Letter #289: Kris Fredrickson, Matt Jacobson, and Mark Goldberg (2020)
Founder of Verified, Managing Partner at Coatue & Principal at Benchmark and Partner at ICONIQ and Founder of Chemistry & Partner at Index | The New Fundraising Landscape
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Kris Fredrickson is the Founder of Verified Capital. Prior to founding Verified Capital, Kris was a Managing Partner at Coatue, and before that a Principal at Benchmark Capital. Before joining Benchmark, Kris founded two companies: Curology and Munchery. He started his career at Goldman Sachs.
Matt Jacobson is a Partner at ICONIQ. Prior to joining ICONIQ, Matt was an investor at Battery Ventures and Technology Crossover Ventures (TCV). In between TCV and Battery, Matt served as the CEO of Groupon’s New York operations. He started his career in Lehman Brothers’ investment banking division.
Mark Goldberg is a Cofounder and Managing Partner of Chemistry VC. Prior to cofounding Chemistry, Mark was a Partner at Index Ventures. Before joining Index, Mark was a Business Strategy & Operations Lead at Dropbox, and before that, a Senior Associate at Hudson Clean Energy Partners. He started his career as an investment banking analyst at Morgan Stanley in their Power & Utilities and Leveraged Finance groups.
Today’s letter is the transcript of a webinar hosted by Mark Goldberg while he was at Index Ventures alongside Kris Fredrickson and Matt Jacobs called The New Fundraising Landscape, which took place just a month after California became the first US state to mandate a statewide shelter-in-place order (SIPO). In this conversation, Kris and Matt introduce their respective firms (Coatue and ICONIQ) before jumping into a wide-ranging discussion covering how their fund and personal perspectives have shifted since SIPO was implemented, advice they’re giving their portfolio companies, whether goalposts have changed in terms of evaluating new deals, building relationships remotely, how to approach fundraising, the increasing importance of references, valuation expectations, the fundraising market, advice for remote pitches, investing for market share vs cutting costs, market dynamics, term sheet construction, how to think about M&A, some general advice, and more!
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
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Transcript
Mark Goldberg: Thank you so much for joining. For those of you who don't know me, I'm Mark Goldberg, I'm one of the partners at Index in San Francisco. Now, the reason we decided to have this webinar is because we started getting so many questions from our founders, from founders outside the network, about what is happening in the fundraising market as a result of COVID-19. So I think the sheer number of participants we have on this call is a testament to how top of mind this topic is. And just one logistical point, I think people are already doing this, but there is a Q&A feature at the bottom of Zoom. Feel free to put your questions down, and we'll try to get to as many of those at the end as we can. And with that, I'd love to welcome Kris and Matt. So I've known Kris and Matt for a long time. They're two of the investors I most respect at the later stage of growth. Coatue and ICONIQ are funds that we have loved working with over many, many years. And with that, maybe I'll actually let each of them introduce himself. So Kris, maybe I could just hand it to you to give a quick background on yourself, on Coatue, and then Matt, when Kris is done, to do the same.
Kris Fredrickson: Yeah, absolutely. Well, first of all, thank you, Mark and Index, for having us. We love working with you guys, and are always sort of clamoring for chances to speak with your companies. And so appreciate the opportunity today. So, name's Kris Fredrickson. At Coatue we don't, at the moment, make it super easy to learn about us--we don't have a website--things that we're sort of in the process of fixing. But we started life as a tech-focused hedge fund 20 years ago, but we were always the type of public market investor that loved high growth companies. So we built the firm on early-ish investments in like Apple and Amazon and Netflix. And it used to be that you could be involved in those companies at relatively earlier stages in the public markets, but as that sort of changed, and companies wait longer and longer to go public, we launched a private fund. And we view it as sort of less of a strategic shift, and more as the market sort of shifted under us in order to be involved with the most exciting, or at least earlier growth companies, this was sort of a logical next step. And so today we manage about $10bn as part of that effort. We invest all the way from seed to pre-IPO rounds. I co-lead that business for us, and I focus primarily on consumer and fintech, and then I have a partner of mine who runs the business on the enterprise side. And most of my day is spent on our late-stage investments, which are sort of companies that are worth maybe in excess of $500mn. And then just sort of on me, personally, I've been in tech my whole career. I started as an investment banker, and then I worked with two startups. One I raised almost $100mn for, and it did not make it. It's a company called Munchery. And then I started another company called Curology that looks like it will be an enduring company. And I give both of those examples just to say I like to think it gives me some sort of empathy for the founder experience. I've been through a tough one, I've been through one that looks like it'll work. And try to sort of take that lens to the investing that we do. So excited to be here.
Matt Jacobson: Also very excited to be here. Matt Jacobson, a general partner here at ICONIQ Capital. We're an investment firm that is fortunate to work with some of the most amazing founders on the planet. I helped launch our effort seven years ago, and investing in growth. We have about $7bn in assets across 70 investments in that strategy. Just thrilled to be speaking with this community in particular, given my amazing personal experience just working alongside Index with so many companies, on the boards of companies like Datadog, Adyen, and Collibra, Intercom, where I met Mark, and hopefully many more to come. So looking forward to this.
Mark Goldberg: Great, thanks a lot, guys. Let's dive right in. And I see that we're already starting to get some questions from folks on the line too. Kris, I'm gonna start with you here. So a lot has changed in the last 8-10 weeks here. What at Coatue--and what have you personally thought about how your investment framework has evolved in that period? Are you looking for new things, different things--just for folks on the line, give us a sense for how your thinking has evolved, as a fund and personally, over the last few months.
Kris Fredrickson: Yeah, well, I would say, as investors, we're sort of in a constant state of taking in new information and making adjustments, and this period is obviously no exception. I don't know that there have been any sort of major changes to the framework, but I would say, we've always had a view, and we increasingly have a view, that big moments of change, and crises are obviously big moments of change, create opportunities, and they sort of cause people to--consumers and businesses--to reevaluate what they were doing before. And on the other side of that, it tends to accelerate adoption of technology. And I think we've seen this a couple of times in the past. After 9/11, there was sort of a short-term slowdown in travel, but on the other side of that, it was an inflection point for some really incredible online travel companies--Expedia and Booking and others. There's sort of a similar dynamic after the 2008 recession, which is companies ramped down their ad budgets, and when they started to ramp them back up, they realized there were some really incredible alternatives to television and print and stuff like that--and it was Google and Facebook. And so I think there's sort of a big question about what comes out of this one. There are some sort of obvious mainstream ideas that are seeing incredible engagement. There's food delivery, grocery delivery, there's digital media, social media. But then there's also industries that are sort of earlier in their adoption curve that are having a moment. We've got--Mark, obviously, focus on fintech. A bunch of fintech companies seem to be hitting all time highs in sign-ups and inflecting. Sort of a similar thing happening in telemedicine. It's a big moment for remote work and collaboration, which Matt can speak to with a lot more authority than I can. And I think we are--we're just sort of focused on--before this, I'd worked at Benchmark, and one of my partners used to say, It's not our job to see the future, it's just our job to notice the present most clearly, and sort of figure out what's going on in small pockets. And I think we're very focused on that type of thing right now.
Mark Goldberg: That's great. Thanks a lot for that. Matt, I don't know if there's anything that you'd want to chime in on that question as well?
Matt Jacobson: I think things have certainly changed in terms of the framework in the last two months. But I think there are companies that are just impacted by this unduly given their relationship to travel, entertainment, restaurant, hospitality, etc. And there's a lens in terms of, hey, the depth of this macro economic plunge, and where these companies will come out on the other side of that. And there are other companies where this is a bit of a referendum and a pressure test in terms of shrinking budgets in a recessionary environment, and a lot of ability to adapt and learn from the signals and data points in the environment, sometimes in a difficult way, to build stronger companies through the end of this. And we're increasingly looking at those signals, both in the portfolio and any new investments that we're making.
Mark Goldberg: Yeah, that's great. I mean, we're definitely seeing the same thing from Index. And I would say a lot of the--there's a lot of healthy kind of restructuring going on, and reevaluating a company's cost structure and how that's appropriate, the current lens. But maybe, Matt, just to stay on you for a second. You kind of started by talking about some of the companies that we collaborate on together as funds, and you guys have so many other excellent companies, and you sit on so many boards, and what are you telling the companies that are, I'm sure, asking the same sort of questions here about what's now different from an operating perspective? How do we make changes to our operating plans in light of the new environment? I'm not sure that there's universal advice across your companies, but if you have any advice that might be helpful for the folks on this call that you're telling your own portfolio, I'm sure they'd be interested to hear.
Matt Jacobson: I mean, we work with some exceptional companies and founders and CEOs. We're learning as much, or maybe more, than we're putting out. But I think with many of the companies on this call, they're--many of our companies, like I'm sure many here--doing scenario planning around COVID, from measuring leading and lagging indicators more finely than in the past, and kind of managing to cost and cash, proactively, in helping kind of support these dialogs as actively as they want us to be. I think many of our companies spend a lot of time building their beautiful annual plan for 2020, and it moved to a monthly or quarterly posture, and that's a lot of pressure on the finance teams. And in terms of the challenges, I think there's a range of impacts, as Kris talked about, from diverse as like unanticipated demand surges in education, collaboration software, food delivery, to layoffs in impacted industries, which is just brutal. And every company is different. And so where we're asked, we're diving in, really trying to understand the problems. There's no cookie cutter answer, from credit to sales compensation to performance management, and kind of trying to be careful to find the signal of context before offering any perspective, because I'd say there's a great degree of variance across the portfolio and what they should be managing to right now.
Mark Goldberg: Yeah, that's really interesting. And Kris, maybe I'll kind of segue into you. I mean, one of the things that in our portfolio we're seeing is the goal posts shift a little bit. And I don't know if that resonates with with folks on the phone or with either you, Kris, or with Matt, but for many years, it's been the pressure you get from from boards, from the investment community is, What is the growth? What is your year over year growth? That's what's ultimately going to drive investor interest. And I don't think because of COVID-19, but certainly since maybe WeWork last summer, there's been a little bit of a shift in the pendulum between growth and a path to profitability. But Kris, why don't we kind of let you pick up on that? I mean, have you seen the goal post change in terms of the way that you as an investor in late stage companies are evaluating new deals?
Kris Fredrickson: Yeah, I think it's a good question. And I would say certainly things are different now. There's enormous uncertainty. I'm not an economist, but this feels like sort of an unprecedented moment for all of us to be navigating through. And I'd echo what Matt said before, which is, as investors, to the extent that we know things, that's often a founder somewhere along the line that has has taught us that. And I think we're all navigating in real time. We're on the phone every day with our companies, trying to understand exactly how things are evolving and how we'll sort of navigate the situation. But I would say in terms of sort of goal post changing, the main thing that we are looking for when we do meetings with people these days, and then we continue to be active, is just that founder sort of appreciates the gravity of the situation and that there are adjustments being made for it. And it's less that we know exactly what the adjustments are. It's more that we want to see that a person sort of appreciates what's going on. And so I would say, the financial plan that existed, Matt alluded to this earlier, it has a fantastic financial plan that was created for 2020 at some point, whatever that was is no longer the plan. And the same is true of the '21 plan. And exactly where it all ends up is sort of hard to know, but there's been sort of a cyclical shift back towards unit economics. This is something that just goes back and forth between growth and unit economics. It was moving towards unit economics well before all of this had happened, and I think this sort of shifts it a little bit more in that direction. So we might be a little bit more forgiving on the growth side as we look at a company and have a little bit of a higher bar as it relates to very clear progress towards the unit economics to make the business sustainable.
Mark Goldberg: Yeah, that's great. I actually, I want to switch gears a little bit, and Matt, let me kind of point this question towards you. But one of the things that for me, personally, and I think across the team at Index, has been a little bit more challenging in the current environment, is actually building rapport with founders that we we don't know. We actually haven't quite been tested with it yet, but I think it's just about to start, where we're going to be forced to make decisions on companies and founders that the entire process is going to be remote. And because especially, Index, we invest from seed through the growth stages that you guys invest in, but the commonality across stages is, this is a people job, and so much of it, to Kris' point on you're just looking for the founder to have certain attributes of understanding of what the market could do and how to prepare for it is. It's just that interpersonal relationship. So Matt, the question to you would be, how are you guys wrestling with that challenge? How are you building these relationships? If at all.
Matt Jacobson: Yeah, we spend a lot of time discussing this as well. And have not come to firm conclusions on it yet. We made a point, when we started ICONIQ, never to have companies present to us in a partner meeting. We've always met them where they are, if that's New York or Tel Aviv or Amsterdam or Boise, Idaho. We got on planes, and this is totally different. We have not invested in a team we met through Zoom. We are open to it, but the chemistry is really important to us, and we're learning, like, how do we replicate that? I'm on the board at GitLab, and the company is 1,300 people, fully remote, and the CEO hired most of his executive team without meeting them. We often tell founders that, like, bring out a new investor is often akin to making a big executive hire. And so we're literally doing a webinar after this with him and [inaudible] and Zapier, in terms of their process. But I'm hoping to learn from companies like Gitlab in terms of what they've done. And one of the questions that I'm asking is, how do you build rapport and chemistry? Because I think it's so important.
Mark Goldberg: I wish we had inverted the order here, because then we could have just brain drained the GitLab CEO and team on how they're doing it remotely. I mean, I've heard funny things of--and I'm open to all crazy ideas, but going to an open air park, six feet apart, and having a having a walk to--we were kind of talking before the call got started on ways of just even building a relationship over Zoom. But Kris, I'd be curious, do you have any thoughts on this one?
Kris Fredrickson: Yeah, yeah. So we're sort of all learning on the fly and just starting to encounter this issue similarly as well. And I think we'll get there. I think we're sort of about to issue a term sheet on a company that none of us have met in person. And but this has been an issue, and I'd say there's sort of two things I've noticed from the process. One is that this feels like a moment when the really mission-driven founders can kind of shine. And so the thing that started to get us comfortable was--I think we started to feel like we knew this founder better, or as well as we could have, given that it was over Zoom, because the person spent so much time on why this mattered to them, like how the problem frustrated them, how it sort of touched them, like why this was their sort of life's work and mission. And I think that helped us to feel a little bit more of a connection. I didn't fully realize it at the time, but that's a big piece of it. And then the other thing I would say is it feels like references become really important right now. And in particular, it's hard to go from meeting a founder and you just going from zero to getting the level of comfort that you need if you don't sort of have somebody in common, like you understand them and you can, you can sort of offload some of the judgments that you might have been able to make in person, like, is this the type of person that is trustworthy, and is thinking about the right things and really cares about what they're doing. And so I'd say those are sort of the two things that I've noticed.
Mark Goldberg: Yeah, and just a natural extension to that, I assume, is probably top of mind for a lot of founders on this call who might not have a deep Rolodex of relationships with investors, but--why don't we start, Kris, and you can pass on this one to Matt and throw him under the bus, but would you have any advice to founders who don't have those deep relationships, who might be fundraising now, trying to reach out to a broader set? Could the advice just be, Hey, stick to the fewer names that you do know. Would it be to go through some of those references that you spoke about. Just any advice for folks on this call who might not have kind of as deep a bench of relationships?
Kris Fredrickson: Yeah, I would say, rely on your existing investors to tell you who is active right now. I think some of the things that are getting done are not getting announced necessarily for one reason or another, or it's sort of on hold at the moment. And so I think the first part is sort of targeting and figuring out who to talk to. But I don't know that the sticking to people you know is the plan, just because I think it's good to optimize for taking care of the business and getting something done. And so it feels like--everybody's sort of navigating this together. I talked to my friends who are investors, and they're all--similar questions at the same time. To the extent that the lockdown plans for an extended period of time, I think this is something we're all going to encounter and all find a way to get comfortable with. It feels like this is sort of a forced experiment, but in some ways, I think the some good things will come of it, there will be some silver lining.
Mark Goldberg: Yeah. Matt, anything you'd add, or I'm happy to move on, if not.
Matt Jacobson: I think references--do more references on both sides--I think is very important. But to your point, that favors people within a certain echo chamber and disfavors those outside of it, but I would say, just leaning into existing relationships, even if it's not with your investors or for other investors, but other founders you know and their investors, and just second and third degree relationships, I think are increasingly important. If anything, we're seeing more of our founders in a portfolio being a filter to other entrepreneurs that are thinking about raising capital. That's grown dramatically in the last month, and I expect that trend will continue.
Mark Goldberg: Yeah. I mean, I think one of the one of the things that we've been thinking about at Index quite a bit is it's kind of the opposite of that question, which is, how do founders get more comfortable with Index as they don't get the same opportunities? I mean, so much of how we try to kind of put our best foot forward with an entrepreneur is to spend a lot of time with spend a lot of time with them and hoping that some of that personality of the fund comes through. And that's something we haven't solved yet. We've done a few--the last stage in our process is a partner presentation, and I think we still haven't nailed the entirely remote job of showing who we are to our best abilities. So I think it's gonna be a working process on both sides, but great to get your perspective there. Kris, let me take this actually back to you. I think one of the other things that's very top of mind for folks across the stages and ecosystem is valuations. And people have have seen valuations kind of go up and up over the last few years and are wondering, is this the time that valuations could potentially correct to a major way? So I think what will be helpful to hear from you is, how are you thinking about valuation in light of the last two months with Corona, and, has it had an impact? Should founders expect more pressure from investors? Or do we think that things really haven't changed?
Kris Fredrickson: Yeah. So I think there's sort of important to understand the way that valuations get set in the private and the public markets. In the public markets, there's tons of buyers and sellers, they find a clearing price. In the private market, the highest bidder, or something close to the highest bidder, often sets the price. And it's a very different--it results in sort of a more--it's a more robust valuation in the public markets that you'll see. But I would say, from my point of view, at least, the cyclical swings in the stock market don't matter in the way a lot of people think they do. So like, when we underwrite, we build sort of a five year model, and then in there, we assume the company's gonna go public at some point, and then in the fifth year, when we're looking at our exit, what we think the company can be worth in the future, we're generally in consumer and fintech, at least, applying an earnings multiple. So we're looking at, okay, what do we think the sort of normalized earnings power that business could be in the fifth year? And then the key thing is that the multiples we're using are like 20-year averages for different types of businesses. So if it's a really incredible payments business, we might be able to say, Okay, over the long term, this is a business that could get 30-35x earnings. In recent times, you've seen some of these companies trade as high as 70-80x, but if you look at a long term average, which we've sort of got to do, because the exit is so far away, then you need to be looking at things. And so you're in some ways, sort of insulated from the day to day swings. If it's a business that is maybe taking balance sheet risk, or a lender, or something like that, you're looking at something that's more like 10x earnings on the exit. And most things kind of fall somewhere in between those. And what's happening today is, we think more about sort of what's happening with the economy than what's happening with the stock market. And I think that's like--it's more that you've got a different number five years from now for your revenue and earnings, than it is that there's a different multiple or a different valuation that you're getting.
Mark Goldberg: Matt, any thoughts on how ICONIQ is looking at it?
Matt Jacobson: From a valuation perspective, I think Kris pointed out well that there's a--private companies can choose when to transact, for many cases. And many later stage companies that we know are pretty well capitalized. There's obviously companies in travel, hospitality, real estate, physical services that are directly impacted, and there's real direct impacts here. But many companies are very well capitalized, and so they have a choice to raise now or not. And we have four portfolio companies that have done rounds now, post COVID, where it was decided post COVID. I think two of those were actually partnered with Index. And they're all $1bn+. Two were clear up rounds, and two were flat rounds. But those were flat to something that was done like within the last six months prior, and valuations founders seemed to be happy with. And so those are a few data points in terms of the strength and health of the of the market.
Mark Goldberg: And Matt, you talked about, a lot of companies have the choice to raise right now, and if they don't feel like the terms are on the table, they can hunker down, they can make some changes to the operating plan, and they can go longer. What I think is harder, and there might be some folks on on the call here that don't have that choice, and there are a lot of businesses that will likely need to raise in 2020, regardless of where the market is. For those companies, any advice that you would offer? And Matt, why don't I start with with you, and then Kris, if you have any thoughts, we can go from there.
Matt Jacobson: Yeah, this may seem a little bit idealistic, but I would be as open and transparent as ever. I mean, where were you at the beginning of the year? What wasn't perfect, internally, before this? What do you think the impact will be of COVID? What are you doing? As Kris talked about, where are the focus points on cost and efficiency relative to to top line growth, and really, kind of letting the investors in. Would do a lot of mutual references. And again, it may be idealistic, but if you want to bring in a partner in 2020, I think you want to really understand, on both sides, the way they're going to show up in any environment, and being very open and transparent in terms of what you know, what you don't know, where you were strong and where you were weak headed into this, and you know how this situation has exacerbated or put pressure on that, I think will be increasingly important.
Kris Fredrickson: Yeah, I think that's exactly right. I think we've always sort of favored the type of founders who are--when you're doing diligence, they say, Here's the login to my dashboard, or something like that. You get sort of a sense that there's nothing that you don't know about there. And I think Matt hit it right on the head. That is especially important right now, because I think you're asking people to get comfortable with something when none of us have certainty and none of us are able to predict what the future is going to look like. And I think that's just the right sort of an empathetic attitude on on both ends is the right way to navigate that situation.
Mark Goldberg: Yeah, I mean, I can speak for the Index perspective there. We had a company we were excited about where, when asked about kind of the impact of Corona on the business, the founders answer was, we haven't seen an impact yet, so don't worry about it. And to us, that was a pretty big red flag in terms of, maybe this business will be impacted, maybe it won't be, but the attitude that, hey, just don't even think about it, didn't sit particularly well with us in terms of how we viewed that founder's ability to manage through this. With that, we're actually getting some really great questions from the Q&A, so I'm gonna try and flip over, and a lot of this ties into some of the conversation we've already been having. So actually, Matt, I'm gonna put this one towards you, from Sherman. Sherman was talking about meeting a fund for the first time over Zoom, which is something we were speaking about earlier. No prior relationship to the VC fund, it sounds like, and asking the question of, Any advice for how founders can can be their best in that? And I'm happy to weigh in after you. And again, feel free to pass to either to Kris or to me, if it's not something you want to address.
Matt Jacobson: I mean, we're just seeing this for the first time, but I think energy, both positive and otherwise, can show up very differently on video and on Zoom, and so, potentially going to investors around the table and pitching your existing investors or seed investors through the format and getting their feedback on the process, I think could be a powerful signal in terms of, hey, how do you show up in terms of energy, throughout this medium, and finding a time where it best fits with your schedule. There's a lot of things going on with life that surrounds us in this setting, and kind of being very focused on that, I think would be important. But it's not a topic that I have a great bit of depth on, but it is the way that we're looking at how we're showing up for different companies and founders.
Mark Goldberg: Yeah, so I agree with all that. This is a little bit tactical, but I would also say the logistics--and again, this is just fresh off of five or six weeks of shelter in place now. The logistics matter on the Zoom calls. So I think trying to find a place where you have a strong internet connection. If the internet connection isn't working, I would suggest canceling the call and finding a time when it does. These are the sort of challenges that shouldn't impact an investor's perception of a business and the strength of a founding team, and yet it does make it more challenging to break through with that kind of personal relationship when you don't have the kind of logistics to make the call successful. So it sounds very tactical, but again, fresh off of a few weeks of doing this, I would suggest investing not just in the story and preparing your business, but also just getting the meeting dialed in correctly. I'm gonna go to a question from Thomas here, which I think is kind of a geographic one on this, which we haven't really talked about on the Zoom so far, but to the extent that there's gonna be differences in places like San Francisco, New York, London, where most VCs are physically located, could this be an opportunity for businesses in parts of Europe and cities that historically have been maybe underrepresented from a venture investment perspective? I mean, maybe even just more broadly, I mean, what do you think the geographic impact of Coronavirus has been and will be in the coming months? And Kris, why don't we start with you?
Kris Fredrickson: Sure. I mean, I'd say we are increasingly global, more so every year. And at this point, on both the private and public side of our business, about 40-50% of our dollars are invested outside the US, and we've seen that number go up over time. And I think it will continue to trend in that direction. I think these businesses are global. There's sort of no borders in terms of the sort of incredible proliferation of technology businesses that we're seeing. And so I think this is going to just be sort of part of that natural transition. The other thing we've seen is just the virus has sort of affected certain regions more than others. Certain regions are more capable of dealing with it than others. They've taken totally different approaches and attitudes. It's not entirely clear what the best approach is going to be. I think we're in a little bit of a moment of uncertainty. I would say it does feel like there's starting to be some light at the end of the tunnel. Over the last week, we're starting to see some evidence that sort of western style containment measures can work. You've got some data that Spain and Italy and the US now, importantly in New York, that looks like you're starting to see some of the right things. But really, nobody knows how this is going to evolve. I think that geographically, this will be the type of thing that, because everybody is getting more comfortable remotely, because everybody is getting more comfortable on Zoom, this, I think, is a good argument can be made that this will sort of accelerate activity outside of the traditional finance centers.
Mark Goldberg: Great, thanks Kris. Just to keep things moving, Matt, I'm gonna give you a different question, because we've got a bunch of good ones here. This is from Fraser, and something we've actually spent a lot of time discussing internally at Index, but would you have any advice for growth stage businesses that are potentially market leaders in their category that are maybe debating, while everyone else is cutting costs, do we put our foot on the gas and accelerate to kind of catch that rebound and consolidate our leadership position? Or is this something where you should continue to be cutting costs in line with the rest of the market?
Matt Jacobson: I think again, it's very contextual to like the specific market dynamic and the impact of the business. We have both companies in the portfolio that have a market leadership position, that are continuing to invest throughout this period of time to drive that advantage. Generally, those businesses have been less impacted and have value mechanisms, time to value, or delivery mechanisms that are very powerful at this point in time. And there are other companies that are market leaders that, again, we don't know how the environment will react, but, far less focused on some of those dynamics, and more focused on, hey, how do we maintain the health of the business and keep our cost structure in line with what we're seeing in terms of the top line so that we can build a plan a year or two from now, and emerg from this a stronger company, and less focused on direct market share in those instances, and more focused on how we drive through this constraint.
Mark Goldberg: Yeah, just quick call from the Index perspective as well. For us, the number 1, 2, 3 priority is survival right now. And so we talked a little bit about goal posts and how they might be shifting in the environment, and even if you're a market leader, again, it's just we don't know how prolonged and how deep the recession will be. And so for us, it's do what you need to do to have the balance sheet to support surviving this period of challenging growth. And in some ways, you get a mulligan year in growth is how I'm looking at it--I'm actually curious how Matt and Kris think about this--where if you miss your growth projections by 50%, you're probably--if this was 2019, you would be punished severely by the investment community, and in 2020, you could look like a hero and come out an even stronger leader on the other side, because so many businesses will not survive. So I think this is an opportunity for market leadership, but again, I would put survival as the highest order bit, and then do what you can from there. Just another question, more on tactics, and Kris, maybe I'll kick this over to you--at the later stage, are you seeing any changes in kind of the timeline of a raise? So if a typical raise had taken a founder X weeks before, are we now seeing it 2X weeks? I know we're only a few--we don't really know, I think is the answer, yet, but any perception of whether--if you put yourself in the founders shoes, they should be thinking about spending more time fundraising than they otherwise would have?
Kris Fredrickson: Yeah, yes, is, I think, the answer. I think we've been in an environment for some period of time now, when everybody was--there was so much enthusiasm and things have been good for a significant period of time, a bunch of really strong secular trends that you would see preemptive financings happening frequently, where you would see somebody giving a term sheet sort of early on into a process that would accelerate everything. We're operating on very little data here, but I see that a little bit less frequently now. I see people taking a little bit of their time, and the founders that I've spoken to have, for the most part, been super empathetic on this point, and have adjusted, and have signaled earlier in the process that, like, we're here for whatever you want to know, like, we'll do this on a time frame that works for you. I think people have largely adjusted in a totally reasonable way that gives me confidence and helps me dig in, because I think a lot of my day is just figuring out where to spend my time and where to allocate it. And there are times when it's clear that I won't be able to get somewhere quickly enough, and I don't want to ask a founder to spend time with me if I'm worried about that. And so I think the right strategy right now is to just be open, to be flexible, to plan on it taking a little bit longer than usual--twice as many weeks is probably not a crazy, rough guess for something quantitative.
Mark Goldberg: Great. I'm gonna keep going, because we've got some more good questions. And this is gonna be inside baseball, because this is from my partner, Nina, who gave us one. So Nina asked, How do you balance over correcting for valuation in this environment versus taking a longer term view of kind of what a company could be over time? And this is something--maybe even stepping back, where at Index, we thought a lot about, Are there going to be some bargain opportunities from a valuation standpoint that could arise in this environment? But are the funds that wait for those bargains potentially just going to miss some tremendous opportunities? How do you guys think about that dynamic that Nina just described, and how are you investing around it?
Matt Jacobson: Based on the principles earlier that many companies have been well capitalized heading into this, at least from our view, and in some of the conversations we're having, there is a choice in that factor. And so I don't see it that way. And like, from an investor perspective, we're not looking to find--our strategy is not to invest in companies that it is a bargain. It's companies that are kind of continuing to persist in enduring, and leaning in, forward, to those companies, and it's been a core strategy since inception. And so I think the market may adjust. The question is, like some of the adjustments we're seeing are probably where the market was, I'm talking about software and SaaS, probably two years ago, anyway. So it wasn't that long of a time ago in terms of that adjustment. But I still think the market for enduring assets will be very forward. And I think the concept of bargain hunting will be misplaced. And at the end of the day, it's not a trade--like a lot of these investments are long term partnerships, at least in our view. And so it's not a trade on either side. It's not a trade on our side, and it's not a trade on the founder side. And so it's just a fair and forward view based on our collective best view of where things are.
Mark Goldberg: Just keeping it going here. So Tobias asked, and I think there's a great question, are we seeing any shifts in term sheets themselves? Is there more structure? Are you seeing liquidation preference kind of revert to things we could have seen in term sheets from a decade ago? Kris, why don't we start with you? Are there key terms that you've seen changed, or pressure on term sheets move in a way that traditional vanilla term sheet from the last few years is now starting to see some more bells and whistles?
Kris Fredrickson: I am not seeing that, quite yet. And it doesn't mean that we won't, but it isn't something that I have encountered to date. And I think sort of similar to what Matt said on the last question, it's generally been sort of an error in our industry to optimize around finding something at a good price. You generally want to find really incredible companies, and then you have to make the valuation work. I kind of feel the same way about terms. And I think most of the rest of the market sort of does as well, which is, first thing is you have to pick an incredible company with an incredible founder, and then as a second order, it's the valuation and the terms and all that stuff needs to make sense.
Mark Goldberg: Yeah, that's very much the Index philosophy. There's no structure in our term sheets. But I am starting to see, for portfolio companies that are raising, more funds take a different attitude than the one you just described, and more funds kind of opportunistically put structure in to protect their downside cases. I think my own sense is we will see more of that, but maybe from different players outside of kind of the traditional VCs that maybe the folks on this call represent. I don't know, Matt, anything you'd weigh in there?
Matt Jacobson: We saw one last week where it was a good valuation but it had a ratchet in terms of an IPO. We've been through this is a firm. I think we decided, probably three or four years ago, that we will just do no structure, ever, in any deals. And when we advise companies, again, you have to look holistically at the trade offs, but in general, even if we are totally objective in the conversation, would prefer companies taking a discount in valuation relative to taking some of these terms that could misalign them from investors or create waterfall effects in terms of future financing rounds. And that's the viewpoint and advice that we've shared before this, and we'll continue to share.
Mark Goldberg: Great. A good question came in from Abhinav around M&A and opportunities for companies with with strong balance sheets to consider being acquisitive. I don't know if the question was in the spirit of aqui-hires for companies that don't survive, or for real product or revenue acquisitions. But curious if--Matt, maybe go back to you on this one, if you've seen, either from portfolio companies or just in market, companies with strong balance sheets start to consolidate other companies.
Matt Jacobson: Yeah, it's interesting. It's two things. One is the same topic that we were talking about earlier, which is for larger scale things or people that the founders of these companies have never met before, they have to go through the same exercise that we're talking about in terms of financing, in terms of thinking about an acquisition without a deep familiarity of the company or visiting their offices or all these other factors. And I think people are still thinking through that. In terms of aqui-hires, for companies that are well capitalized, it could be a very interesting opportunity. And one of the founders we work with, who also works with Index as well, said, Hey, it actually creates a more level playing field in terms of the fact that the entire company is now remote, and so bring on some remote team from an acqui-hire, that onboarding process has actually been considered smoother in certain cases, which is kind of interesting.
Mark Goldberg: Yeah, Kris, let me throw this at you. And this is something that I think all of us on the call are wrestling with, but do you see any differences in your own personal availability in these times, and maybe shift in your priorities between portfolio, other things, versus maybe new deal activity that you could spend with potential founders. I think we've all experienced, whether you're a founder, operator, investor, a shift because of this. For me, it's taking on a little bit of childcare that I hadn't done before--more childcare than I'd done before. But how has your own availability changed in terms of kind of new time for new founders?
Kris Fredrickson: I would say for the first several weeks of this, it was pretty severely limited on new things, as we were just understanding and making sure that we were being supportive and there for our founders and sort of available at all hours. It's starting to return to normal, but it's nowhere near normal yet. And so I would say probably half of my time, which is a much higher percentage than usual, is spent internally focused, with the portfolio, with our firm, with our team, just adjusting to this new reality, figuring out what it means for us, what it means for our companies, making sure we're being supportive. But it's on the path back to being normal, I would say.
Mark Goldberg: Great. All right, I'm gonna make this the last question, and I'll keep it pretty open ended. And also, first up, just to thank Kris and Matt for joining here. I know you guys are busy and really appreciate your time this morning. And then to thank all of you who joined on the webinar this morning. But I guess just kind of any parting thoughts you'd offer to founders who are navigating this time--doesn't have to be fundraising related, but you've got a lot of folks on the call who are thinking about how to manage their business over the next ensuing quarters. Any broad advice that you would offer folks?
Kris Fredrickson: Yeah, I'm happy to start. And I would just say, there's a lot of uncertainty. There is a lot of, like, very real human things that are happening right now that are sort of, I think, priority number one, and they feel the most immediate, and there are going to be difficult decisions that need to be made in the short term. But I would just encourage people to remember that on the other side of these things, there is always meaningful opportunity for the people who are able to survive and navigate through them. I mentioned at the beginning of this some of the inflections that we've seen historically. These moments always create an opportunity for people to rethink how they do things. And whenever people are rethinking how they do things, that usually is good for technology companies, because on the other end of that, some people start to realize the benefits.
Matt Jacobson: I think that's fantastic. I share a lot of the views that Kris had. The one thing that I would add is just, one of the things that we've seen is at this point in time, when there's so much stress and so much change, there's generations of founders and CEOs that have built companies through 2000, that have built companies through 2008, and leaning into these relationships more and more, and kind of building out those mentorship relationships will be invaluable. And the way that we're seeing founders and CEOs in our portfolio lean into those individuals is amazing. And surrounding yourself with some of those people that have been through this before and can share their perspective. Obviously, you'll have to do this on on your own and make your own decisions. John Chambers is on the board at Sprinklr and just has been an unbelievable resource with the entire executive team in terms of his experience in managing through crisis at Cisco. And there's many, many executives out there, either independent board members or other mentors, that can be just a phenomenal resource to individuals in this point in time, and speaking with those people with that experience can be very valuable.
Mark Goldberg: Great. Yeah, Kris, that Instacart example really hits me. I've been trying to get my parents and other people in my family to use different technology for years, and this feels like the inflection point. And Matt started this call, I think before many people joined, talking about a haircut service that had just started to come to your house and give you a haircut--well, I assume, fully garbed and ready to handle the the appropriate safety implications--but I think it's just another good example of innovation coming from crisis. And I lead a lot for FinTech investing at Index, and fintech was born in the last recession, so we'll have to see what comes out of this. Anyway, I think that's a great stopping point. Kris, Matt, thanks again. Thank you everyone for joining us. I think we're gonna be posting highlights from the conversation after, and if you have other questions, feel free to email me.
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