Founder vs. Investor

Rest energy.

06 Nov

Daisy Alioto on post-ZIRP nonfiction.

My latest business trip starts as all of them do, on the outskirts of the city, untangling a necklace in the back of a cab to LaGuardia. My nails are newly orange. When the woman painting them asked what I do for work I said, “I’m a writer.” I said it automatically. “I write about art and architecture,” I said. And it’s not a lie. 

But it’s also not the whole truth, because I now belong to a very small subset of business owners with venture-backed startups. Winding through the security line (signing up for TSA precheck has been on my to-do list for at least two years) I think about a story I heard recently. An investor asks startup founders to fly to Los Angeles to meet (on their dime). He takes them out to steak (on his dime). Over dinner, he looks them in the eye and says “I’m in.” They return to New York, let all of the other investors squatting on the fence know they now have a lead investor. But then they get a call: the promise was premature. He’s actually out. 

I’m giggling at this a little bit, not because I think it’s funny, it’s only funny in the dark sense because it happened to a group of men. And almost every woman I know has a story about traveling to visit a man on her own dime, being taken out to dinner, and being lied to. Nothing is true until you see it reflected in your bank balance and even then it’s iffy. If I knew these men personally I would buy them a drink, cup them gently by the shoulders, and ask, “First time?”  

“To repurpose an old cliché, giving money to strangers is the worst system of funding innovation, except all the others that have been tried,” writes Jerry Neumann, coauthor of the book Founder vs Investor: The Honest Truth About Venture Capital from Startup to IPO. The book, released in September 2023, is a fresh entry into the canon of books about startups and the high-risk style of investment propping them up. “I make a deal with the devil because I think I can win, and I want to see my vision come to life in the biggest way possible,” writes Elizabeth Zalman, the book’s other author. She is the founder in the Founder vs. Investor equation. 

The book is epistolary in nature, trading off between their perspectives. The authors tackle topics like fundraising, dealing with your board, and exits (whether through acquisition or IPO). In case the perceived power dynamics weren’t clear, each of Neumann’s sections is denoted by a wolf and Zalman’s with a silhouette of little red riding hood. Founder vs. Investor was published into a firmly post-ZIRP world. For the uninitiated, ZIRP is shorthand for “zero interest rate policy,” which kept interest rates in America close to zero more or less continuously from 2008 to 2022. These low interest rates made it cheap to borrow money, and therefore strategic for LPs (limited partners) to fund VCs that could make big bets on startups whose returns might outperform the stock market. 

The amount of seemingly “free” money created a generation of startups that had no incentive to be profitable, just to grow quickly. There are books about what happened to those startups––Super Pumped: The Battle for Uber, Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork, Bad Blood: Secrets and Lies in a Silicon Valley Startup––to name a few. These are written by journalists, outside of the industry. And, as Drew Austin writes, these books are destined for adaptation. “In this world, with content as a supreme cultural value, it’s better for something to be interesting than ethically sound. Widespread attention bestows an aura; becoming content is how reality is made real.”

But ultimately, both spectacular success and spectacular failure are boring. Founder vs. Investor dutifully repeats the Power Law that (allegedly) guides most decision making in venture: $2 million to gain 20% ownership of a company that becomes worth $1 billion is enough to return a $200 million fund to its LPs––a similar bet spread across 100 companies needs only one winner. 

But ultimately, both spectacular success and spectacular failure are boring.

The authors repeat this logic to dispense with it. Most of the book is about trust and relationships. “You’re getting married without sleeping with someone. In fact, you’re getting married without sleeping with someone and only after one of those coffee-only first dates that ends with the butt-out hug,” writes Zalman. With the end of ZIRP, we can expect more books like this. Not about the unicorns (there will be fewer) or the failures (they will become even more the default) but the messy middle, the shifts in power that occur when the companies that do survive become profitable quicker and spooked LPs return VCs to the role of perpetually-raising entrepreneur. 

In fact, it’s already starting. On October 25th, New York Magazine published an anonymous essay titled, “Confessions of a Middle-Class Founder”. The author details what it’s like to run a profitable startup with no immediate path to a rocketship exit. “You could call me a middle-class founder: proprietor of a business you may or may not have heard of, tenuously wealthy on paper, by no means a failure but not yet a success, chugging along in the twilight of an era that minted more giants and more waste than any other in history,” they write. The comments on the piece are overwhelmingly positive: “fantastic writing, he either missed another calling or found one here - would def read more.” 

I’ve booked myself the aisle seat for this flight. 30C, as it says on my boarding pass. When I book travel for my husband and I, I always book him into the aisle and myself into the middle seat so that he can stretch out his legs but we can sit together. As I am boarding the plane, I overhear the woman at the counter tell someone “I’m going to move 30C,” and sure enough my digital boarding pass refreshes. I am now in 30B. The dreaded middle. Nothing is true until you see it reflected in your bank balance.

The men on either side of me have claimed the arm rests so I am resting my hands on my knees. I am also leaning slightly forward, because I cannot lean all the way back without coming into contact with at least one of them. I should say that I don’t have a problem with touching strangers. I once let a stranger on the subway sleep on my shoulder simply because he seemed tired. But it does feel a bit unfair, to be infringed on in this way. I turn up the Lou Reed song I’m listening to. 

Suddenly, Elon Musk’s icy gaze appears in the aisle. A man is holding up Walter Isaacson’s new biography of Musk to show the man on my left. Here is yet another example of a well-trod genre, the startup founder hagiography. “Having made a pattern of writing biographies of important men—and one important woman, Jennifer Doudna of CRISPR fame—Isaacson is now in the position of a kind of kingmaker. To keep up his pattern, everyone he writes about implicitly is branded a genius,” says Elizabeth Lopatto, reviewing the book in The Verge. 

Over the course of the flight, my companions’ arms will slip further across the armrests until I am being elbowed in both ribs. There is no way for me to position myself that doesn’t reckon with the stubborn reality of their position. We are symbiotic creatures, defying gravity together. I know how to pick my battles, I give up trying. 

Non-fiction trends in startupland don’t just include book-length hagiography, but the ambient knowledge work built around the ecosystem. Only a finite number of people can deploy or accept capital, but anyone can talk about it. Nikita Bier, the founder of Gas, recently tweeted: “The percent of people ‘in startups’ who only do things adjacent to actual work (podcasts, newsletters, invest) feels like it’s growing exponentially.”

Only a finite number of people can deploy or accept capital, but anyone can talk about it.

But my personal favorite was Bier’s trollish follow up, “How does a newsletter writer keep their spouse attracted to them?” I don’t have time to detail how I personally do it, but as Gen Z VCs can’t get deals through (or see no path to advancement) the amount of podcasts and newsletters post-ZIRP is only likely to grow. I suspect that most of this media will not be as interesting as Founder vs Investor because it will be made by people who haven’t made anything. 

I do have critiques of the book, however. There’s a little too much teasing––as if the statements made about the power dynamics between founders and investors are special, taboo secrets and not something any smart person would immediately understand. “You may find some rhetoric to be charged, provocative, perhaps angry at times,” writes Zalman in a note at the end of the book. 

For me, becoming initiated into venture capital was similar to going to an elite college after public high school. I learned to rattle off the prestigious schools my classmates attended: Phillips Academy (Andover), Stuyvesant High School (Stuy), Choate Rosemary Hall (Choate). It’s low level code-switching to feign knowledge of Andreessen Horowitz (Andreessen if you’re talking, A16z if you’re writing), or Tiger Global Management (Tiger) or Union Square Ventures (USV). Although, there are hundreds of funds you’ll never hear about unless another founder introduces you and it’s always two dudes in Estonia calling themselves “lunchbox capital” or some shit. (You can think of those as the Pennsylvania boarding schools.) 

Neumann compares capital to water: “The venture capitalist is the bottle; they’re just a snazzy vehicle for the money. If you’re headed out to explore the desert and someone offers you a Dasani, you don’t sit around until a Fiji shows.” Aside from the fact that absolutely nobody wants Dasani, this isn’t breaking new ground. To me, the good stuff in Founder vs Investor only starts when things get emotional. 

At one point, Zalman includes an email she sent to an investor she was friendly with after he funded a competitor. The subject line was just “really?” and the body was a frowning face. 

Being a startup founder turns you into a piece of media, whether you write a book (or newsletter) about it or not. A founder’s destiny is to be “read” quickly by an investor, which is why legibility is so important. To be read wrong is to be refused. (To be read right is often to be refused as well.)

I remember a couple hours in a coffee shop in Midtown with an investor who was only in America for a few weeks. We talk for a long time––multiple smoke breaks for him, multiple bathroom breaks for me. He tells me about working for China’s Belt and Road Initiative in Africa. I tell him about my theory that the majority of companies in the current market can only be distinguished by their taste. He’s a very careful listener, but I can tell that I don’t have him. 

A founder’s destiny is to be “read” quickly by an investor, which is why legibility is so important. To be read wrong is to be refused. (To be read right is often to be refused as well.)

As we leave the coffee shop, he lights up another cigarette. I know that this is my last chance. The athlete’s arm inside my head winds up. “You mentioned having missed the opportunity to invest in X and Y early,” I say. X and Y are real companies and I make sure to emphasize their names, to show that I was listening, and to twist the knife as much as possible. “What if this is another such opportunity?”

He pulls his cigarette and smiles. “Our fund has so much money, even if I’m wrong, I could lead your next round.” I should have said, “What makes you think I would let you?” but my brain doesn’t get there in time. It doesn’t get there until I’m a block away, on my way back to Grand Central Terminal and by then it’s too late. I know I’ll never see him again. 

The other issue I have with Founder vs. Investor is that it’s hard to disentangle Zalman’s gender from her experience. Clearly, Female Founder vs. Investor isn’t the book she wanted to write, but at various key points it is the book we get. 

“Make your appearance a nonissue,” she writes. “Women are treated poorly, often by other women.” (True.) “In any case, looking dowdy is the best way to ensure the focus is on the business and not you. For women, and especially women who are attractive, I’d recommend knockaround clothes. Leggings, Doc Martens, sweatshirts, loose-fitting jeans, glasses instead of contacts.” 

The first thing you learn as a startup founder is that no advice is universal, but it’s the specificity of Zalman’s experience that sticks out. “A new investor pulling out a picture of a bunch of naked male torsos (pants on), covering their heads, and asking me which one was theirs in our first one-on-one dinner,” and “An investor putting his arm around me and kissing my forehead a block from our office,” are stories told as mere bullet points in a list of incidents she thought it was important to tell her board members about. She has every right to get on with it, but as a reader, I couldn’t move on as fast. 

Part of my desire to linger longer on the way gender shaped Zalman’s experience is because the book isn’t just post-ZIRP, it’s post Girl Boss––that shorthand for female CEOs of the ZIRP era. The Girl Boss was the ideal brand leader, but by becoming the face of her company she also became the face of its missteps. She was glued to her Blackberry, while her successor is more likely to be building things that make you want to log off. 

For Ashley Mayer, an investor at Coalition Operators and former Glossier VP of communications, the end of ZIRP is intertwined with the way female founders are perceived. “I perhaps naively hope that a silver lining of today’s particularly challenging startup environment is that we’ll all have less energy for scrutinizing women leaders outside of their business decision-making,” she writes in a recent Medium post. “When everything is up and to the right, the most interesting stories are the flaws and failures; that’s no longer our luxury.” I agree that this might be a gift to their public perception, but when money is tight, underrepresented founders are always the first to get washed out. 

Music has eras, and every investment thesis today is a response to ZIRP, just as punk was once a response to mainstream rock. Venture capital was the invisible curator of millennial consumption. It gave us shifts in distribution that begat shifts in culture. But the way VCs talk about their own culture is overwhelmingly stale. 

Music has eras, and every investment thesis today is a response to ZIRP, just as punk was once a response to mainstream rock.

There’s also the very real possibility that by using profitability rather than scale as the new wedge to evaluate deals that VCs are rendering themselves irrelevant. There are currently thousands of companies that raised their last round with the mandate to grow as fast as possible re-entering a fundraising market that is primarily interested in revenue. The ones that survive by achieving profitability won’t quickly forget this whiplash. Becoming a profitable private company means retaining control of your board. It means free speech. It means picking your own seat on the metaphorical plane.

There’s a reason that Malcolm Harris’s Palo Alto: A History of California, Capitalism, and the World is 720 pages (another outsider narrative). Venture capital has been around plenty long enough to tell its history. It just so happens it’s about to get interesting again. 

PLAYBACK

Snippets of streaming news — and what we’re streaming.

  • “Hollywood’s golden ages don’t arise from the miraculous congregation of geniuses. The industry’s default setting is for crap. Occasionally, the incentives change just enough to allow a cascade of innovation, but those incentives inevitably shift back to the norm.” (The New Yorker)

  • A Hot Ones and Chicken Shop Date crossover episode

  • Listen to our November playlist:

NOVEMBER 2023

NOVEMBER 2023 · Playlist · 30 songs · 11 likes

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MIXTAPE

Good links from the Dirtyverse.