowed me to tail around with him one summer by the name of Bob Patterson. Half of his time was in a law firm, half of his time was in a venture fund. That's how I got exposed to venture.
Fast-forward, four years later, I was coming out of business school. Bob and I stayed in contact. I'm looking for a job coming out of business school in '92 and he said, "Get up here, we're interviewing at Thompson Clive," which was the firm that he was with. I flew up, and I met Richard Thompson, the founder. I like to joke that they made the mistake of hiring me.
[laughter]
Greg: That was back in '92. I spent about eight years with Thompson Clive by the end of that period running their US office. They were a London-based firm. Then in 2000, Bob and I spun out and created Peninsula. We are now on fund four of Peninsula. We've been doing early-stage tech investing or I've been doing it for 29 years now.
Ryan: Greg, to kick off if you don't mind, just started at a higher level, we're all coming out of COVID. There certainly seems to be a lot of activity, especially in the startup markets, a lot of hiring, a lot of fundraising, a lot of move momentum. What are you seeing right now, just at a macro view, in early-stage investing and where the markets are?
Greg: I think the markets are probably as hot as they've been in 20 plus years. I don't think they're quite at the.com craziness but they're not too far off from that. People aren't running around getting term sheets in hours by any means. It's a healthy, frothy market, a lot of capital but there's also a lot of good deals.
We're looking at [unintelligible 00:05:58] there's things that come across our desk that are just way overpriced and crazy. There are also some real deals. We've got a couple right now that I'm feeling pretty optimistic about where the valuations are reasonable, where we can still generate eventual return without having to generate the billion-dollar exit. I think the venture market's healthy right now. I think the pace of venture investing has increased during COVID.
I think everyone, when we came into this pandemic, everyone thought, "Oh, we're going to hunker down and as we come out of it, that's when the real flow of capital will happen." I think it's just the opposite. The flow kept flowing through the pandemic. Now, the question is, as we're coming out, will it accelerate, stay the same or go down? I don't know, I have no clue. I think that the quality of deals that we're seeing is good enough, I think the amount of investing will probably stay the same. I don't think it'll go up much more than this for the next year or two. There's some really good stuff out there.
Trae: The volume of deals that COVID maybe even accelerated that, as you mentioned. I think previously we were talking before the show that Zoom allows you to see many more pitches and speak to many more founders.
Greg: Maybe it's predictable if we all sat back and thought about it. The pace of the deals has increased because quite frankly, you can do Zoom calls one right after the other whereas before, I'm going to meet an entrepreneur, it takes me an hour to get there, or if I'm flying somewhere, it takes me a day. The pace in which we're seeing deals is a lot faster.
Ryan: Most of our portfolio companies, as you know, are very early stage. A lot of them are looking to raise their first price round, maybe their second price round. What advice, if you can, would you share with them as they go about? Most of it is like the pitch deck or presenting. You did mention a comment that you share, that you use a lot. I'll quote you quite often, I won't often give you credit, but I'll quote you quite often. One of the things that I like to say that you think of is whenever you're trying to get an investor on board, we're basically asking them to take a leap of faith, and one of our goals is to make that leap as small as possible, as short as possible. What have we shown them? What can you do? This translates into what we talked about a little bit, maybe traction. What are some pieces of advice, if you don't mind for people that are getting ready to go out and raise around.
Greg: I would say practice the pitch deck a million times, iterate it, get as much advice as possible. If the investor doesn't know exactly what the problem is, and how you solve it within three slides, you're not doing great. Their attention span isn't going to last past that.
If you haven't got that, get it, fix it. If you do have a real problem out there in the market, and you have a solution for it, and you've got customers who swear by it, then quite frankly, you should be able to raise money. Plain and simple. You should be able to raise money. If you're not, there's something wrong with the pitch, how you're approaching it, the business model, whatever. If you have a product, software, whatever that solves a real problem for a customer and a customer's willing to pay for it, that's what it boils down to. Something that simple. The question is, "Okay, well, how many of those customers out there? How big is the market? How much can we charge? Can we do it in a profitable way?" All of that stuff. Fundamentally, if you have a product and a problem and you're solving something for a customer who's willing to pay for it, you should be able to get funded in that stage, Ryan, because those are the early stages. Once you have that, then it's either, "Okay, I need money to turn the flywheel faster or expand and do X, Y, and Z."
It's that first money in where you got to prove to an investor that there's a real problem, your product solves it, and the customers are willing to pay for it. It's really pretty that simple. You have to convince an investor of that quickly and then also that there's enough of those customers out there such that there's a big enough market and we can put money in and we can invest at 2 million, 5 million, 10 million, whatever, but we can get out at 50, 100, 500 or a billion, whatever that number is.
You see the order of magnitude. We have to see the way of putting money in at whatever value but then driving a value on an exit such that we can generate a venture return. Those early stages, it should be pretty straightforward and simple. If it isn't, figure out why it isn't because that's going to be the challenge.
Ryan: That's good. You're right. It's very different at this early stage than say what we would consider a growth round.
Greg: Even an A round, like [crosstalk] what we're talking earlier, A used to be the early round. The A is really now, "My product's done. Product market fit exists. I've got customers, I've got quite a few customers, and I figure out the flywheel on how to drive it." Now, I need money to invest in that flywheel. Then the B is you hit 10 million in ARR. Now, we're really going to step on the gas and we're going to go international or expand our product line or whatever it is. That's the B now.
Ryan: Yes, it's really shifted since even I've been in this just because I'm younger but not by much.
Greg: Thanks a lot.
[laughter]
Ryan: Now it's [unintelligible 00:12:26] used to be there. We'll talk to clients about this as well that we used to call it a series A because that was generally the first, A as in the first letter. Nowadays, we'll see it as the fourth round of funding. You'll see a safe or convertible note and then oftentimes, a preseed, followed by a seed, and then a series A. It's really amazing how the funding has shifted.
I see a lot of that. I'm interested in your comments on this. You had made a comment earlier about so much money coming in. I think a lot of this is over the last 15 years, there has been so much money coming to venture that for these smaller funds that don't have the deal flow, don't have the reputation, they have to keep getting in earlier and earlier to get in front of the larger, more established funds.
Greg: We actually experienced that quite significantly in our second fund. Back in the day, when I first started in venture, we were located 3000 Sand Hill which was Mecca in venture capital. We would share deals with and look at deals with the Kleiner's and Sequoias and USVPs and all of the big names because quite frankly, back then, they were big names but on a much smaller scale, whereas when we raised our second Peninsula fund, we were doing series A lead investing.
What we found was that we were no longer sharing deals with those firms but competing with them and competing with them in Silicon Valley hence the name Peninsula. What was interesting was that we experienced exactly that which was the deals that we would go head-to-head with them, we weren't winning. We weren't a brand name. We had to go earlier and assume more risk.
We also, I think serendipitously, went outside the Bay Area and found much, well, I would say much better. We found better deals for our firm and for our type of investing than what we were finding in Silicon Valley. It became interesting in that how these funds have grown. Shoot. I remember back when I think it was Kleiner that raised the first $100 million fund. There was talk around Sandhill Road. Jesus Christ, how are they going to invest that. That's crazy.
Ryan: 100 million.
Greg: 100 million. Now, 100 million is a seed fund. Exaggerating a bit but not by much. What's happened is that the asset class went from a cottage industry to a valid asset class for institutions. Now, if you go to any large institution, when you say what's your asset class allocation model, they'll have venture slated in there whereas 30 years ago, very few of them ever included any private equity or venture. It's an accepted asset class now which means more money's come in.
There are times when I'd say it's a bad thing, but overall I think it's a good thing. I think theirs created an engine for innovation and job creation in America because of this. I think Silicon Valley is Silicon Valley partly because of this. It was Silicon Valley prior to this, but my point is that it accelerated it. Every other part of the country wants to replicate what Silicon Valley has done. Some have done it very well in their own flavor, some are still trying and so forth. I think the amount of capital that's come in has been good.
I think that's interesting is that with COVID and with now remote working, there's a lot of companies, I would pick on Silicon Valley, a lot of companies in the Bay Area it's like, "Yes, sure, we're still going to be headquartered here, but we got people working in Utah and in Arizona and in Nevada," because quite frankly we're all remote anyway. We don't need the office space or as much office space. We don't need everybody to live here. I'm hoping that a byproduct of that is the cost for building companies, particularly in Silicon Valley comes down a bit because that seemed to be one of the challenges that investing in Silicon Valley had.
Trae: I want to talk about board meetings because that's one of the central thesis for our show here, Greg, is to help our founders anticipate, prepare for board meetings. You sit on several boards. From a very top level, how can a CEO best prepare and use a board effectively? Just give us a little talk, what are your thoughts on board meetings.
Greg: I have a lot of thoughts on board meetings. First off, nothing new should ever be reported in a board meeting. If you're talking to your directors only at board meetings, you're doing something wrong. You should be on the phone with them constantly. If you ever come to a board meeting and say, "There was a problem but we fixed it", and that's the first time the board's hearing about it, you're doing something wrong. Be open, be transparent. I'll tell you the best CEOs I've worked with are those that say, "I don't know how to fix this." The worst ones are the ones that say, "I know how to fix everything."
It's one of those things where constantly be talking with your directors. Nothing should be a surprise. Understand the directors are there to help solve problems. If you have a director--and most directors are not this way--but if you have a director that is ready, fire, aim, you have the wrong director. Most of the directors are, "Okay, what's the problem? All right, you know I've seen this, we had this happen in three other companies. Here's what we've done, what are you thinking? We'll work through it to figure out the right solution." If you're so afraid of showing any weakness or vulnerability to your directors, you got to change that attitude. It's got to be completely flipped.
Trae: That is a weakness, right?
Greg: It's absolutely a weakness. If you have an inability to show vulnerability or lack of knowledge or, "Hey, I don't know how to fix this," or quite frankly, "I think I know how to fix this, but I want to talk to you about it,", all that is great because what you do by doing that is you bring that venture guy in, realize then, "Okay, I can trust him. If he's got a problem, he's going to call me. We're going to figure it out together." When you're not sharing anything, any problems, or if you do share a problem but it's been fixed, what you're instilling in a venture guy is, "What else have you not told me?" Be open. Be transparent. The venture guy, understand he wants you to succeed. He put money in you for a reason, so therefore, open up and share your problems with them.
We also understand being a CEO, that's a lonely freaking position. Who do you talk to? Who in the company can you really go talk to about the shit? Maybe a CFO if you got it but usually at the early stages, and you're worried about making payroll, you go talk to the employees about that?
[laughter]
Trae: Bad idea.
Greg: Bad idea. We get it, we understand that it's a lonely position and quite frankly if you don't avail yourself to the board and to your venture guys, you're making a huge mistake. With regards to board meetings, like I said, nothing should ever be new. The other thing that I find interesting is that a lot of board meetings are, "Well, we got to update the board on what's going on." Well, do those in pre-reads, get those things out beforehand. Let people do the reading so that they can come to the meeting prepared such that you don't have to waste people's time talking at them, updating them.
As a CEO, what you should be doing is, "What are the 1, 2, 3 questions that I need answered that my board can help me answer?" If you can't come up with those questions, think harder because they're there. No business is perfect to the point where you don't have issues to, problems to solve. What I tell our CEOs is, "Cater your board meeting around a question or two. What are the questions that I'm trying to get answered?"
Obviously, there might be people on the board that may have more experience in some areas and you want to tap that. That's great but come to the board meeting with questions. "Here's what I need from you guys." Provide the information upfront so that you don't have to waste their time updating them, and then get into the meeting and have the dialogue. Have the debates because in the end, when you do that, the better or best answers always come out. That's how you use your board. Ironically, that's when the board starts to believe and trust in you more.
I think the good board meetings are the ones where you have really meaty subjects and good debate. Healthy, respectful, civil, but good debate, and--
Trae: The heart rate gets pumping a little bit in some of those?
Greg: To some degree, but it's more intellectually, it's more intellectual and it's like, "We got to figure this out and make sure we're doing the right thing." It's not so much, it's my way or the highway, it's more of a dialog that everybody kind of coalesces. What's interesting is that when you have a group of people who are trying to get to the right solution when the right solution presents itself, everyone gets on board. That's why I joke when people say, "Oh, we need to have a number of board members so that when we take a vote." If you're taking a vote at a board meeting, something's wrong. Seriously, it should be unanimous or consensus of, "Yes, that's the right thing to do." If it isn't and if it's a three to two vote, I'd suggest go back and figure out how do you get to a 5-0 vote.
Ryan: Interesting. One of the things I'll-- We sit in a lot of board meetings and help and we present with our clients, and we always speak to the financial update. The financial update is always at the end. We always share this slide two-three days early, and I'll tell them, "A good board meeting, we don't even get to my stuff because it's not a topic. The topic is the meat of what are we doing with the product, what are we doing with sales, what are we doing with features? If we spend our time talking about my slides, there's a problem."
I always like to say like you're saying, "Share this stuff early, make sure everything's accurate, give them the KPIs, give them the runway and all the metrics, but communicate so frequently that that shouldn't be taking up discussion time. Discussion time should be on where are we out on our go-to-market? Where are we at on our key hires? Where are we at on our beta versus our NVP versus our pilot? I love it when we prepare for a board meeting, I'm like, "I hope we don't get to finance because that means that we don't have anything else to talk about if we're worried about the overspend on travel last month."
Greg: Yes, couldn't agree more.
Trae: Greg, you're in Portland now. You make it down to the Bay Area, and you mentioned the geography's melting away in what you do anyway, but how are you enjoying Portland? What do you do up there for fun?
Greg: We've been loving Portland. We've been up here now for about five and a half years. After a week of getting up here, my wife and I looked at each other and said, "Why did we wait so long?" Life is easier here. I was telling you guys earlier I've been meeting downtown. It'll take me ten minutes to get there and park. There's just a level of easiness here. We love to ski. We love to fish. We love the outdoors. The Pacific Northwest is just incredible.
We actually like seasons too, so the rain and the snow don't bother us. In the wintertime, you hunker down a little bit more. Your house projects that you work on are inside. I think we bought this old house. It's a hundred and ten-year-old house. The house projects never end. Just finished a guest bathroom about three weeks ago, and now I'm looking, since the weather's changed, I'm looking for my outdoor project, which is placing a new deck.
Ryan: Fun.
Trae: When football season starts up, will you visit? You come down here for the games?
Greg: We do. We still come down for the games. Obviously missed them all last year because we couldn't go to them anyway.
Trae: Yes.
Greg: Yes, we still get down, still have family in the Bay Area, and yes, we'll make it down, and it'll be nice to get back into a regular schedule for that as well.
Ryan: No doubt, good.
Trae: Well, thanks for joining. It's always fun for me to hear a CFO and a VC/board member talk about how to interface with--
Ryan: Good, yes. Thanks, Greg, that was a lot of fun. I appreciate you joining.
Greg: No, happy to do it. It's always fun to talk with you guys and I appreciate everything you do for your portfolio companies and our portfolio companies.
Ryan: Enjoyed it, thank you. Thanks, Trae.
Trae: Thanks, guys.
Greg: Yes, thanks, Trae.
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