C2V June Notes From the Trenches
Welcome friends! With the Celtics back in the NBA Finals, our fellow Beam investor Billy Horschel dominating the PGA Memorial Tournament, Matt and his son Jackson’s flag football team winning their age group’s spring title, and Chris's son Henry's team winning their lacrosse tournament, C2V optimism is at an all-time high.
Even an increasingly panicky (mostly late-stage) VC market can’t bring us down. Why? Because it didn’t take us until last week to figure out that macro risk has increased and multi-billion-dollar companies hemorrhaging cash to try and grow their way out of bad business models might not be sustainable.
Who Could Have Seen This Coming?
With the NASDAQ Composite and SaaS Capital Index more than 25% and 50% off their respective peaks, Sequoia sent out its now trademark “batten down the hatches” memo to founders in its usual timely fashion (i.e., after most of the damage has already been done).
As with its now-famous R.I.P. Good Times memo of early October 2008, which came out 3 weeks after Lehman’s collapse triggered the emergency bailout of AIG and the near-collapse of the entire global financial system (and with the S&P already 75% of the way to its eventual bottom), this memo warns of the impacts of inflation, rate increases, supply chain disruption and the war in Ukraine that have already been taking a toll on markets for anywhere from 6 months (Fed rate hikes) to 2 years (supply chain dysfunction).
It’s like warning someone with lung cancer that they need to stop smoking or something bad might happen.
(A movie reference less than 25 years old! You’re welcome, readers)
The fact is, the only thing that has fundamentally changed in past month is companies with untenable business models are finding they may no longer be able to raise hundreds of millions of dollars every six months at increasingly absurd valuations.
Sequoia is not alone, either. A host of prominent firms have issued similar warnings about a market downturn that we’re already in the middle of, with a similar lack of accountability (blaming exogenous events while ignoring their own bad behavior and even worse advice) and a pervasive air of “well, who could have seen this coming?”
The answer is literally anyone who bothered to look at any of the numbers. We wrote about the brewing tech bubble 17 months ago and honestly, it’s not that impressive that we noticed — it was right there for everyone to see — what’s impressive is that seemingly few others did and even fewer acted on it.
In the same month as Matt’s Medium post, the average company in the aforementioned SaaS Capital Index (“SCI”) was trading at 19.3x revenue, almost triple the 2013-2019 average. If you threw a dart at the list of companies in the index at that point, it was 50/50 you’d hit one trading at more than 20x revenue with a negative EBITDA margin. That’s crazy in any macro environment.
So Where Does That Leave Us?
As one might imagine, a recent theme in our monthly one-on-one calls with each of our founders (we find it’s helpful to talk to our founders more than once a decade), we’ve been consistently asked if we agree with broader sentiments (or in many cases, direct advice from others on cap tables) that founders should be cutting spending and freezing hiring.
For those who have been prudently managing their startups (as our founders have, pretty much across the board) with a guiding principle that consistent improvements in capital efficiency will drive growth (versus the more popular idea that growth can somehow solve for all inefficiencies), the answer is that unless you see a material adverse change in those underlying efficiency metrics, keep doing what you’ve been doing.
As Sequoia is for some reason just now telling their founders, “What works in any market, is consistent growth and disciplined financial management that translates into improving margins.” There’s still plenty of money out there for well-run companies.
In the meantime, at least it appears that fund managers are learning from their mistakes.
Well, some are, anyway.
(By the way, that’s a $12 billion fund…. that closed in January… of this year...)
New Portfolio Company
Our 6th investment from our pre-seed, Tributary Fund, GoodRoads is a Charlotte, NC-based SaaS company that uses computer vision and AI to automate road maintenance. GoodRoads’ founder, Chris Sunde, started the company after living through the road maintenance struggles of U.S. municipalities for over a decade working as a civil engineer.
Road maintenance has grown to a $70 billion annual expense in the US and yet road conditions continue to deteriorate. The American Society of Civil Engineers’ most recent Report Card gave U.S. road conditions a “D”, noting that,
“Growing wear and tear on our nation's roads have left 43% of our public roadways in poor or mediocre condition, a number that has remained stagnant over the past several years.”
GoodRoads automates inspections using computer vision cameras mounted to city vehicles to collect images of every road surface within contracted areas and applies proprietary AI models to identify defect types and provide risk-based maintenance schedule recommendations, accomplishing in days what currently take months to complete.
The company also provides engineers with a centralized data hub and dashboard for budgeting and planning across multiple departments (notably Maintenance and Safety) eliminating costly overlap on projects that are surprisingly common today.
These features save cities up to 25% on administrative waste each year and should save many times this on future maintenance as cities use GoodRoads’ data and insights to improve the prioritization of preventative repairs.
Move Over Deion Sanders
If you missed Chris’s epic win on PrimeTime VC, you can follow the replays and top tips on his Twitter feed.
C2V In The Trenches
Founder Interview
Chris Ricciuti - Founder, and CEO of Noteworthy AI
Matt interviews Chris Ricciuti, Founder of Noteworthy AI, about his motivation for being a third-time founder, what he has done differently this time around, and what his biggest customer pet peeve is. Also, find out which C2V Partner Chris chose to live on a deserted island with.
Superpowers Podcast
Guest Interview
Jake DeCicco - Co-Founder of Super Coffee
Jake DeCicco and his two brothers have a fascinating story about becoming top entrepreneurs in one of the most saturated consumer goods categories - coffee. Jake shares the journey he and his brothers went on and how they used their experience as athletes to work as a team and keep going through the tough times.
Partner Appreciation Night
Chris decided to romance Matt with a sunset cruise. Celebrating some upcoming news that will be shared in the July newsletter.
C2V By The Numbers
Founder Spotlight
Find out what Blutag customers have to say.
Portfolio News
Ian Garret, CEO, and Co-Founder of Phalanx presented at GRIMMCon 0x7 on how to use machine learning in cybersecurity last month. He will also present at RVAsec on combating human error in the future of healthcare cybersecurity this month. Phalanx was also featured in an article from USA Today, Meet the cutting edge tech companies disrupting the industry.
See the 14-slide pitch deck that helped the pro bono tech startup, Paladin, score an $8 million Series A. Read the full article.
Job Opportunities
Koffie: Chief of Staff
Magellan: Multiple Software Engineers. People referred by C2V can apply directly by emailing cameron@magellan.ai and referencing C2V (or the LP that they know).