Category Archives: Startups

Monetize early and often

A common, long-running theme in Silicon Valley is that companies will get started with no sense of a business model.  The common ethos is this: “we’ll get lots of eyeballs, and then we’ll monetize the eyeballs later.”

And certainly if you look at a business like a Twitter or an Instagram, neither were ones where a business model from day 1 made much sense.  To succeed at scale, they needed to establish themselves as very broadly adopted, broadly used services.  Indeed, not so long ago, many were hand-wringing over whether Facebook would ever be able to generate sustainable revenues.  Given that $FB is now pulling in well over $1B / quarter, no one’s really harping on that anymore.  So I think it’s safe to say that for the foreseeable future, we’ll continue to see tech companies that grow first and monetize later.

At the same time, I’m noticing a trend of companies that are starting to monetize earlier in their life cycles.  Companies like Evernote, AirBNB, and Uber are examples, where they were generating revenue really early and growing from there.  My sense is that we will see more of these, for a few reasons.

First, the breadth of endpoints is massive.  Over the last 5 years, we’ve seen the explosion of smartphones, tablets, Kindles and other e-readers, along with the continuing growth of the PC market.  The increase in nodes (or screens if you prefer) and endpoints where a service can be offered and a transaction consummated is staggering.

Along with this rise in endpoints, distribution is now becoming increasingly accessible, if you can pay for it.  If your company can prove that it can generate gross margin on a per unit basis, then it’s going to be possible for you to invest a good portion of that margin in acquiring new users via a broad range of promotional and advertising offerings.

A third reasons is that a broader range of business models–freemium and in-app purchases, for example–have matured over the last several years.  This gives tech startups a path to offering users a low-friction, try-before-you-buy value proposition on the one hand, while offering a path to monetizing from early in the lifecycle.  This is a great thing for startups.

I think all of this bodes well for startups.  Getting revenue in the door at any level is a great validation of product-market fit.  It’s also a great way to keep the doors open and retain equity.  If I were starting a company today, I’d be looking for a path to get revenue in the door from as early on as possible.

 

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I Second That Emotion

Image representing Mixpanel as depicted in Cru...

There’s a management aphorism attributed to Peter Drucker that goes something like this “If you can’t measure it, you can’t manage it.”   This was on my mind, as I read Liz Gannes’ great article on AllThingsD today covering Mixpanel founder Suhail Doshi‘s call for an end to Bullsh*t Metrics.  His basic point is that technology companies have not innovated enough on how they think about measuring their businesses.  He’s calling BS.

Pageviews, installs and total installed base are out.  Engagement and retention are in.  This makes a lot of sense.

When I meet with very early stage startups, as I did last week at AppNation for VC Office Hours, I find myself repeating a few of the same points again and again.  Very early stage companies (i.e., pre-product or pre-product-market fit) tend to want a sense for how many installs or pageviews they need to attract an investor.

My answer heads a different direction.  To me, the first thing I want to see is evidence of what I think of as early product market fit.  Rather than showing me installs, show me that any small number of users that truly, with concrete evidence, really want your product.   This is actually more difficult to do than you might think.  It requires that the startup can show engagement and retention over a period of time.  And it requires that the startup is thinking about what how it measures user engagement in a manner that’s specific to that specific company.

This perspective seems aligned with Doshi’s feedback.  One thing that I liked a great deal in his post was his recommendation that startups focus on One Key Metric (OKM).  The idea is that tracking 1 actionable metric that “they can literally bet their business on.” Companies picking OKM have to deeply understand their business and what is driving growth and success in order to do so.  This reminds me of discussions that I’ve read of Facebook and Twitter‘s early growth, where FB started to realize that if a user added 7+ friends, that the likelihood that that user would become a retained user went up dramatically.  Similarly Twitter found some number (I don’t recall what the number was) of followers where, when attained, a user would be much more likely to be retained.

This mode of thinking and focus on OKL is smart–it focuses the leaders of a company on understanding, deeply, what users are doing on their service and what drives value to the user.  Hard to argue with this.

BRV portfolio company, Thumb, where I serve on the board, has been drilling in on it’s on OKM.  (I can’t disclose what the metric is.)  It’s been exciting to watch how the focus is leading to increasing retention and engagement, which as publicly reported is already quite high.

In any case, if you’re a startup in the tech space, I recommend reading Doshi’s post and contemplating what your OKM is.

 

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Cha-ching! AngelList’s new round

TechCrunch is reporting that AngelList is raising a “big round of financing at a valuation that multiple sources say will top $150M.”  As a first round of outside financing, it’s a whopper.

I couldn’t be more excited for the team and for AngelList.  It’s been a great service, one which has inserted itself into the necessary workflow of any early stage company executive or investor, making it one of the great interest-based networks out there.  I look at AngelList  a bit like a look at Quora–a key new social property that is immensely useful in my everyday life.  Kudos and congratulations.

I am fascinated by what the opportunity this round holds and by the potential of what AngelList seeks to become.  It is riding several important waves, which the TechCrunch article points out–notably the recently passed JOBS act.  Always a good thing.

If you’re a startup, you’ll want to be working on your AL profile.  AngelList will gain an increasing importance for startups, if it hasn’t already.  It’s like keeping your LinkedIn profile up to date–make sure you’re keeping your AngelList profile up to date.

If you’re a professional investor, you’ll want to be working on your AL profile.  Basically the same type of thing.  If you’re not there or you don’t ‘get’ ANgelList, then spend the time to figure it out.

About the only word of caution I’d have is this.  If you’re a startup, then getting on AngelList <> getting investment.  There’s a lot that goes in to building a company and attracting investors.  AngelList postings aren’t going to do it on your own.  If you’re an investor, same type of message.  Early stage investing is risky business.  The JOBS act and other efforts are lowering the barriers to anyone investing in these early stage ventures.  The adage of fools and their money holds true here.

 

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Market Cap / Employee

Monday I caught up over lunch with long time friend and superb Japanese entrepreneur, Nori Matsuda.  Matsuda-san is the CEO & Co-Founder of Sourcenext, a publicly listed consumer software company in Japan.

During the discussion, he talked to me about how he thinks about building public technology companies.  He mentioned a metric he thinks about a lot: Market Cap per Employee.  He thought that this was an interesting expression of a company’s culture, of how much opportunity, how much energy there likely was at the company.  He then rattled off the Market Cap per Employee of several large public tech companies.

I built this simple chart below, and I think it’s telling:

Company Market Cap (B) Employees (K) M/E (M$)
FB 52 4 $13.0
APPLE 528 73 $7.2
GOOG 219 54 $4.1
MSFT 227 94 $2.4
AMZN 107 51 $2.1
YHOO 21.8 14 $1.6
CSCO 98 67 $1.5
Zynga 1.8 3 $0.6
Nokia 13 105 $0.1
HPQ 23.6 350 $0.1

 

If you’re thinking of working at a public company, then this is probably an interesting metric to look at and consider.

Alternatively, if you’re running a startup, it’s also an interesting metric.  You might consider your current valuation and divide it by the number of employees.  See where you stack.  It’s probably at least some kind of indicator of the opportunity and the momentum in front of you.

 

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Be Careful What You Wish For : Color’s Cautionary Tale

TheNextWeb broke the news that Apple is acquiring Color Labs.  This closes what was one of the highest profile, most hyped startups of the last 5 years.  In my time in Silicon Valley, I’d say Google’s launch of Google Wave and the launch of Color were the top two in building massive hype that then came up really short.  (Do you all remember when people were *begging* for Google Wave invites?)

And that’s ok.  Sh*t happens. New ideas fail every day.  That’s reality.  What *has* changed I think that the costs of failing are dropping.  A lot.  Moore’s Law, the continuing growth and robustness of cloud-based infrastructure and open source tools and development environment, and the development of methodologies like the Lean Startup, have all combined to help teams run customer development cheaply and quickly.  They can build and vet ideas quickly and when they start raising money, they have a much better sense of what works and why.

Color ran counter to this–it went big.  On every front.

I think the cautionary tale is that you should be careful what you wish for.  I was once invited to judge a startup pitch contest.  This contest was held at Color’s Headquarters in downtown Palo Alto.  This was post Color launch, and the bloom was definitely off the rose.  Half of Color’s office space was allocated now as kind of event space, which is where we held this startup pitch competition.

Anyway, before the contest, there was a long networking cocktail type event.  I remember standing there talking to different startup teams.  One of the teams I talked to pitched me their idea.  I said to them, ‘hey, what you’re doing is interesting.  I am not interested in investing in it [for wahtever reason, can't remember] but let me know if there’s anything I can do to help.’   One of the founders looked at me, then glanced around the room and said to me, ‘Well, there’s a $42m check sure would help,’ referring of course to the monster Series A Round that Color had reportedly raised.

My response: “Look, be careful what you wish for.  If I had invested $42M in this thing, and now half of the prime real estate in Palo Alto was being used as event space for cocktail parties and startup pitches, I would want to fire everything that breathed.  This would make me so angry.  Go out and build something awesome.  Then the world of investors will find their way to your door.”

Too much of the press and Silicon Valley community celebrates the raising of money.  Indeed, a raise is seen as press worthy.  I’m less convinced that its news worthy–some founder convinced some investor to write a check.  Meh.

To me what is news worthy is winning a customer, getting a really high profile, value added partnership nailed and in market, landing a truly world class exec or developer.  The really important building blocks to constructing a real company are what we should be celebrating.  Not that you got someone to write you a check.  Focus there, and do that great and the funding announcements will find a way of happening.

 

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Silicon Valley is Stupid

David Weekly is in terrific form with his post today on GigaOm Silicon Valley is Stupid Which is Why it Works.  It is a delight to read his writing–David’s energy, intelligence, wit, and wattage come shining through.  The article itself is spot on, and is really a must read, particularly for groups trying to build more of the Silicon Valley ethos into their region, town or country.

One additional element to Silicon Valley that I think is important, at least based on my own experience, is the openness and general inclusiveness of the community.

In most places, the existing social hierarchy–where one went to school, whose kid you are, whether you have friends in high places–exerts a huge influence and can be a huge help (or barrier) depending on where you fit.  Of course, Silicon Valley has an element of this–certainly being on a first name basis with A-listers like a Ron Conway, Mark Zuckerberg or John Doerr would likely confer a some benefit to you: who you know matters.

It’s not as much who you know, it’s what you’re doing.  In my experience, two elements really balance this out.  First, here in Silicon Valley, the core arbiter is really around what you’re doing and what you’re building.  This focus on what you’re doing (and the quality of the people you’re doing this with) overshadows, in my view, whomever you might know.  For example, I’ve talked to people who claim they were the right hands to Larry (Ellison) and then went built businesses for Steve (Jobs) whom I thought were complete yo-yos.  At the same time, we’ve funded successful companies where the founders were basically unknown and unreferenceable, as they had so few LI connections or prior real work experience. Put another way–if you had the choice of being an awesome team working on awesome projects with no network versus being super networked but working on a meh project with a meh team, you’d take door #1 in a second.

Silicon Valley is more open.  The second element is that the Silicon Valley network is as open as I think you’ll find anywhere in the world.  Not only are the most seasoned and experienced investors or executives generally findable and reachable, but the vast majority of them operate with an ethos that they’ve always got to be growing their networks.  This is not to say that barraging them with a spray and pray email form letter is going to get a response, of course.  That style blows and you won’t get far.

But broadly speaking, if you want to connect with anyone, and you work at it thoughtfully, you can get it done.  Concretely, visualize Bud Fox (Charlie Sheen) in the movie Wall Street, who’d chased his prey, Gordon Gekko (Michael Douglas).  You may have to work at it to connect with someone, but with persistence, creativity, and quality, you should to connect to them.

My own experience in Silicon Valley over these last 5 years is evidence of this.  I moved to Palo Alto from Tokyo, Japan, where I’d spent nearly 4 years working for Microsoft in its Japan subsidiary.  Although I’d really enjoyed my time at Microsoft, I really felt that in the tech industry, so much growth and innovative thinking was occurring in SV that I had to get there.  I knew that I wanted to stay in tech, and I knew I wanted to get involved in smaller companies (an easy threshold to meet, given that when I left MSFT had more than 90,000 employees).

In any case, when I showed up in Palo Alto, other than some former Microsoft colleagues who’d moved here, I effectively knew no one.  I had a network of zero, basically.  From day 0, however, I found that I got great opportunities to meet great new people, that vast majority of them were interested in helping me find my way.  This ethos was quite broad, and time and time again, I was struck at how helpful and thoughtful people were in helping me out when there really wasn’t much upside for them.

Nowhere is this more clear than how I actually met David Weekly.  When I lived in Tokyo, working for Microsoft, I was getting really serious about leaving MSFT to head into the great unknown of Silicon Valley.  I was reading about Silicon Valley, and surfing around LinkedIn to learn about people.  I stumbled onto an article about the SuperHappyDev House events that David was hosting at the times.  (They’ve since mushroomed into something much bigger and more broad.)  These were apparently all night hackathons at some house he was retngin up in Hillsborough.  And what struck me was that his LinkedIn profile had an Endorsement from a police officer who had come to, I guess, break up one of these parties.  I remember thinking to myself, “I’ve *got* to meet this David Weekly guy!”  (I also became a user of PBWiki, a great product, btw.)

Anyway, fast forward 3 or 4 years, and I’ve got myself here, helping out at the FounderInstitute, Adeo Ressi‘s global startup incubator.  Adeo and I were basically neighbors when I moved to Silicon Valley, and he couldnt have been more helpful and fun to get to know.  He was getting the FI rolling, and he was kind enough to give me opportunities to speak, facilitate, and at times just help out.

Anyway, I was moderating an evening’s events at the San Francisco FounderInstitute, and there as one of the guest speakers, was David Weekly.  I introduced myself like a total fanboy, though I’m not sure that I asked for an autograph.  :)  I introduced him to the FI founders with my Tokyo story.

A culture where people are most honed in on what you’re building and what you’re doing.  An environment that’s really open, where people tend to want to just be helpful to others in getting out there and building cool stuff.  Those are two more of our additional stupidities out here that make this place so very great.  Thanks David for the great article!

 

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Beware the Generalizations

This week I got the rare opportunity to have a low key dinner with the founders working at the NewME Accelerator in San Francisco.  It was a great visit—the energy and sophistication of the teams there was really strong, and I enjoyed the time.

This talk was strictly Q&A—just me sitting with a group of around 15 founders, fielding questions one after another.  I love this format.  But if you’ve spent time with me, you’ll know once I get started I don’t really stop talking, so this may not be all that unique.  :)

The founders’ questions were many.  Some were specific and use case oriented, such as, “Our team has built a product, we’re getting traction, and we think we need to raise a small seed round.  Some are suggesting we raise more, what do you think?”  In your case, given the instincts that’ve gotten you this far, I reco following them going forward.  If you have an offer to raise more, then think about that then.

Or, “I’m a founder with unique and differentiated real world experience in a specific market, and I want to hire a tech team to build a product this industry needs.  How do I raise money to hire them or how to do I hire them before I have money?”  Catch 22 — not sure what to say, just have to figure out a solution.

Others were pretty hypothetical, “If you had one company with 2 million users and no revenue, and another company with a small number of users and $50,000 in revenue, which would you be more likely to invest in?”  Hm.  Totally depends on trajectory and relative opportunities of the two.

In answering the questions, I often had to reiterate a caveat I find myself making a lot these days.  Namely, when I’m answering a question on a business I know only lightly, as in when I show up at a Q&A with founders, my answers are going to be broad brushstroke generalizations.  These generalizations may not work for you in your particular situation.  Mileage can vary, a lot.  The core truth is that your on the ground reality may be the sort of thing where my advice, or the advice of other outside perspectives, is pretty useless or even harmful.

In my own experience, in building startups the core on the ground reality is pretty muddy and opaque.  This is a constant reality—startups are inherently dealing in uncertainties, and uncertainty creates ambiguity.  Uncertainty and ambiguity is more the norm than the exception.

At the same time, many in our community, investor types like me and other outsiders, present a worldview that is much more certain.  Company 1 is screwed, Company 2 is can’t miss.  Do A, do not do B.   The world is black; not white.  Approach y worked for company x, so you should think about doing y too.  In an uncertain world, the narrative of certainty is valued.

I disagree with this thinking.  Far more is unknown than known, especially by those of us far removed from the front lines of our business.  I encourage founders to hear out different opinions, but retain your own perspective, informed by the reality of your situation.

In most cases, the situations we’re dealing with aren’t black and white.  They’re gray.  Beware of people who make you think the answers are simple and that generalities work.

If the answers were simple, anyone could do this stuff.

 

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Reflections on Y Combinator Demo Day

Image representing Y Combinator as depicted in...

As a venture capitalist, I often say when speaking with founding teams, everything is a signal.  Everything is a signal, because as a potential investor in a team and the earliest stage of an idea, business and company, you are dealing with the most intangible, the most uncertain of situations. With as much imprecise, uncertain information as you are sifting through all day as a venture investor, I find that I tend to pick up on little signals.

Several months ago for example, I was taking a pitch from 3 co-founders.  The ideas was pretty interesting.  Not in my sweet spot as an investment, but a credible, if early, idea.  Something about the founding team struck me as a little off, however.  About halfway through the pitch, I stopped them.  ”Tell me about the three of you came together as a team,” I said, “I’m hearing an interesting idea, but to be honest, guys, I can’t get a read on the chemistry between the three of you as a team.  If I had to guess, I’d say you three met for the first time this past weekend and thought it’d be fun to start a company together.”  They got a sheepish look on their faces and said that in fact, they’d met for the first time at a bar 10 days prior and had cooked up their plan.  Not a bad thing at all, in my mind, they just needed more time together as a team to figure out what kind of organization and company they wanted to build. This example is one of many I could point to where small signals make an impact.

With that as a framework, what was signaled at this week’s Y Combinator Demo Day as to the state of Silicon Valley and tech startups in general?   Y Combinator, of course, is the well-known startup incubator co-founded by Paul Graham.  It is a terrific organization, the gold standard of startup incubators. This batch of startups had over 70 companies, and hundreds of investors of all stripes filled the main auditorium of the Computer History Museum in Mountain View, California. With this many companies presenting, and with this many investors, there were signals galore, from which to try to point to what’s going on in the world of start-ups in Silicon Valley.

Here are the key observations I saw coming out of the Demo Day.

Revenue is happening faster.  It is well known and oft discussed that the costs of starting a company has been dropping all the time.  Open sourced software stacks and development tools, and low cost cloud resources from Amazon Web Services, all conspire with Moore’s Law to drive lower and lower startup costs for software companies.  These trends enable teams to do more with less, and this trend will only continue.

The newer phenomenon, however, is the capability to build and drive revenue faster than ever before.  More YC companies this batch than I’d ever seen before were ramping revenue, and in some cases ramping it quickly.  This is a great trend for all involved.  The signal here is that startups have an opportunity to drive revenue sooner and faster than I think ever before, and I expect this to continue.

Software continues to chomp.  VC Mega Firm Andreesen Horowitz has as their mantra software is eating the world, and this Demo Day showcased this trend in an interesting way.  Here’s what I mean.  Several years ago, critics would complain that YC companies were so single minded in their efforts to deliver a basic quantum of value by Demo Day that they were really building only features and dressing them up as companies.  Some would say also that the earlier YC efforts were far too consumer focused or limited.

I think those critiques were overblown then, and they’re totally obsolete now.  This year’s YC batch showcased companies with solutions aiming to disrupt a vast array of markets.  Several of these markets are ripe for disruption: trucking and logistics (Keychain Logistics), non-profit fund-raising (Amicus), rental price prediction (Rent.IO), interior design (Tastemaker).  All of these markets suffer from fragmentation, a low tech, antiquated value chains, and so on.  It’s awesome to see these YC companies driving to disrupt these markets.  I’m thrilled for them.  And the signal here is that if you’re thinking about starting a company, consider a sleepy old industry and what and whether you might be able to build something that dramatically upends the value chain as it is currently established.

Companies are combining bricks and clicks.  One change in this batch of YC companies, in my view was that more are stepping beyond pure software, to include real-world elements.  For example, Viacycle is a new bike sharing platform.  It combines technology with real-world equipment to enable users to rent and share bicycles.  Tastemaker is a software oriented approach to requesting a bid for design, but there are real-world steps in its process, including professionals who measure your room, and getting a hard copy of your design brief delivered.  The signal here: as software continues to disrupt more and more of daily life, we’re going to continue to see software extend beyond purely virtual and online, into real-world everyday implementations.

Venture is continuing to shift.  The trends in startups I mentioned above, will have I think a few impacts on investors.  First, focus will matter.  Startups that are getting more focused on disrupting specific verticals or value chains will, I think, over time start seeking money that’s smarter and more aligned with what they’re doing.  Second, investors will have to realize and adjust to the reality that more companies they seek to fund early will likely have revenue coming in through the door.  This will, in some cases, drive valuations.  In other cases, it will drive a healthy conversation around how to think about growing the business.  All in all these are all great things.

To close, I tell people that YC Demo Day is like Christmas morning for me.  Its a day I look forward to always.  It is a delight and a privilege to watch these many founders showcasing their hard work over the last several months, and its a great experience to remind me why we’re all so fortunate to do this job here in Silicon Valley.

 

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Engineering Agility as Competitive Advantage

TechCrunch covered today Facebook‘s announcement that they are doubling their site’s release speed, “rolling Facebook onto new code twice per day.”  This is an awesome achievement.  It’s a testament, in my mind, to Facebook’s engineering focus and energy.  It’s also a great milestone to show taht the team is focused on the right dimensions of execution despite all the press and hand-wringing going on around Facebook post-IPO.  Rather than a firm filled with distracted gazillionaires watching FB’s stock chart, Facebook is signing up to and delivering on an even higher standard of engineering agility,  Might be time to buy (note I’m not a public market investment professional, so don’t make a decision on the basis of this Friday afternoon blog post.)

I think that this announcement points to a larger trend that we will start to see throughout the technology ecosystem.  Specifically, I’m interested in tracking how engineering agility drives and fuels a team.  This is partly about ‘going lean,’ and getting something out to your users quickly.  It’s also about having the engineering chops in your organization to be able to manage on two fronts.

Front 1: being able to do all the incremental updates and bug fixes quickly and with high quality.  In a sense this is the endless cycle of innovation that every product is going through everday.  Figure out metric, tweak nob, track results: wash, rinse, repeat.

Front 2: being able, concurrently, to drive to the next discontinuity, the next major release.

Balancing both is, I think key and challenging.  In the same way that we watch user growth on the metrics of DAU, MAU, and DAU/MAU, I anticipate that we will see more transparency and standardization around engineering agility in startups over the next few months and quarters.  It is certainly something to look at and watch, and I expect that we’ll find measures that do a better job standardizing this over time.

 

 

 

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Reading The Power of Habit

The Power Of Habit

I started reading the Kindle verison of The Power of Habit: Why We Do What We Do in Life and Business.  I’m still early on, but it’s been a fascinating read so far.

It describes the obvious with a new clarity that I’ve found worth revisiting: namely, that much of life is a collection of habits.  Adjust a habit, and this can in turn can have a whole set of cascading impacts.

Very pleased to have come across the book–a great kick in the butt to get me back into posting to this blog, a habit I’ve neglected since coming back from my travels.

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