ANGEL: FirstMark’s Rick Heitzmann on shaking off the bull run, “shock absorbers,” and more | E1670 | Summary and Q&A

Summary

This video discusses the challenges and lessons learned from the three cycles of investing and operating in the tech industry, including the dot-com bubble, the Web 2.0 cycle, and the current speculative asset bubble. The speaker interviews Rick Heitzman, a venture capitalist who has experienced all three cycles. They delve into topics such as shaking off the 14-year Bull Run, Airbnb's reaction to the COVID downturn, reminiscing on the problems of the dot-com bubble, and the importance of senior members of startup teams acting as shock absorbers during difficult times.

Questions & Answers

Q: How does Rick Heitzman view the past Bull Run we've experienced?

Rick Heitzman views the past Bull Run as a speculative asset bubble, fueled by zero interest rates and a lack of consequence due to the availability of cheap capital. This led to bad behaviors such as early fundraising and speculation in assets. However, he believes we are now living in an age of consequence, where the realities of the market are starting to set in.

Q: What causes people to become deluded during the no consequence bubble, and how can they overcome it?

The no consequence bubble can cloud people's thinking and lead them to forget how businesses truly work. They become too optimistic and rely on the constant availability of capital. To overcome this delusion, they need to recognize the new reality and understand that capital is not always freely available. They must sober up, adjust their behaviors, and focus on creating value and profitability.

Q: How did the dot-com bubble burst compare to the current speculative asset bubble?

The dot-com bubble burst was worse than the current situation because it was characterized by hard shutdowns, severe job losses, and significant decreases in valuation. Many companies did not have a path to profitability and were heavily reliant on financing. In contrast, companies in the current bubble have some revenue and customer base to rely on, making it easier to right-size their businesses and adjust their expenses.

Q: How did Airbnb react to the COVID downturn, and what can we learn from them?

Airbnb reacted brilliantly to the COVID downturn by taking decisive action and securing insurance from Silver Lake and Sixth Street. They executed efficiently, reducing costs and focusing on their core business, which allowed them to weather the storm without touching the capital they had raised. This shows the importance of being prepared and making calculated decisions during challenging times.

Q: How do marketplaces react to a down market compared to other businesses?

Marketplaces have the advantage of being asset-light since they do not own physical assets. Most of their costs are in people and marketing. In a down market, they can adjust their marketing spend, right-size their teams, and focus on generating higher returns from their people. This flexibility makes marketplaces more resilient compared to asset-heavy businesses.

Q: How can startups navigate the challenge of accurately calculating the cost of acquiring customers and their lifetime value?

Startups often make mistakes when calculating the cost of acquiring customers (CAC) and their lifetime value (LTV). The cost to acquire a customer is more volatile than expected, and assumptions about customer retention and upselling can be incorrect. It is crucial to have realistic expectations and be conservative when estimating CAC and LTV. Churn and competition should be taken into account to avoid overestimating the value of customers.

Q: How can CEOs keep their team engaged and motivated during a down market?

CEOs and senior team members need to act as shock absorbers for their employees during challenging times. They should provide a calming influence by being transparent and open about the current reality. Communication is crucial, and employees should be reassured that the company has a plan to navigate the downturn. Setting realistic expectations and being transparent about the timeline and the challenges ahead can help maintain team spirit and motivation.

Q: What lessons can be learned from previous cycles and the leaders who navigated them successfully?

Leaders who have navigated previous cycles successfully have shown the importance of being self-deterministic, setting realistic milestones, and focusing on achieving profitability or break-even. They have demonstrated the need to be transparent, communicate clearly, and act decisively. By taking control of their own destiny and focusing on building a sustainable business, they can attract more capital and increase their chances of success.

Q: How have term sheets and financings changed in the current market compared to the dot-com era?

While the current market has not seen the extreme term sheets and financings of the dot-com era, there have been some challenging terms such as multiple liquidation preferences and down rounds. However, it is important to learn from the past and avoid crushing team spirits through overly harsh deals. Building a positive team environment and maintaining a sense of optimism is crucial for long-term success.

Takeaways

Navigating the ups and downs of the tech industry requires acknowledging the realities of the market and making strategic decisions based on those realities. Startups should focus on reaching cash flow break-even and controlling financing risks to ensure their survival. Transparency, communication, and acting as shock absorbers for the team are essential for maintaining morale and keeping everyone motivated. Setting realistic expectations and being self-deterministic can increase the chances of success. It is important to learn from the past and avoid overly harsh deals that can crush team spirits.