Josh Elman wants to fall in love. He wants to make this investment. But the startup founder sitting across from him—bland and too confident for his own good—is making it difficult. The founder is not so much playing hard to get as clueless.
Elman is a partner at one of the tech world’s top venture capital firms, Greylock Partners. These days Greylock maintains not one but two offices in the San Francisco Bay Area. One is on Sand Hill Road, in Menlo Park, long the Wall Street of venture capital and more or less in the middle of Silicon Valley. But these days the center of gravity in the tech world has shifted north to San Francisco, and Greylock, like most of the area’s leading venture firms, now leases space in the city.
Elman is working out of Greylock’s San Francisco offices on a sunny Wednesday in the fall of 2017. It’s there, in a factory-chic office in a part of town thick with startups and rival venture firms, that I join him for a lineup of meetings that starts with this less-than-inspiring founder of a mobile-app company that’s been around for several years. “This is someone I’ve known a long time,” Elman tells me. “From before I was a VC.”
The ground rules of this fly-on-the-wall session dictate that I can’t name the entrepreneur or his startup. But there’s no stopping me from describing the man as an odd duck. I’ve sat in on my share of pitch meetings over the years. I’ve witnessed awkward mumblers who can’t make eye contact. In the late 1990s, at the peak of the dot-com madness, I tried not to visibly roll my eyes over the hubris of the MBAs descending on Silicon Valley with their charts and projections but not much else beyond a smooth, practiced delivery and the promise of “ubiquity” for whatever they were selling.
But never had I come across an entrepreneur as buttoned-down-boring as this one. His background looked good on paper and included a stint on Wall Street. He was older than the typical founder. Yet he didn’t seem to have the personality to lead a growing tech startup.
The founder, who also doubles as company CEO, claims that he isn’t at Greylock looking for money. “We’re not in fund-raising mode,” he says to me as we’re introducing ourselves to one another. As he tells it, he’s just an old colleague asking another for friendly advice as he preps himself to raise a large slug of money. This will shortly turn out to be bunk.
The founder takes a seat across a conference table from Elman and plugs in his laptop loaded with a multi-slide presentation aimed at convincing financiers to invest at least $50 million. To his right sits a top executive from his company: a wiry man with a shaved head, a deep r´´ésumé, and an intensity that suggests he would crash through a wall if that’s what it took to win. “We literally were making changes in the car a few minutes ago,” the founder tells Elman. He’s aiming for nonchalance, but it comes off as an obvious ploy to lower the stakes on a high-stakes meeting. He has no doubt been sweating this moment—and every slide—for weeks.
It might be overstating things some to say that pitching Greylock (as a Newsweek contributor wrote in 2014) “is a bit like being a rookie pitcher stepping onto the mound at Yankee Stadium—with Babe Ruth walking up to the plate.” But there was no doubting the firm’s supremacy. Greylock had been an early investor in both LinkedIn and Facebook, when $27.5 million bought nearly 6 percent of a company today worth more than $500 billion. (In other words if Greylock and its limited partners—those putting up the money that Elman and his partners invest—had never sold a share, that $27.5 million would be worth $30 billion today.)
The also bought early stakes in the music streaming service Pandora, which was worth $2.6 billion at the end of its first day as a publicly traded stock in 2011; Instagram, the 13-person startup that Facebook bought for $1 billion in 2012; Tumblr, the microblogging company that Yahoo purchased for $1.1 billion in 2013; Zipcar, which Avis paid $500 million to buy that same year; Dropbox (a digital storage service), valued at $12.7 billion when it went public in 2018; Medium (an online publisher); and Airbnb.
Greylock has the economic means to provide the CEO with the money he needs to build out his idea and also the connections of Elman and his partners, along with the services of the eight full-time recruiters who work for Greylock and its in-house communications team if a startup team needed help with its messaging. (A lot of the big firms provide these kinds of ancillary services, to increase the chances that the portfolio companies it funds are winners.) Quite simply, Elman could make his company.
This is not the founder’s first time pitching Elman. That’s obvious a minute or two into the meeting. “I want to start by thanking you for calling BS on our numbers the last time we met,” the man says. Elman fills me in later. A year or two earlier, the founder had offered revenue estimates based on the brightest assumptions—“and then basically he doubled everything.” But apparently Elman has a soft spot for the CEO. Or at least he sees potential in his company.
The founder had been struggling to find the right business model, and Elman has been helping him find the right market for his app, even if he hasn’t been willing to invest yet. Now, several business models later, the founder is certain the company is positioned where it needs to be. “We really appreciate all you’ve done to help us hone the business,” he says. A small smile appears briefly on his face but disappears immediately, as if someone has snapped shut the blinds.
“I’m just trying to be a blank slate here,” Elman says helpfully. Elman is of average height, with the chunky build of someone for whom exercise is largely speed walking between meetings. He has thinning hair and blue eyes behind a pair of stylish metal glasses. On this day, he’s dressed in a blue T-shirt under an untucked plaid shirt, jeans, and running shoes. He’s an upbeat, if fidgety, presence in the room, with a puppy-dog spirit, all nods and smiles. He almost leans into the presentation, as if primed to be delighted by whatever an entrepreneur might utter next.
An early slide boasts of the tens of millions of venture dollars his company has already raised. The smile dissolves from Elman’s face. His fingers absentmindedly find a pen and begin playing with it. The VC within seems almost offended that a founder is boasting of blowing all that money in search of the right market. Elman lets another slide or two pass but then asks the founder to go back. “You save that for the end,” he says of the amount of venture money raised already. After the meeting, Elman is blunter: “He had burned through”—here he gives the exact number, but, suffice it to say, it was closer to $100 million than to zero. “And he’s putting that up at the top of his slide deck like a selling point?”
Elman’s mood brightens when the founder starts talking about the competition: fat, established brands not tech-savvy enough to offer much in the way of the competition because of “legacy systems” hobbled by “the pre-mobile economic model.” He boasts that most of his growth has been “organic” rather than paid, which has allowed them to pick up users without much in the way of customer-acquisition costs.
All of this is encouraging news for a mobile-app maker wanting to be on the smartphones of hundreds of millions of people around the globe. Millions have already downloaded the app. True, most aren’t yet paying customers, but the founder shares some clever ideas for getting anxious parents and others to pay monthly for the premium services they’re selling.
The smile returns to Elman’s face. “This is the first time in a meeting with you where I get the investment thesis,” he says. Third parties are already paying millions to gain access to the audience they are aggregating: to advertise their services or to access data about its users. And there’s the promise of much more. Elman does some quick math in his head and encourages the founder to be bolder in his pitch. “Play up that this is a ‘billion-dollar opportunity,’” he suggests.
Elman is observant, fast-thinking, fast-talking; he doesn’t seem to miss much. The founder, by contrast, is slow to pick up on social cues. Dour and unexpressive, he plods through the prepared presentation—which Elman continues to interrupt. “The big question is defensibility,” he says. “Couldn’t any number of big companies do exactly what you’re doing?” He lists several, including Google and Facebook. “How do we know you’re the only ones who can cash in on this honeypot?” Looking at me, Elman says, “That’s always the question.”
The CEO doesn’t attack the question so much as brush it aside. But here his sidekick offers a far more convincing argument that gets Elman nodding and smiling happily. Another slide gets him talking about burn rate: the money a company spends on salaries and other costs each month. At this point, the founder’s company is burning through less than $1 million a month. “If you ramped up your burn rate to closer to 3 million, no one would freak out,” Elman advises.
From where I’m sitting, the message is unmistakably clear: Elman is telling his old colleague to mash his foot down hard on the gas pedal. Spend more now to dominate the market and put distance between yourself and any potential rivals. Prior to becoming a venture capitalist, Elman had worked at Facebook and Twitter. He knows something about growing a tech company. Yet rather than pause to consider the VC’s comment, the founder bats it down, saying dismissively, “I’m like a Depression baby when it comes to spending.”
Every venture deal eventually reduces to the “valuation”: the paper worth of a company. Coming up with that number is necessary for the investors to figure out their ownership stakes. For example, a startup is valued at $20 million (the “pre-money” valuation) if the venture capitalists are spending $5 million to buy a 20 percent share in the company, or one-fifth of $25 million (the “post-money valuation”). The CEO, perhaps feeling emboldened by Elman’s encouragement, offers, “I think it should be a $750 million valuation.”
Elman squirms in his seat. He pulls at his face and tugs at his clothes. It’s never easy to bring up what venture capitalists call a down round. The tech graveyard is crowded with companies that were valued at $400 million when they raised a C round (a third round of funding) but only $200 million (rather than, say, the $800 million valuation the founders had been counting on) on the D round.
That scenario dilutes the ownership stake of the founders and the company’s initial investors—and also all those early employees who had been hired with the promise of owning a sliver of the company. Elman suggests the possibility of a down round, but the CEO shudders at the unpalatable prospect of bursting the bubble of all his hotshot programmers banking on a big payoff once the company hits it big.
“My engineers would mutiny if I even bring up a down round,” the CEO says, slamming shut the door on further conversation. There’s more talk: about possibly changing the company’s name, its slogan, and ways they might improve their pitch. “It’s time to pull together a narrative,” Elman tells the two men.
The art of being a venture capitalist means never saying no, even if you rarely say yes. Greylock Partners met with several thousand entrepreneurs in 2016—and made 16 investments that year. Yet what if the startup that struck you as a dud in a first round—the A round—catches fire, and you and your partners want in on a B or C round? Or what about that entrepreneur’s next company? Elman offers the founder only encouragement as we say our goodbyes.
“This is great. I want to lean in and talk to the team,” Elman says, referring to others inside Greylock. “The last time we met,” he tells the founder, “I was 75 percent sure what you were proposing would work. Now I have a higher confidence range.”
On the way to the next meeting, Elman gives me the arguments against investing, starting with the CEO himself. “If we were to invest, we’d have to have a difficult conversation about whether he would be the CEO moving forward,” he says. The valuation was another possible deal killer—especially when the company’s founder had just told him that they would probably lose their best engineers if forced to accept a down round.
“But for argument’s sake,” he says—and then proceeds to outline the opposing views: Yes, the company has blown through a lot of money in search of a working business model, but it still has multiple millions in the bank. More importantly, he adds, the company has been booking significant revenue, and all the numbers point in the right direction. “They’re no longer scratching and clawing the way they were,” he says.
Maybe a 40-fold increase in revenue over the next 18 months, as the founder imagined it, is on the giddy side of optimistic, but what if they grow 20 times? Elman does some quick calculations in his head and imagines a time in just a few years when, based on even these relatively more modest growth numbers, the company is generating $300 million or more in annual revenue.
A big smile flashes on his face. “Then,” he says, stopping to look at me, “it becomes interesting.”
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