Cloud Native StartupFest 2023

Hi, I'm Jesse Robbins. I am really excited to help open and frame this unusual event for an open source event. This is a day about startups, about funding, about current economic climates. Mostly this is a day really focused on helping all of you. Hopefully you're here because you are trying to build a startup, get a startup funded, make a startup successful, continue getting startups funded, do capitalism, something like that. So my background: I started building internet infrastructure in the '90s when I was in high school. Then I went to work for Amazon, where I was "Master of Disaster," that was my title. I sort of created a lot of what we now think of as DevOps, and exported that into the community by launching the Velocity Conference, which is actually where DevOps came from. Then I founded Chef, which was an early open source pioneer, infrastructure as code tool and platform. And then like a fool I tried to start another company in a different space. And then decided all of the pain and suffering that I have been through in building open source and infrastructure and developer tools, I'd like to help people avoid. And so I now do that at Heavybit. Heavybit is an early stage venture capital firm that focuses on helping people just like me, and hopefully like all of you, build the next wave of developer tools, infrastructure, and AI-powered software and technology that makes people's lives better. [Erica Brescia introduction] Awesome. Tough act to follow, but I will try. My name is Erica Brescia. I got into open source a little bit later than Jesse, 2005. I think it still makes me pretty OG. But I started with building a company that did software packaging and deployment called BitRock. We then founded another company called Bitnami that kind of grew up alongside Chef and Docker and some of the other early DevOps companies. I sold that company to VMware. I went on to be the COO of GitHub for two and a half years right after the Microsoft acquisition. We launched GitHub Actions, Copilot, which you might have heard of by this point, Advanced Security, and some other stuff during my time there. I am now an investor. I joined Redpoint almost two years ago, for basically the same reasons as Jesse. I have made a gazillion mistakes. I've learned a lot of things the hard way. I love to think about what I would go back and do differently, but instead of doing that actual work myself, now I partner with awesome early stage founders. At Redpoint we have two funds, an early fund that does seed and series A and then a growth fund that does B and beyond. [Dave Zilberman introduction] My name is Dave Zilberman with Norwest. My career was a little different in its origin. I started in investment banking, and hopefully there were no bankers in the room, but I hated it. And I went and joined a startup company and loved it. And so within a one year period I went from hating my job to loving the job. That company was ultimately acquired about three years later, and I was still so excited about the startup entrepreneurial journey I looked at different opportunities and wound up going into venture. So I've been in venture now for about 18 years. The energy that the entrepreneurs bring is so invigorating, it's so exciting. [Jesse resumes] A secret of the entrepreneurial lifestyle: make venture capitalists pay for things. This is a favorite life hack. We will buy dinners and coffees and other things, and we will pay, until you're more successful as a company and then we're like, yeah, you guys should pay. How many of you have founded a company that you are trying to get funded? How many of you are thinking about it? For those of you that didn't raise your hand, why are you here? No, I'm just kidding. How many of you are a first-time CEO? Okay, everyone, let's give a round of applause for them. That job sucks. I've had it for the longest of anything else that I've had. I'm going to start by saying something that's hopefully not controversial: open source software is the most positive and transformative force in the history of IT. And when I say that, what I mean is everything that happens around both the social and technical movement that it underpins. Open source is a profound revolution in collaboration, in partnership, in building and dreaming, in getting together around things that people care enough about to build and put their art out in the world. What is important for everyone to understand is building businesses around open source is a new thing. When I founded Chef, we were told straight up, "You cannot build a successful SaaS business or a business of any kind using the Apache Software Foundation licenses." Like, cannot. Told. Not. I have a photo I could show you of me pitching Tim O'Reilly, and him saying, "We just don't think Chef's going to work." But mostly the controversy was that we were building around Apache, which in 2008 was relatively new. Open source is not a business model. Open source is a movement. It's a practice. It's a way of doing art and collaboration in the world. And we're still figuring out the business models. But it is all new. The anchor of what I'm going to communicate to you today is: most of the advice that people are getting and giving, I want to encourage you not to rely too heavily on outdated blog posts, Twitter rants by people that are no longer in the game or are playing a totally different game. One of the things that I see in the companies that come to me and we try to help and pitch and coach is that often, and particularly right now, founders have some really unhealthy beliefs about how things work, and they're the ones not getting funded. They're not getting funded because they are relying on outdated information or narratives that are based in the past where it was a lot easier in many cases to get certain things done. We are "doing a capitalism" is what my partner Dana says at Heavybit. When you say "I am going to build a company" and you're going to use venture capital dollars, VC is like a weird financial product that mostly people shouldn't ever use. You have to be really special and building a special kind of business in order for venture capital to be the right way of doing that. When you take a dollar of venture capital money, you are signing yourself up for a journey that hopefully ends with a really really big and valuable company being built. But it has certain limits and constraints. [On the capital environment] Over the last three years in particular, the dynamics of what we do has changed because it turns out there were a lot more people with a lot more money trying to invest in our companies who have never done it before, or who have done it before but now have their own needs. This has created some very unhealthy dynamics. If you've seen a lot of companies raise huge amounts of money in the last two to three years at these stratospheric valuations because they've gotten 5,000 to 10,000 GitHub stars and their mom is really proud of them — my mom is in PR so I get a lot of feedback about my pitches from my mom — it is a different time. A lot of the advice that we've all been using and looking at, data and metrics, is completely wrong. Regard all advice from the last three years as being suspect, because the capital environments have changed pretty profoundly. Blog posts that people write about the past, like "all you need is $200K in ARR and 500 GitHub stars and you can raise a series A" — that is a lie. You can get a coffee for sure. A VC will buy you coffee for that. We'll talk to you. But that's the meeting metric. [On stages] Pre-seed: your mission is to prove that this idea and early community can actually be a product. It doesn't need to be a very good product or a complete product. It just needs to be real, does a thing, you can get people excited about it. A small number of people pretty excited is still pretty great. You can raise $500K to $2.5 million. You get a year to two years to turn that idea into a product. Seed: you've got this thing, you can show it to people, you can raise more money to hire a larger team. About five people max in the first stage, 10 to 20 people max at the second stage, where you now prove that customers will pay for the thing that you built. You have 18 to 36 months to do that. Series A: you're going to prove that the business you built on the product you proved is a thing people want and can scale a little bit, maybe a lot, but probably a little bit. That's $4 million to $20 million. 18 to 24 months before no one really believes you anymore. Pre-seed is the most fun stage because it's just you and true believers and you're on this journey and everything's perfect and nothing is wrong. Every successive stage you basically transition from being a founder to a manager, executive, person, leader. It's a bummer. At pre-seed we are evaluating founder-market fit and your ambition. We need to like you. You need to be a likable person who can get communities built. You have to be interesting and worthwhile to talk to and it has to make sense why you're doing this thing. You have to have a really cool product vision. And I want to see your early community forming. What doesn't matter to me is GitHub stars. That's not traction, that's just a like button. Likes don't matter. It's actual community engagement. Part of why I became a VC was because no one actually answered a bunch of really hard questions for me. So like, this is the time. We are on video. This is a really good moment to be like, "I heard this stupid thing, is it true?" We want this, in part because it will make great content later when someone's like, "Well I thought that Chef..." So anyway, please think about your questions. We want them. No off limits. [Erica on what investors look for] What investors are looking for at varying levels, at seed and series A, is really these three things: how many people are using or care about what you're building, how quickly is that increasing, and is there a big enough market to actually build a huge business here. Traction plus momentum plus TAM equals money. At Redpoint, our early stage fund is $650 million. We expect roughly to invest about $25 million in a deal over time. What that means is we need to be able to give you $25 million and have at least a version of the world that we can paint that says that check can be worth $650 million. That's the bar. We're looking for at least 10% month-over-month growth. Really best in class is at least 20%. If you don't have these, you probably will not be successful trying to get venture investment. My advice to you is if you're not at these numbers, go back and focus on building your momentum rather than trying to raise. You'll be much much better off. Your YC batchmates don't count. We're really looking for quality logos. Just selling to other startups is not going to get VC attention. We ask customers, "Would you fight to keep this?" That's one of the questions we always ask. Consulting revenue doesn't count. We literally write that off to basically zero. What we want to find is that people will pay repeatedly for the same product. Founder-market fit: are you a founder that wants to build a small company and sell it in a couple years, or are you a founder that is on a mission to IPO? Both are totally okay. One makes sense for a venture investment, one does not.