German cybersecurity is dead

German news media ran a story yesterday about a hack by "Advanced Persistent Threat 28", purportedly of Russian origin, who penetrated the data networks of Germany's federal government and its security institutions. That is to say the German equivalents of the entire executive branch, including chancellor, cabinet, and executive branch agencies like CIA, FBI, ICE, federal and state police services, military intelligence and security command. Yes, let that sink in.

Counter-intelligence noticed the breach in December. At that point the systems had been compromised for the better part of a year. A year.

Notwithstanding the fact that all journalism related to this attack is abysmal - in particular the "let's blame a sovereign nation for what amounts to a cyber act of war" based on what: an IP address? a common methodology? - the fact that a breach at federal level can remain undetected for a year speaks to how woefully unprepared Germany is in cybersecurity.

At this point, one should assume that there is no such thing as German state or economic secrets. Everything has been compromised. For a nation that used to pride itself on security and the strength of its intellectual property, this is a very sad day indeed.

What are you ignoring?

What are you avoiding looking at?

I love asking founders these questions. I don't believe I get a real answer until I've spent more time with them, sometimes until about a year or so into the relationship. Suddenly something happens and they open up.

Here are some of the most common issues I see that founders are hesitant to address or talk about with their VC:

- the job is all-consuming and their life is on hold
- all areas outside of work (especially: fitness, love life, family life) are neglected
- worries about how they're viewed by others; doubts and insecurities; wondering how they come across in one-on-ones, in small groups, at board level; worrying about their relationship with board members/VCs, management team
- in general, founder and management team troubles; how much value they're adding; whether they are respected, feared, resented
- they have creative ideas for the business but are shackled by the need to focus on shareholder value, the expectations of board/VCs
- immense time pressure until next capital raise to show traction/"make it" as CEO
- being increasingly and sometimes overly concerned with image/media/PR
- figuring out the best use of their time / not constantly getting sucked into activities
- wanting to change company culture, but unsure how
- worrying that they're not using technology well (especially social media)
- comparing themselves to others in similar positions - how are they holding up? 
- whether they're dealing well with underperforming employees
- lacking people skills/EQ and wondering about how it's affecting their leadership

At some level, these are very common worries for anyone in a position of responsibility. And all these concerns are connected: life is rushing by in a blur, you're completed exhausted and, contrary to expectations, you're not very happy. At some point it's perfectly legitimate to ask: is this worth it?

Step one is to list the items that you're ignoring/not facing with perfect openness and honesty. At least be honest with yourself!

Step two is finding someone to talk to. No matter who you are in the organization - you need a peer, a mentor, a confidante or a coach whom you can trust. Most importantly: this person shouldn't tell you what to do. The world is full of those who think they know what's right for us. But this is a process to help you figure out what's right for you, and not anyone else. So best to get someone less left-brained, with higher EQ and more likely to listen and ask, rather than rush to tell.

Step three is asking yourself the big, million dollar question: what's life all about for you? If you're answering that question completely out of sync with how you're living it, it's time to make a few changes. Most people don't ask "do I want this job"; they ask, "how do I cope?" Gaining the awareness to ask the first question will help in answering the second.

True, powerful leadership emerges once people are in touch with their true, authentic selves. Way too many folks pursue success for the sake of it - living someone else's expectations for their life. Facing that realization and having the courage to do something about it is the start of something great. As trite as it sounds, follow your heart and you will lead others to greatness.

Here's what's really going on in European venture in three charts

Man, you gotta stop clicking on that 'bait. But now that you're here, I thought I'd share three slides from the macro update to our LPs yesterday.

I. The first one shows a now pretty well-established trend. Total deal value in European venture is at all time highs, but number of deals is at five year lows. And you can feel it in the market out there, can't you? Time to borrow some Patagonia from your favourite VC to make it through the Polar vortex. Personal prediction: this is going to get worse before it gets better.

The reason? Many of our early ecosystems, like Berlin, are still figuring out that venture works much better as a consensus-building, cooperative approach if total capital available for follow-ons is the constraint. The savvier investors are starting to wait, round sizes are going up, it's harder to raise smaller and earlier.

Note: Sunstone is doing a push to do more seed rounds (€250K-€1M), so once again we're trying to get ahead of the trend. We want to be early, we have conviction and we will lead every round we choose to do.

II. New funds raised is way, way down (though capital raised is holding pretty strong). We're at a third of the 2008 number of new funds raised, more than 50% down over the last five years. Sounds like smart LPs are doing the same thing smart VCs are doing - crowding into the quality funds. Venture in Europe is still a small, small industry, and it's fairly clear based on track who is doing a good job.

III. Exits remain... well the slide says "relatively strong", which is historically true. But "a mixed bag" would capture it just as well in my view. Look at that tiny IPO number - we're mirroring the US here without any regulatory reason why (at least nothing substantially different vs pre financial crisis). Also note the $500M+ exit for 2017... under ten companies were sold for $500M+ in EV in Europe in 2017. This is still a very, very small and specialized market.

That last number is particularly worrying to me because it's the "available" enterprise value at exit that can sustain European venture funds.

Imagine you have a $500 million fund and you want to do a 3x gross return on it. That means returning $1.5 billion. Assume you own around 15% of your average portfolio company. That means your portfolio companies must generate total enterprise value of $10 billion. Now look at the number of $500M+ exits again (admittedly, these are only the exits where the value was disclosed, but at that level they tend to be disclosed).

Over the last four years, Europe had ~40 exits over $500M. Let's assume the average is around $750 million (which will be generous), that's total enterprise value created of around $30 billion. So as a $500 million fund in Europe, you need to have 33% market share of those exits to be able to do a 3x gross return. Those are very hard odds to make a living by.

Which is another reason why Sunstone likes its "right-sized" early stage fund size of around $140M. It's a way to consistently generate good returns for our investors and be able to become return backers to our entrepreneurs. 

Flus & seizures

For the first time in about a week I'm sitting at a keyboard again. The flu pandemic kicked my butt hard. It felt like rapidly accelerated aging.

I still didn't feel well enough to travel last night. And so I missed attending our bi-annual LP meeting in Copenhagen today, which is a pity because meeting our investors is always a big learning opportunity. 

But a few years ago I got onto a flight while still congested and damaged an ear drum. That was very painful and I couldn't hear properly for weeks. I promised myself not to do that again, so I feel pretty good about keeping that promise to myself.

On top of my own illness, I infected both my pregnant wife (double brownie points for that one, as you can imagine) and our daughter Charlotte (2). "Charlie" then had a febrile seizure on Saturday. For those of you who don't know what that is (like me, prior to Saturday), it looks just like an epileptic seizure and it's brought on by high fever. She convulsed for several minutes, seemed to stop breathing and started to turn blue.

Thankfully we are pretty good in these situations. We had her on her side immediately, opened her airways, and had emergency services at our house within 5 minutes. By the time we were riding in the ambulance she was getting back to her happy self again (and what's more important an SpO2 of 98%).

So she's fine, but we're a bit shaken. Because, you know, " have a child is to forever have your heart go walking outside your body." (Elizabeth Stone via Jerry Colonna). Ain't that the truth.

So, all this to say - I'm back. And I look forward to writing about more boring stuff this week.

To lead, first be loyal

Leadership is often used to mean "getting people to do what you want." A more worthwhile definition could be "getting people to want what you want." Or even better "making things that should happen, happen."

Leadership, above all, requires loyalty to both people and truth.

Top-down organizational change rarely works if the people aren't ready for it. At other times, I have been a hapless bystander as management has ruined a good company in a bad market by trying to drive it to greatness. Great theorists can make the worst generals.

As I don't tire of saying: people are more important than things. At times, those things include the truth.

Sometimes, all it takes is a bit more time for people to come around to your view. So be patient. Respect someone's ideas and dig deeper to see why they don't like what you believe to be the truth. Such a clarifying journey can be helpful for both the leader and the led.

To "command" loyalty is impossible. To deserve loyalty, first you must be loyal. This includes loyalty to your people, but also to yourself.

In speaking truth, it is thus necessary to gauge the readiness of others to hear it. They may need to hear it. They may say they want to hear it. But sometimes they can't hear it. Timing is crucial, since you may not get a second chance.

Above all, be loyal to yourself in evaluating the truth. Question whether you see what you want to see or you see what is. When discovering that the truth is not what you want it to be, do not take it out on others. Authority exercised thus is not just disloyal - it is incompetent and cowardly.

Authority is granted; it does not happen by appointment. Good leaders realize that whatever they may wish to do, it is only in the strength of their team that they can hope to accomplish it.

Beware the metaphor as a mental model

A few years ago I spoke to a founder working on generative machine learning. After the chat she sent me a follow-up, thanking me for the meeting, and said she particularly liked the "metaphors" I had used to talk about her segment.

I'm sure she meant it as a compliment, but the comment threw me. Had we not managed to have a real conversation about her work? Was my technical limitation starting to show (I don't have a CS degree and the little programming I do could be generously described as "script-kiddy")? What did she mean?

This was prior to my coaching days, so I didn't give her a call to ask, which would have been the obvious and straightforward thing to do. Instead I retreated - good introvert that I am - into dwelling on it. Which leads us to this blog post.

"Mental models" have become more popular recently because of a speech given by Charlie Munger in the 1990s. And perhaps also because the world is more connected and complex and we still have to live very human lives with very average intelligence dealing with a lot more ambiguity. That's before "The Merge" anyway, but I'm getting ahead of myself.

The concept of mental models has been around for a very, very long time. It's right there in the cave with Plato and rather the whole point of Kant: there is no real direct access to things-in-themselves. Our perception and its concepts mediate between us and the world. You could argue that cave paintings are an abstraction and that parietal artists knew they weren't making "real" buffalo on the wall, so this likely goes back as far as human history or at least as far as the development of language.

Which leads me to my second point. Metaphors are a type of mental model. They're very good for communicating. They're powerful, memorable, evocative. All good things if you want a point to stick. Take the "Big Bang" theory (a Fred Hoyle creation). I wonder if "Primordial Singularity" would have had the same resonance.

But as mental models, metaphors for critical thinking can be sloppy. Their abstraction of the things-in-themselves relies on the ability of language to supply us with relevant images. Which is a much worse way to go about building a model than, for example, the Pareto principle.

This, of course, leads to the imprecision of language and the realization that most of language is metaphor. But let's not go down that - wait for it - rabbit hole. Rather, I've found it helpful to note when I'm going down metaphor lane (sorry). It helps me question whether I'm taking a lazy shortcut (again, sorry) to abstraction, rather than doing it thoughtfully.

Music Saturday - Folksy Ventures Playlist

Algorithms have become so good at making playlists, I doubt my kids will ever understand the big deal that making a mixtape was. That got me a bit nostalgic, so I thought I'd make you a virtual mixtape (Spotify link). 

Anyone who knows me knows I love a good bit of Americana. Hence the Texan bride (she has other redeeming qualities), the unsuitable-for-Europe Lucchese boots and a penchant for Townes van Zandt et al. Enjoy.

How to feed 10 billion people (request for food startups)

Last night my wife and I watched the first episode of Netflix' documentary, Rotten. Yes, our life is run increasingly by algorithms. Isn't yours?

The episode was about the adulteration of honey, the circumvention of existing trade laws and regulations, colony collapse disorder, and many more interesting and pretty sad things.

Modern supply chains can be nasty - the deeper and further upstream you dig, the more you'll find an attitude of "it's not my problem." I'm not sure I know four more damaging words in the English language. 

A lot of the food startups we have looked at over the past years have been focused on convenience. Some were looking at nutrition. None, as far as I can recall, have addressed the incredible damage we are doing to our planet as a result of the way we make and ship food. There are 7.6 billion of us and we're going to need to change how we do things.

This article in the Atlantic has an interesting take on the different worldviews in current agricultural research. I'm neither a techno-optimist, nor am I a Malthusian dystopian. I think there's a third way that transcends and includes both points of view, making different products for different tastes and willingness to spend while working within the constraints set by the environment.

For me, the problem of how to feed 10 billion people sustainably is an interesting starting point. If you're doing a direct-to-consumer food startup with deep vertical integration and an integral view on how the food industry should change, we're always open to chat. If you're the founder, you can get in touch via this form. Or if you want to suggest a few European companies we should look at, simply send me an email: 

Worthwhile ideas and how to have them

There are no larger fields than these, no worthier games than may here be played. - Thoreau (Walden)

Ideas matter.

I like talking to people outside of the tech industry. These days, a lot of them tell me that they'd love to be a founder. It's become very cool to be a founder, because we see them in the media so often. Gates, Jobs, Zuckerberg, Spiegel, Kalanick. The biggest barrier to becoming a founder, people tell me, is that "they don't have an idea." The public's idea of invention/innovation seems to be that everything follows from that instance of inspiration.

My first job in venture was as an analyst with Atlas (now Accomplice) in 2007. The counter-intuitive orthodoxy then was: ideas are a dime a dozen. It's all about team and execution and timing. The best argument I ever heard for that was: if ideas were valuable, there'd be a big market for them. And there isn't.

Of course, the truth is integral. Ideas do matter, but not the way people think. Most startups start out doing one thing, but end up doing something else within a short space of time. But there's a lot of value in where you start.

Compulsion is best. If you can build something in a segment you're obsessed with, go with that. It won't get boring and no matter what happens, it will have been worthwhile.

The common advice is to focus on a problem. Preferably one that you are having. But most people in the developed world have fairly trivial problems. That's one of the reasons we are seeing so many trivial companies. Which is odd given that massively important problems abound. Start at the environmental crisis, or the crisis in faith and meaning, or the fact that over 70% of people hate their jobs.

Framing a problem as a question is good. Explore the segment and iterate. Come up with a partial solution. In my mind, that's how Facebook and Uber and Airbnb got to where they are. They started with small, well-defined but partial solutions. And then realized that the full answer would sustain a much bigger business.

The best such large market you can come up with is something that any internet user could use. Zero marginal costs of distribution meets global scale. Those continue to be the most exciting businesses for me. We are seeing too few of them at the moment.

Many VCs (including us) value domain expertise. But a fresh and naïve look at old industries often yields interesting ideas. Zen mind, beginner's mind (thanks, Shōgaku Shunryū). There's much less to unlearn if you're too stupid to know better.

Ideas don't spring up in a vacuum. Terry Pratchett had this concept of Inspiration Particles that sleet through the universe and hit people in the head as an explanation why several people often have the same idea at the same time. I think it's an evolutionary process. Previous selection begets new variation. It's often more revelation than inspiration.

The best places for new ideas in the US seem to be universities. I'm not sure why, but that's just not as common in Europe. Maybe it's the lack of dorms. Young hackers just screwing around are great crucibles of ideas. I joined the foundation board for the Humboldt University, one of the largest universities in Germany, to have this conversation in more depth.

In general it's good to surround yourself with smart people. Explore the edge cases of the problems that excite you. Frame your idea as a question so you get less pushback. Listen, learn, iterate. The main advantage you have as a startup is your speed of learning and iteration.

I thought that having a purpose is helpful, but have come to view it as essential. Purpose is the narrative of why you're doing what you're doing. It's helpful in the outside world, with investors, customers or regulators. But it's crucial when it comes to convincing brilliant people to join you on your journey and to get people to come to work every day with a spring in their step.

The best narrative I've ever heard in that respect is from Patagonia founder Yvon Chouinard in "Let my people go surfing." It's a book I enjoyed tremendously. My colleague Yacine said he'll write a post on it (here's his Medium - no pressure, Yacine). 

Ideas really do matter. And the way you approach them, too. What you devote your life to is one of the most important choices you can make. Honor yourself by making it something worthy of You.

The weird secret of our most successful founders

"Let not to get a living be thy trade, but thy sport." - Thoreau, Walden

We meet a lot of founders every year. And we do have a shared view in the partnership of the characteristics of founder teams that we like. Top of that list is determination - persistence or grit. Further down are things like domain expertise, social cohesiveness, raw intelligence, and charisma. All very important.

But there's a secret weapon that our best founders share. And that they share - in our view - with the most successful entrepreneurs globally.

You see, our best founders aren't motivated by money. They're motivated by the thing they're doing. Which is making stuff. Building teams that make stuff. Striking deals to source, transform and ship stuff. Helping their people that make stuff have the right resources to be great at making stuff.

Building the product and building the company is what drives them. Making customers happy. Being straight with suppliers. Doing right by their people.

Our best founders are passionate. That passion extends beyond their love of creation to the organization that creates. Money is a consequence of these things done right. It is the fuel to be able to keep doing these things. But it is not the end goal.

Now, this "causality" might be tautological. Lots of our fast-growing companies get early acquisition offers. By definition, the founders that sell early don't go on to be our most successful.

But we've now chosen to look at "authenticity" of the founders as something to gauge before an investment. Is the business a creative extension of a long-standing interest? Or did they make a spreadsheet of the pros and cons of 30 different ideas? The latter teams often don't have the staying power to create greatness.