Reacts: Chris is Back With Controversial Thoughts on the Last Few Episodes

Chris: The answer to the question is put yourself on their side of the table and get them to understand the terms they think are clever, are stupid. And if you can't rationalize with that investor, now I'm being a little hyperbolic. I would rather shut the company down than partner with someone like that.

 Hey, I'm Chris.

Yaniv: And I'm Yaniv. Chris, you're back. I'm really excited to have you back. in this episode, we're going to have a special Chris React edition. Chris, I know you've been listening helplessly to my episodes with various guests and shouting at us with your own thoughts. As you listen, here's your chance to finally share your thoughts.

Can't wait to get started.

Chris: Yes, absolutely. And if I've been listening to the last four or five, I dunno how many episodes I've been away now felt like an eternity. We thought we would do a little bit of me chiming in with some of my own thoughts, my, conflicting opinions, my suggestions for the topics that we've done over the last, four or five episodes.

So If you haven't heard those yet, I definitely suggest you go back, listen to the back catalog, in my absence, and then, this episode will make a whole lot more sense for you.

Yaniv: We've missed having you on, so, good to have you back.

Chris: But before we get started, I just wanted to say, thanks for having me on your show Yaniv.

Yaniv: Welcome. Anytime, mate.

Chris: No, I have to, I'm forced to say you guys did an amazing job in my absence and I want to send a real big thanks and shout out to all the guest hosts.

They were really incredible and learned a lot. So, thank you to all of those and thanks for, powering along without me my voice is still not perfect, but it's getting back slowly but surely.

Yaniv: You still have a unique sound, but I sure it's gonna continue to get better. So a couple of things have happened in your absence, of course. one is we have unveiled our new brand.

Chris: Yes, that's right. I have been helping out behind the scenes and I'm so glad that, finally got out. And working with UntilNow was really great. you often work with agencies who can overcook or undercook certain things, but I think we ended up with something super intentional, super clean, they just did a really great job and they were fun to collaborate with Weren.

Yaniv: Yeah, absolutely. Uh, think I was a bit of a cynic at the start. I have no aesthetic taste, and I always thought these branding exercises a loaded nonsense. But, working with Kea and Fran and RIS from the UntilNow team, I'm a bit of a convert. I think they did a fantastic job.

I learned a lot along the way, and I think we've ended up with a really. Great clean brand that reflects what we're about.

Chris: I'm already a convert in terms of aesthetics and design and color and even pixel alignment. And, I've worked a lot of agencies on brands and, UX and so on. And, these guys were just really, in kind of the upper echelons of, people to work with.

So I'm really glad to be partnered with them. And the other thing that happened, while I was away is we hit 50,000. Which is pretty crazy.

Yaniv: Yeah, I mean, it's insane actually when you think about that, that's a, fully packed sports stadium of people listening to us. growing a podcast, it's, not easy. It's, not that instant reach you can get going viral on social media, but, we know, and I've spoken to quite a few people who listen to the podcast is the personal connection that you'll get listening to us, having us for better or worse in your ears.

And so it's a real honor to be part of so many of your routines, I suppose, and all the great messages we've got, from all of you over those 50,000 listens. And of course, the obligatory thing to say, we are just getting started.

Chris: The posts on, LinkedIn and on Facebook and on Twitter, people sharing their enthusiasm for the show and not just like, Hey, listen to the show because I'm obligated through the startup pack, but actually, speaking to the specific value they're getting, which is aligned with the intention of the value we're trying to put into the show.

That's really gratifying when they talk about it being action packed and pragmatic and, insightful, but like fun and personal. That's exactly what we're trying to do. And, to see that feedback from, the audience has been just so gratifying. so, yeah, thank you to everybody who's been doing.

Yaniv: Absolutely. Thanks so much. and actually, We do have a little favor to ask you all as part of the pact, as a little 50,000 listened present from all of you to us. we've just gone. Into video, right? Chris and I, we have faces for radio, but we've decided to go video anyway. so we have a YouTube channel, which has existed for a while, but hasn't had a lot of love.

And we're now posting video versions of every episode to YouTube, which I know is something that a lot of people have been asking for. But whether or not, you've been asking for it, well, we'd love if you. Channel a follow on YouTube. we currently have six subscribers. I think Chris, you and I are two of them.

I think another one might be my mom. we definitely have a, big mountain decline there. So if you wanna give us a little present, go straight to YouTube now. Subscribe to the startup podcast. that will start to get us more visibility through that channel too.

Chris: So let's go through the episodes that you guys did in my absence, yanev, and, I have just a few thoughts to chime in on each topic. Some of it to reinforce what you guys already talked about, some of it

Yaniv: Disagree a little

Chris:  To disagree a little bit.

Exactly.

Yaniv: I know people have been missing our disagreements, let's jump in.

Chris:  So the earliest episode that I wasn't on, was talent density. Is that right?

Yaniv: yeah, I believe so. That was with Henry from Mutanix.

Chris: Packing your team with highly talented people and being really discerning about who you hire and how you activate and motivate them to build a great culture and a great high performing team, which I thought a really great episode. the one thing I wanted to touch on or rather emphasize is that, High quality talent is unfairly distributed.

If you think about a long tail distribution curve where 90% of the talent comes from one or 2% of the, population. Steve Jobs used to refer to it paraphrasing now, but the idea of.

A team of a plus players can run circles around team of B or C players. I've bumped into a lot of founders who are bumping into the salary expectations of that kind of talent, immediately start feeling a sense of, well, this is unfair, or it's out of band, or, I can't afford this. And the thing I wanted to emphasize is the goal is not a fair distribution of salary across your team, but rather you pay for what you get. that's not to say that you should be, bent over a barrel or something.

But there needs to be just this acknowledgement, about the value creation of that 1%, 2%, 5% top talent. And to think of remuneration or compensation, in a way can measure it with that value and the scarcity and rarity of that.

Yaniv: I just wanted to clarify something because I agree with you, but when you talk about unfairly distributed, I think I've got a picture in my mind, which I think sort of speaks to this, which is, you might say that talent or intelligence fits on a, bell curve, a normal distribution. Right?

But the interesting thing that happens is when you take the talent at the. extreme end of the bell curve, the impact that talent can have doesn't follow that normal distribution. Instead, if you look at the top 1% of talent, they can deliver 10 times the value, the impact, the output that just slightly less talented people can, right?

There's this real premium to people who are the best at what they do. this is obvious in, sports and arts and those. Fields where it's like, unless you're one of the best in the world, there's no point. And I guess in our space, perhaps it's a bit more forgiving.

You don't have to be the best in the world, but if you're not one of, the very, very good people, if you're the next layer down, the amount of value you deliver is way less. And so to your point, when you get this like nonlinear level of output and impact, you need to be willing to pay for that.

Chris: Yeah, and I've described this before on the, podcast, but I've literally worked with startups and teams and founders where it's taken 6, 12, 18 months to achieve the same thing. Over 3, 4, 5 weeks with an a plus team. And the result in those five weeks was better, sharper, and more productive than those 12 or 18 months.

The value of that, the opportunity cost and the impact of that is almost priceless. And so you really need to understand that. And the other thing that's, I think maybe not obvious. If you're working in a small business, you know, the first episode we ever recorded was this idea of small business syndrome.

If you're working in a small business where the scale, the upside is limited, then paying exorbitant fees or compensation for AAA talent. Has a limited upside as well, but when your upside is exponential and global and disruptive, the value of that upside is limitless.

And so the premium there is different again.

Yaniv: There's this great quote, I think it's from Jeff Bezos, which says, in baseball, you take a big swing and if you hit the ball really well, you can get up to four runs, right? You get a home run. Bases are fully loaded. you get four runs.

But he said in business sometimes you can swing and hit and you get a thousand runs. There isn't this upper cap the way there is in more constrained environments, That's the logic of the long tail distribution of the big bet of having the best people.

Chris:  But if you're not used to startup land and software, land and internet scale and network effects, it feels like you can only get a four or a five or a six, right? In business. But actually you can get a thousand or 10,000 if you really hit it outta the park. And so a lot of founders I think, who are listening to the show outside of Silicon Valley, come from a traditional business background or come from a culture environment where they see a lot.

Traditional business operations. exponential outcomes are unintuitive, I think. so all of that is what I wanted to really bring home and, highlight, about the talent density episode.

Yaniv: Okay. so if we wanna move on then to the next episode, which is about investor communications.

Chris: Yeah, so this one I thought was an excellent episode Jessy always does an incredible job articulating herself and, and exploring the problem domain with you. The only thing I wanted to chime in here was the specific format of, what we used at Uber, which was, metrics up top, those key metrics that Jessy and you discussed.

what is the North Star metric that you're paying attention to, growth and retention and revenue maybe. And at Uber we always used to do, tld. Which was too long, didn't read like what are the five bullet points or three bullet points if I don't read the rest of your email, what do you want me to walk away from?

Then we put that, very, very top and then we have T3 B three s. So what are the top three things? And the bottom three things, bullet points, not paragraphs and paragraphs, ideally expresses themselves in very actionable, metrics driven ways.

And so that way it was really, really focused. It was, tldr, first, those North Star metrics. And then top three, Bottom three things, it's a very crisp format Now, there are all sorts of formats that might work for you. I think to Jesse's point, consistency over time is the most important thing.

and a focus on real pragmatic and actionable updates is, kind of the next most important thing, not just a bunch of fluff and paragraphs and paragraphs of words. and then the format I like personally is that T three B three,

Yaniv: I've seen a lot of good, bad, and ugly, and I, I made. Point in that episode that I never really understand the difference between bad and ugly. So once you conflate those, you've got good and bad, which is very similar to t3, b3,

Chris: Yeah, exactly.

Yaniv: I'd be interested in your thoughts too.

We were sort of talking about monthly versus quarterly updates, and I think Jessy and I both came down fairly strongly on the side of monthly updates. Is that something you would agree with?

Chris: Yeah, I absolutely agree with monthly, startup, a week is an eternity and a month allows you to understand the trajectory of given subject and understand what you might do to mitigate or, manage a certain risk or a certain outcome, that's plenty of time to summarize what's going on in the business.

I think weekly is probably too much, and quarterly is way, way too slow.

Yaniv: And that again, speaks back to t3, B three, simple metric driven, not too long because I sit on both sides. I'm an investor and a founder, founder's time valuable. So if you're spending.

Hours and hours and hours writing a monthly investor update that's going to impact your ability to run the business. any good investor is not going to want that, so you should be able to write your investor update pretty quickly so that you can then afford to send it every month.

And so there is this element of automation templatizing, just making sure that you can do this without it being like a giant stress and a giant hassle for you.

Chris: I've actually seen some founders send like a whole letter in paragraphs and paragraphs, which I think is way too much. And I've also seen founders create a very glossy, like pdf, like a flyer, none of that is necessary. the update should be in the body of the email should be pithy and actionable and pragmatic.

This is not a exercise in marketing communications. It's an exercise in, keeping your closest partners up to date with, real, actionable information.

Yaniv: Works for me.

Chris:

 So the next episode you guys, did was the investor terms, and fundraising terms and, clauses and concepts to watch out for Yanev.

And I thought that episode was just really fantastic. reading a term sheet and understanding these clauses is everything when you're a first time founder. and, the only thing I found myself, of screaming at my Spotify playlist was, you guys were being so diplomatic, like, so diplomatic about these terms.

It's like, you gotta want to watch out for this and it's probably not a good idea if you have one of these. and I was like, guys put a finer point on this. if you see warrants in your term. If you see tranches in your term sheet, unless there is a very, very good reason you should run, run, don't walk away from that investor, or have a very, very clear conversation with them.

You do not want warrants, especially warrants tied up in like, well, we're gonna help you a little more and we're gonna do this other stuff for you On the side, you're either an investor, you're not, you either have skin in the game or you don't, you should not need warrants in order to do follow-on activities.

And tranches. Signal that you are micromanaging in the worst possible way. Yaniv, I love the way that you said this, which is you're like micromanaging upfront, which is like the worst kind of micromanaging. You put your capital at risk and by putting it at risk, you get equity back. That's the game you're playing.

Everything else is revealing as an investor that you don't know the game that you're. and as a founder, you need to be careful about those investors. So that's the thing I wanted to do is just make that really pointed for the listeners this is not okay.

Yaniv:  So here's an interesting thing and I think makes for a good discussion because it's not that I disagree with you, but. We have a lot of people listening to us. and you know, I'm, seeing firsthand, I've mentioned this on LinkedIn recently. This is a very tough fundraising environment at the moment.

And so a lot of people don't have a lot of options, sometimes your back's against the wall and the question becomes, okay, if you get a shitty offer, do you take it because. that or nothing, or do you hold out and where is that line? One thing that I guess I wanted to distinguish in these more difficult times is the difference between an investor who is idiotic or predatory on the one hand, and an investor who is willing. Take you on as a distressed asset, but needs a lot of protection.

Right? There are times for that, probably not for trenches, but there are times for an investor to say, look, we think you are currently in a state where your chance of a good outcome is relatively low. We'd like to back you, but in these circumstances, we need additional ways of protecting our downside and realizing additional upside in order for that to be viable.

Chris: So let's discuss valuation. Let's discuss, the capital allocation. Let's discuss this being a bridge to a or a bridge to seed. Let's discuss, working more closely together. Let's discuss how you're gonna introduce me to your 17 other investors to dilute your risk. Let's discuss 17 other lever.

Without you micromanaging me upfront or, secretly backdooring additional equity with warrants. because what you're gonna do, Mr. Investor, is you're going to hamstring my cap table and you're going to create a self-fulfilling prophecy, which is to mitigate the efficacy of that next round.

don't care how distressed we are, I'm not gonna take on more distress because of your, lack of risk tolerance.

Yaniv: I am inclined to agree with you, and especially trenches, like trenches are, idiotic, right? They betray a fundamental misunderstanding of the model. but I guess another one I wanted to bring up as the devil's advocate here is you said, let's talk about valuation.

Quite often from the founder side, it's either coming from the founders or from earlier investors. There is this strong desire to avoid a down round, meaning you don't wanna raise at a lower valuation than your previous round. And then a new investor will come in and say, okay, we can do that, but we need to structure the investment in a way that you can come out and say, it wasn't a down round, so you can get your headline valuation, but we need to get ours a different way if you're not willing to take the down.

Chris: Yeah. Now look, if you are a sophisticated founder who is worried about market signaling, and you've been in TechCrunch and you're trying to protect your headline and blah, blah, blah, and. Are using warrants or other techniques to try to protect a thing you are trying to protect for your narrative that.

You as a founder playing a particular game. Now that might work in public, but it'll quickly fall apart during diligence for the next round, right? So you need to balance this kind of PR narrative. You're playing with the reality of the diligence of the next round, because remember, right?

You are not running a small business where you earn capital and spend it, you are running basically an equity inflation game. Like if you wanna be really mercenary about this and really like cynical about this, the game is to tell a story, a growth story that is driving 10 plus x multiple at each round.

And if you like, Go in there and your, investors are looking at this cap table and going, what the hell are you doing? This story doesn't hold water. This doesn't work. Then you are, crippling the next round. You know, we had a whole episode about the poker game. It's like accepting a bad hand thinking that you'll hopefully make it up on the next hand or something.

It doesn't work that way. You have to be building that story, building that hand, all the way to the.

Yaniv: Okay. I'm enjoying this little conversation, so let me just take it to its logical conclusion then, I think the analogy is interesting because this is about knowing when to fold them. Let's say you have. Have three months runway left. You have one term sheet available to you and it has some shitty terms in it,

Chris: Mm-hmm.

Yaniv: and your option really is to take that term sheet live, to fight another day.

Taking all that, problem that you mentioned, Chris, you know, the, fucked cap table and everything else, the annoying investors, or to basically wind down your startup, what would you advise in those circumstances?

Chris: So I love that you brought this up because the next episode I think I want to do are at least one of the next episodes. So stay tuned. Subscribe Now, is really the subject of negotiation I was working with a founder recently who, was trying to exit their company to an acquirer, they were just getting really, really shitty terms, terms that were gonna basically scuttle a deal.

It just wasn't worth it for the founder he was trying to negoti. the specifics of the terms how much budget would he have after the acquisition and freedom to make managerial decisions and, who would he need sign off to make certain choices and all this kind of stuff.

They were kind of engaging at the level of the terms, and what I suggested to him was, you need to take a giant step back with this acquirer and discuss at the level of principles what is it that you want from this company post-acquisition. And what you probably want, since you are a bigger company, you've probably got a bit of a calcified.

culture, a bit of a lack of innovation, a lack of agility, a lack of this entire line of business, right? A lack of managers with emotional buy-in. And so probably what you want from this deal is a small, agile, , highly energized. Division building a whole new line of business for your legacy, big co company, right?

And he was like, yeah, that's definitely what they want from us. It's like, so what you want is, at the point of acquisition, a motivated, incentivized founder with a budget to operate with the latitude to make managerial decisions so that the company gets what it needs to deliver on the acquisition. So as soon as he took a step back and spoke, What does the acquirer want?

What does the person on the other side of the table want? As soon as the deal is closed, you are now sitting on the same side of the table, right? So when you look around at each other on the same side of the table, you're like, Oh shit, we fucked this deal because we're no longer incentivized to do the same things when we're on the same side of the table.

Right? So that immediately changed the tone and tenor of the conversation, and now the deal is back on. the same thing should happen with a VC, right? What you want when you invest in this company is for someone else to invest in it at 10 x valuation in 18 months. And so, do you really want to fuck the cap table in this way?

Do you want to hamstring the management team in this way? You are shooting yourself in the foot. You might as well give us nothing instead of giving us millions of dollars and pissing it away on this micromanagement tranche strategy. And so that's the conversation you want to have with whoever is on the other side of the table, which is pretend for a moment the deal is closed.

What do you want to happen next?

Yaniv: You still didn't answer the question, but I, enjoyed your dodge.

Chris:  The answer to the question is put yourself on their side of the table and get them to understand the terms they think are clever, are stupid. And if you can't rationalize with that investor, now I'm being a little hyperbolic. I would rather shut the company down than partner with someone like that.

Yaniv: Okay. And there's the answer. it does come down to that, poker thing where your best outcome is to succeed and your second best outcome is to fail first.

Chris: Exactly.

Yaniv: Taking on more capital just so you can like spend another year or so bleeding out is probably not, the smartest thing to do.

Alright. And now in our little trip down memory lane, we're coming up to the last week's episode, which was my episode with Jenny Rudd about communications. What are your thoughts on that one? Chris

Chris: I really love the episode and, I think it came up or was touched on, and a a point I just wanted to emphasize, which is this idea that a company is like a network of brains, and like any network, the more nodes.

With the more bandwidth between those nodes, the better, right? That's the real definition of network effects is that the more high quality nodes with high quality bandwidth, the better in the network. And so I really love that metaphor that you use John Evan, to think of, that substrate of brains in a network functioning and aligning together.

And that being almost the fundamental building block for all other success in the company, I thought was a really clever way of framing it.

I also wanted to stress. The root of most bad communication besides bad communicators and bad cultural values is, fundamental misalignment. So actually, I posted about this on LinkedIn during my, little voice rest, you either deal with ongoing misalignment at the root.

You have a big hard. Protracted conversation where you force hard trade-offs and decisions about who your target customer is, what your target market is, what your target problem is, what your go-to-market strategy is, and force, the elimination of options, which is very hard for a lot of companies to do and a lot of teams to do who love to equivocate and split the difference.

You either force that decision and that discussion upfront or you will face ongoing. Disagreement, misalignment and bad communication every day and every week. And the problem is oftentimes there isn't an individual. Or a group of individuals who are deputized or empowered to force that hard conversation with the leadership team.

And so you end up having this ongoing misalignment and therefore ongoing bad communication that you can't quite understand, like, why can't we get on the same page about this? Why is there so. Argument and contempt and disagreement and eyerolling and it's this root level misalignment at the very, very tippy top of the dependency tree of alignment.

Yaniv: Trying to figure out how we can make it fit this network metaphor. And I nearly wonder if it's at the protocol level, right? In order to communicate effectively, you have to have certain shared assumptions. and if you don't do that, then your communications are always going to misfire.

Alignment and communication are very much two sides of the same coin. And it's tricky, right? Because you must use communication in order to drive alignment. It's the only tool you have, but misalignment will cause your communications to fail.

And so that's why it's, a special kind of conversation you need to have when you're aligning because you're setting these fundamental rules of engagement on top of which, Of the rest of your day-to-day communications will be based.

Chris: I often find if you’re trying to drive alignment using your best communication tactics. And you, still can't get there. It's like a, Russian doll right? There is another layer up you need to go and another level of specificity. So you need to go up an abstraction layer and get more specific, and exclude more possibilities.

The abstraction layers go higher than you would imagine, and the specificity you need is often much more specific than you would imagine. And so to the degree that you continue to experience this pain, go back, go up a level of abstraction and get more specific.

Yaniv: One of the themes in this communications episode is, soft skills are the hardest. And you can't build a great complex organization that does great technical work if you don't look after the, human side.

The reason I bring that up is that, as you were talking, I was thinking how often do misalignments say between founders and Jenny mentioned, co-founder disagreements being one of the biggest ones like what sort of. Do you want to build? Right? Like do we want a venture backed billion dollar business or do we want a smaller business?

And then even going up a level which is like, okay, what's your motivation for being a founder in the first place? you know, one of them wants to like make their dad proud, another one of them wants to become massively rich. All of that stuff filters. Layer of abstraction, down layer of abstraction till it means you're trying to decide how to prioritize your next quarter, and somehow you're just not on the same page.

So you really have to dig deep.

Chris: Yeah. I've actually worked with founders where I actually went all the way to that level, which is What is your goal? Is it to have a venture? Silicon Valley style, outcome and even like, how big does that outcome have to be for you to be successful? What are you actually aiming at? And to your point, Yaniv, you could go back a step to why do you wanna be a founder?

You know, you said, well, because I wanna make my dad happier or something. You could even go back a level behind that. It's like, why do you wanna make your dad. why would that make you happy? And, oftentimes running a startup is like therapy.

And you need to sort your own shit out before you can sort the shit out with your founder and then you can avoid infecting the rest of the company with your. Cultural ticks and your trauma and your damage. Right? And so it's, it's so, so important and so interesting. So that's what I wanted to chime in on the communication level.

And I, love your metaphor of the protocol level. It's like layer one, handshakes before you get to layer two and layer three. So that's really, really cool.

Yaniv: All right. Well, I think that brings us up to date, Chris. you've had your commentary on, the past four episodes. Is there anything you wanted to add?

Chris: No, I'm glad to be back. I apologize for my, horse throat still, but it should be getting better every week now. So, thank you all for putting up with that and thank you all for listening. And, yeah, sticking with us. It's been so great to see the with a little bit of tactical distance from the day-to-day.

It's been really interesting to listen to the show as a third party, it's great to be back.

Yaniv: Now that you've got the power of your voice back, I am sure you, cannot wait to deploy it, giving sage advice to a variety of startups. So if people do wanna work with you, how can they do that?

Chris: I've carved out time in my day to work with founders on all the issues we discuss on the startup podcast. So if you'd like to learn more about that, do visit chrissaad.com/advisory where I explain what I do, how I do it, and how you can get in touch with me,

Yaniv: Just once again, folks reminding you all. The startup podcast packed and with a special twist on it. If you listen to the startup podcast, and you get value from it, we are asking you to please follow us on a YouTube channel in your favorite podcast app and give us a rating where you can, that really helps new people to find us, and it's only a couple of minutes out of your day, and it means so much to us.

If you wanna find us online, you can send us a tweet, Chris, sad or why Bernstein, at Twitter, or you can follow us on LinkedIn where honestly, I, spend most of my time these days.

Chris: Very cool, young. great to join you.

Yaniv: Thanks everybody for 50,000 downloads. Looking forward to the next 500,000. see you on the other side.

Chris: Catch you the next one. Bye-bye.