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Startup Digest Reading List: Stages of Startups, Option Pools, VC Returns, and Linkedin as a Platform

Welcome to this week's edition the Startup Digest Reading List, featuring stories I found interesting
Issue #126  •  October 12  •  View online  •  Suggest a link
Startup Reading List
Startup Reading List
A weekly curated newsletter on startups and technology.
Welcome to this week’s edition the Startup Digest Reading List, featuring stories I found interesting on startups, venture capital, and fintech.
Last week, my partner Alfred Chuang (founder of BEA Systems which was acquired by Oracle for $8.6B) and I did a podcast on Venture Stories with Erik Torenberg. It’s about investing in startups post-COVID, thoughts on valuations, and how the enterprise and data infrastructure space has evolved over time. 
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Written by Chris McCann, General Partner @ Race Capital, former Greylock Partners. More about me
Stage of Startups, not Name of Company
Pre-Seed, Seed, Mango Seed (I don’t like this term…), Series A - there are so many overly complicated names for stages of companies now. 
Nikhyl Singhal, a VP at Facebook and former head of product at Credit Karma, breaks down a simpler viewpoint of the stages a startup goes through. TLDR: 

  • Pre-product market fit - companies are still figuring out their product and an audience who wants their products.
  • Post-product fit - companies that have found something that works and have shifted towards stability and growth.
  • Growth companies - Demand for the product is exploding and the companies are just trying to keep operations going.
  • Scaled companies - Market leaders with multiple products, layers of management, operations built for scale, etc.
Sizing of option pools
An old but great post by Fred Wilson on how founders & investors should think about the sizing of option pools connected with financing events.
I’ve seen a lot of numbers but the consensus seems to be a range between 10%-20% after each stage of financing. Fred Wilson argues a different way to think about it where the founder puts together a hiring plan for the duration of the runway of the company (18-24 months or however long the financing will last) and sizing it up according to what will be required to meet that plan.
Whatever you pick as a founder, there needs to be enough to attract and keep top talent within the company.
VC Fund Returns Are More Skewed Than You Think
The venture capital & startup industry is an industry all about outliers. Companies such as Facebook, Google, Amazon, Linkedin, Airbnb, BEA Systems, Snowflake, Twilio, etc. are the ones who bring disproportionate impact and returns. 
While I think all of us in the industry know this quantitatively, it is still hard to internalize. Seth Levine of the Foundry Group shares the numbers to show what this looks like in practice. Of 27,000+ startup investments:

  • 64% of them do not return 1x
  • 18% return 1-3x
  • 6%  return 3-5x
  • 7% return 5-10x
  • 3%  return10-20x
  • Less than 2% return greater than 20x
LinkedIn as a Platform
An old but great post written back in 2011 by Adam Nash (who was at the time the VP of Product at Linkedin) about the network effects which allowed Linkedin to be a platform.
It’s a great analysis that seems so obvious in hindsight, but has since led Linkedin to be acquired for $26B and its network effects are still durable today despite its products.
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This Startup Digest Reading List goes out to a wide membership base of founders, technologists, investors, and operators. Feel free to share with others, sign up here: https://startups.startupdigest.com/
Techstars Startup Digest Startup Reading List is curated by:
Chris McCann Chris McCann - General Partner @ Race Capital, former Greylock Partners
chris@startupdigest.com
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