Summary of Episode
#32: Andrew Gershfeld, venture capitalist and partner at Flint Capital, joins Annaka and Ethan to share his thoughts on how startups should navigate the current economy. As a VC investor, Andrew provides us with insights on navigating VC funding and preparing for difficult economic situations.
About the Guest:
Andrew Gershfeld is a partner at Flint Capital, a VC firm that has invested in big-name companies such as Source, WalkMe, and Flo. Andrew began his entrepreneurial journey in management consulting and eventually led his own startup. Andrew emphasizes the importance of listening and growing empathy while working with startup founders.
Podcast Episode Notes
From a scientist to a startup founder, Andrew’s entrepreneurial journey [0:58]
Management consulting and understanding venture capital [3:32]
The importance of listening to others and understanding the challenges of entrepreneurs [5:15]
How investors may see economic turbulence and downturns [7:03]
Steps startups can take to prepare for and weather an economic downturn [11:30]
You should still try to get funding even if the economy seems volatile [15:08]
How evaluations have changed over the past few months [17:03]
Selling secondaries — selling existing shares of a company from one shareholder to another [20:02]
Down round — newly issued shares are priced lower than previous issued shares were priced [21:31]
How Flint Capital supports the companies they invest in to help prepare for economic hardship [22:22]
Downturns are an excellent time to start a business and VC capital is still there to support great entrepreneurs and great ideas [24:34]
Andrew’s advice for founders, “build your support circles” [27:30]
Full Interview Transcript
Annaka: Hey everyone. And welcome to Startup Savants. I'm Annaka.
Ethan: And I'm Ethan.
Annaka: If you're a returning listener, welcome back. And if you're new, this podcast is about the stories behind startups, the founders who run them, and the problems they're solving, today. Our guest is Andrew Gershfeld. Andrew is an ex-entrepreneur turned venture capitalist and board member to some pretty big companies, such as Flo Health.
Hey, Andrew. Welcome to the show. How's it going?
Andrew Gershfeld: Hi, thank you for hosting me. It's an amazing opportunity.
Annaka: We are super excited and we've had some great interviews surrounding venture capital before. So we're stoked to get more into this with you. And let's start with your background. You were an entrepreneur and now you're an investor and a board member at several companies. Can you tell us about the entrepreneurial journey? What kind of businesses did you start?
Andrew Gershfeld: Well, in fact, that was not a very straightforward journey. I'm a scientist by my major degree. I had my master's degree in physics and math, but during the last year at college, my friends and I decided to build a startup. Well, the idea was very clear, like a small pocket size projector that could create a high resolution image of a decent size. Let's say, like 36 inch diagonal. It was based on the tech that we were researching at that time. We built a prototype that was of a size of a typical PC of that time. It was 2007. So if you could remember the size of PCs, it was quite a huge-
Andrew Gershfeld: Yeah. So we decided to fundraise to create a pocket version of it. And I was the worst at science, from the whole team. So the burden of fundraising, creating business plans, and pitching investors, became mine. And in a few months, like about five months, we generated a term sheet for one of the hardware investors. But then the recession came and the deal fell apart. And the company didn't take the path we intended to make.
So one of our advisors suggested to me that I should go for management consulting for a while to get a better understanding of the business, et cetera. And he saw I was just a graduate. So he said, "Okay, it would be beneficial for you to learn more about business. I see you're interested in that." And I spent three years at management consulting.
And then in 2010 I started a new company. It was just around the time when the group home clones were appearing all over the world. And I made my own. I had a plan to bootstrap it, but very quickly realized that competitors that attracted VC money were taking over me. So the decision was to sell it quickly. In 2011, there was an M&A, and I decided to spend more time understanding the VC market and what it is. So, that's the story about how I came into the VC.
Annaka: Yeah. And how did you make the choice to transition into investing or did it just kind of follow the path?
Andrew Gershfeld: Well, in fact, because I was fascinated in how venture capital could dramatically accelerate the growth of the business compared to other forms of capital or other forms of growing the companies, like bootstrap, for example, it was curiosity that drove me there and the desire to build actually never left me. So the investment firm Flint Capital is our own startup. We treat it as a growing company that comes through all the stages of its life. Even though it is 10 years now. So it's a mix.
Annaka: Yeah. Yeah. I think there might be a personality type that's drawn into VC and investing and we had someone, their job they wanted to be in the group was an accountant. And I'm like, man, that's completely opposite from me. What is something you brought with you from your time as an entrepreneur that impacts your role as an investor?
Andrew Gershfeld: Mainly two things. First thing is the importance of listening to others. That both helps the entrepreneur to navigate the most effective path through all the challenges that they face. And it also benefits the investor's ability to make good decisions and to help their portfolio companies.
And the second thing is understanding the challenges of being an entrepreneur. Investors are very different than entrepreneurs. We are not at the steering wheel. So many who have never been there and done that. They don't understand what it means to lead the company, what kind of responsibilities, a company slash leadership. So I think that helps a lot, me and our team, that has that experience, because not only me, but all my partners being founders themselves, to speak the same language, to have the right kind of empathy to our portfolio founders, and to be there for them. That's one of the major learnings.
Ethan: So right now here in the US, and in lots of places around the world, we're working through a bit of a, let's call it, an unfriendly economic climate. So from your specific standpoint, what are you seeing in the world of startups and how long do you think this downturn is going to last?
Andrew Gershfeld: Well, I definitely don't have a crystal ball. I won't say how long. It can be a very, very large range of the estimates. So for the start of it all, I think there will be less money available in the market. And they will be allocated very differently compared to several previous years when we had almost ‘startup bonanza.’ So I think that would be the most impacting factors in the next couple of years.
Ethan: What do you think the kind of phases of an economic downturn are? I mean, are there kind of discernible, like this is phase one, everything is terrible. This is phase two. It's still bad, but maybe it's less bad. Is there any specific way that you kind of look at that?
Andrew Gershfeld: Yeah, mainly I think that we have passed the phase of accepting, majorly have passed the face of accepting the reality that there is less money in the market. It's harder to get investors being excited in what you're raising right now. It's a reset of retaliations that we will be facing soon. So I think the acceptance of the reality, this first phase, we already passed.
But I think the next phase is understanding where it all will lead us and what kind of challenges could be through that way. So I think we currently are at the moment, when most of the companies have to answer the question, they are already prepared to the worst case scenario, and what kind of that worst case scenario can be for them, because there are many of the businesses that would benefit on any kind of economic turbulence or downturn. For example, a lot of automation that is happening right now that helps to reduce costs and save real money for the enterprise and for the world, they will definitely be prospering through this time.
Ethan: So those kinds of Black Swan type companies where they just do okay for a little while and then something happens and they don't get hurt from it. They take a major benefit from it. Is that what you're saying?
Andrew Gershfeld: I would add here that the pandemic accelerated a lot of shifts to digital transformation. But then we have a cool down of the economy right now. And the cool down is usually good for turning on the efficiencies. And it accelerates another part of transformation. Like for example, AI, that enables a lot of things previously done by people and can scale up things dramatically. It's definitely a deflationary force that would help us to save more money and would save profits for enterprise and would definitely transform the kind of work people do. So I would say it's not just a purely Black Swan. It's just the acceleration of existing trends in both ways. First, awareness of the technology that the pandemic did, and now the adoption of the technology that economic downturns lead to.
Ethan: All right. So we've talked about a few of the different phases that downturns can take. We tried to get you to say how long it was going to last and you didn't take the bait. You didn't give us a prediction. That's fine. But let's move on to actionable steps. What is the first step that you would encourage a startup to take to prepare for an impending economic downturn?
Andrew Gershfeld: Like always, I would suggest that focus is the most important thing. And the first thing we did in our portfolio, we reached out to our CEOs and asked them to accept the reality that there's a downturn on the capital markets. They must prepare now because speed matters here. And historically, the companies that prepare in advance tend to survive better. So, they have to model different scenarios of the future and make sure that they can survive the worst, so that's the major steps that we encourage our portfolio founders to make.
Annaka: And as far as the planning and calculating, what things can startups and founders do to plan and prepare for the next 24 months?
Andrew Gershfeld: Well, it seems like when you are in that position, when you have some kind of unpredictable future, it's very important to prioritize your burn control, especially in the market where we entered right now, where the funding is limited.
So you should have the runway for at least this 24 month. A burn multiple, that is how much you burn to create $1 in a new era. This burn multiple should be as low as possible. And cash flow during the downturn is the most important. It is more important, sometimes. Then, revenue growth. I think in the current environment, it's definitely more important. So the reason is simple. If your company survives and the economy starts to grow and everything is fine, you'll be able to win the markets and the piece of share of the competitors that didn't survive.
Ethan: A moment ago, you mentioned focus. Tell us what that means to you. What should they focus on?
Andrew Gershfeld: Okay. So I think that major focus should be on how you spend the resources that you have. So focusing your investments. Resources are limited. So you should focus on investments that drive profitability and EBITDA rather than selling, accelerating, to the scale when you sell a dollar for 99 cents. So I think it's time to build product driven growth with healthy, unique economics, and it's time to build real business.
Ethan: Cool. So what are some of your recommended strategies for startups that just got caught up in the bad timing? They haven't gotten their funding and they're now seeking funding in maybe one of the least friendly funding times. What do you want to see those companies doing?
Andrew Gershfeld: Well, they should secure as much funding as possible. So you've got the recent round or like the previous round, go to the ones that wanted, but couldn't get into the round and offer them some extra space. Maybe you get a quick yes. Go to venture debt. Try to leverage that kind of funding option.
Accepting a flat, or sometimes a down round, like lower valuation, is still at the table. As I said previously, it's better to survive now than die and see how your competitors that were maybe doing not that great product have passed through that time. And the percentage of something valuable that survives, the small percentage of something valuable that survives, is much more valuable than 100% of zero. So I think that is the way.
Ethan: So you mentioned valuations. What are you seeing with the trends of valuations? I mean, is the math just completely different in how VCs are kind of coming up with these numbers? Have we reached the bottom?
Andrew Gershfeld: Well, it's hard to tell about the bottom because market timing, it's a very difficult thing to do. But on the other side, a good approximation, like a good example, what's happening with valuations is the NASDAQ index. And what you see with the public market translates with a certain time into the private markets.
The valuations of the growth stage company at the growth stage has been cut dramatically. We've all heard the stories of selling secondaries or making down rounds with the companies that were cutting 90 or 80% of their previous valuation down. On average, I would say we reduced to very healthy multiples on a growth stage. And because investing at different stages is the game of who will come next and how much the next investor will be willing to pay, when you see that the growth stage investors are not ready to pay high multiples, early stage rates start to adjust their valuations.
I think we are getting into a more healthy environment right now. The difference is that, at the early stage, we have much more capital already committed to the funds and much more capital called already that actually enables a little bit of better capital influences in early stage, like seed and series A investments.
So maybe we will see less valuation plummeting in early stage compared to what we have seen at the growth stage. But what I'm saying is an average to the whole market. Of course, some companies will be doing great. They will see good unit economics, good growth. There will be a line of investors to put money in. And we would see very, very good deals for founders of such companies. But again, an overall trend has been, as I described, and so the baseline has been reset already.
Ethan: So you mentioned a couple of terms that I just want to get a quick definition on. Can you tell us what selling secondaries means?
Andrew Gershfeld: Yeah, sure. Of course. Selling secondaries is selling the existing shares of the company from one investor or shareholder of the company to another. It is different to issues of the shares when the company sells newly issued shares to an investor and the money come into the company.
When you sell secondaries, money doesn't come into the company. They come from the pocket of a new shareholder to an old shareholder, meaning that secondaries usually have a little bit better valuation benchmark, because it is a transaction between the party that is willing to sell existing asset to another party that is willing to buy existing asset for real money. Because sometimes investors that are buying newly issued shares, they can pay premium because they understand how those money will drive the growth of the company at the same time, when you sell secondaries, because money don't go to the company, you actually are buying and selling at an exact price that those two sides believe that asset's worth.
Ethan: Thank you. All right. One more. Tell us what a down round is.
Andrew Gershfeld: Okay. Down round is typically the investment round that is priced at a lower price per share than the previous ones. One, two or three previous rounds, no matter what. But if the price at newly issued shares, at a new round, is lower than any of the previous ones, it is called the down round. As a result of the down round. It usually dilutes previous shareholders more stronger than normally a flat round or an up round.
Ethan: All right. What changes has Flint Capital made to prepare the founders that you all have already invested in for the economic hardships?
Andrew Gershfeld: As long as we understood what and created our understanding of what would be going on or what is going on, we decided to make a larger allocation towards following investments, larger than we typically do. The goal is to give our best portfolio companies as much runway as they need to pass it over to the next level of metrics and to actually survive that period of turbulence.
So the initial idea was to focus a little bit more on the existing portfolio. We still continue to invest. We have launched a new fund that would be making initial investments, and we have done already few investments from that fund. And we also have launched an opportunity fund that actually helps existing companies, portfolio companies, that are doing the best, the gems in our portfolio to accelerate and have good support of money through their lifetime. Opportunity fund would be investing in later stages like series C and et cetera up. And so with bigger checks, just like 15 million or more.
Annaka: That is a good amount of money. Wow. So as far as we're heading into something, if we're going to actually call it a recession someday, cool. If a downturn, cool. Everyone kind of knows something's happening. For people that may still be planning to start a business, should they wait? Should they have all of their ducks all the way in a row before they go for it? Or do you think there's still wiggle room in the VC market to help people out like that?
Andrew Gershfeld: Absolutely. So I'm a venture capitalist and in venture capitalist, you have to be optimistic. Otherwise, you cannot write a check to something that actually exists only in the mind of a few people. So I think that a downturn is an excellent time to start something. We have seen it through many previous downturns. 2008 was a great example of new companies that are currently the tech leaders of the world that emerged in that period of downturn.
So I believe that this one would not be an exception. And in fact, in early stage, as I mentioned before in early stage, like seed and series A investments, there is still enough capital to support great ideas and great entrepreneurs. And we have seen that most of the companies, large companies, have freezed hiring, and many of them actually are reducing the number of… actually making the layoffs. Some companies are doing quite big layoffs, but the statistics shows that for example, tech talent from those companies that have been laid off, finds a job 95% of the time, like in a couple of months, in the startups, at early stages. And their expertise from this corps, for their knowledge, is very helpful for younger startups.
And I think that is a good flow of talent that actually accelerates the process of creating new companies. So there is no good time or a bad time. I think now is the right time to start something if you feel like you have a good idea, you have fund the market, and you feel that there is a business model and the need that could be served.
Annaka: Yeah. Yeah. I think of course Nike got it. Just do it. But I mean, it's good advice all the way around.
Andrew Gershfeld: Yeah.
Annaka: What is your number one piece of advice for entrepreneurs?
Andrew Gershfeld: Build your support circle. Being an entrepreneur has a lot of ups and downs in the mood, in the business, in everything, and having a support circle of people who can give you advice or just listen to you and just talk it through is one of the most important findings that I made myself through the time of being an entrepreneur. So I think that is something that everyone should be creating for themself.
Annaka: Yeah. And a lot of founders we've talked to have said, "Yeah, have your support network. Have your little mentor circle." And I'm always curious to know, how you find those people?
Andrew Gershfeld: Oh, I would separate a little bit those who give you more professional kind of advice from those who can be your buddies discussing some life-changing moments. But because the second ones, you create them through the time, but you definitely should know who they are before you're fully into something. Where, the professional ones, it's always good to talk to people and tell them what you're doing and listen. As I said, listen.
I'm always fascinated about how the tech ecosystem works in terms of supporting each other. When you tell someone that you are building something, usually people try. The initial thing, they want to try to help you. And we've seen a lot of times when very brilliant founders got very quickly to experienced CEOs, meeting with them and they became their mentors or advisors, just because well, people sometimes want to pass their knowledge and to feel still in the game, because many of the successful founders and the CEOs, they don't feel that kind of driving force when they're on the top of a large corporation or something like that.
They want still have that adrenaline and everything associated with the younger startup that is coming from zero to one. So the network is the best supporter here and telling people about what you are doing and what is the vision that you are pursuing.
Annaka: Yeah. So you have the happy hour support circle, and then you've got the business professional mentor circle. Yeah.
Andrew Gershfeld: Yeah.
Annaka: I think that sounds like fun. And how can our listeners connect with you or Flint Capital?
Andrew Gershfeld: Absolutely. So LinkedIn. Andrew Gershfeld. Always there. And my email, email@example.com.
Annaka: That's easy.
Ethan: Sure is. All right. But just in case it's not easy enough, we're going to put all of that in the show notes over at startupsavant.com/podcast. Andrew, thanks so much for coming on and sharing your stories with us. This has been really great.
Andrew Gershfeld: Thank you guys.
Ethan: All right. And that is going to be all for today's episode of the Startup Savant podcast. Thanks for joining us today on this special episode of the pod. So since today's episode was a little shorter, I will continue that trend by keeping this outro nice and tight. Please share this podcast with those who you think it would benefit. That is literally all we ask for tools, guides, videos, startup stories, and so much more, head over to truicc.com. That's truic.com. T-R-U-I-C.com. See you.
Annaka: Bye everyone.
More on Flint Capital
Andrew Gershfeld, partner at venture capital firm Flint Capital, joins Startup Savants to share insight into weathering an economic downturn.