I've read a lot on investing and startups since I started about 5 years ago. Along with Fooled by Randomness, this is my favorite piece that I've read on business and putting things in perspective:
The language of the disruptive attackers was completely different: “It's time to create the sales force.” Hence, the paradox: Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward? The answer lies in their approach to marginal versus full costs. Every time an executive in an established company needs to make an investment decision, there are two alternatives on the menu. The first is the full cost of making something completely new. The second is to leverage what already exists.
Almost always, the marginal-cost argument overwhelms the full-cost. When there is competition, and this thinking causes established companies to continue to use what they already have in place, they pay far more than the full cost—because the company loses its competitiveness. As Henry Ford once put it, “If you need a machine and don't buy it, then you will ultimately find that you have paid for it and don't have it.” Thinking on a marginal basis can be very, very dangerous.
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Many of us have convinced ourselves that we are able to break our own personal rules “just this once.” In our minds, we can justify these small choices. None of those things, when they first happen, feels like a life-changing decision. The marginal costs are almost always low. But each of those decisions can roll up into a much bigger picture, turning you into the kind of person you never wanted to be.
This was stuck as a draft. In light of posts like this and this, it feels stale already. But, I thought I'd publish anyway.
A prominent VC asked an SV Angel portfolio founder this question in a pitch. It was in the context of acquiring users. Now I'm no Mike Moritz when it comes to active questioning and listening - my line of inquiry could be described by founders as banal at best. But this question was so inept and short-sighted that I thought I'd add my drivel on this topic.
In the last 5 years, there have been breathtaking new channels (or “platforms”) for distribution: the Facebook Platform; the iOS app store; Twitter's API; and most recently, Facebook's Open Graph.. In addition to features like the 'notification tray', founders and developers can access, activate and engage millions of users in a matter of weeks.
These are unbelievable advantages for founders - as important as services like AWS. In my opinion, the watershed moment was 2007 when Facebook launched its platform. Back in the day, it would have taken 200 bus dev people/lawyers to sign and paper those deals to implement. [Endnote1 ] Instead, Facebook used an API and a standard Terms of Service. Not only did it make bus dev people fairly obsolete, it was a frictionless way to access users.
That platform saw early players cleverly 'game' the rules to get fast and wide distribution. This was nothing new (see email marketing). But companies and startups were getting millions of users using borderline spammy tactics. And investors were chomping at the bit (including us). The top-line numbers were too irresistible.
The problem is that 'gaming' any platform or new channel usually results in bad users. It may look good in Google Analytics or AppAnnie but over time, that line will slope down and to the right. When I was at StumbleUpon in 2007, I heard Ram Shriram talk about the importance of “good users” and how you want your first users to be your best users. Getting non-engaged users was a distraction. That has always stuck with me. Our experience is that those who differentiate on “gaming” a distribution channel usually attract a cohort of users who don't stick around (i.e., aren't 'engaged). Some of the prominent early leaders in the Facebook Platform days are cautionary tales for investors and entrepreneurs. Meanwhile, Zynga took a fast follower approach and became a franchise. [Endnote 2]
So when I heard this VC ask this question I was dumbfounded. “Gaming” any platform or distribution channel is the fastest way to create short-term value. Users who leave over time. Weak cohorts. We've seen this with each new platform or distribution channel: Facebook Platform, iOS, Twitter, etc. Companies “pollute” these channels by using aggressive techniques - and once you pollute those channels, it's hard to leverage them again. If you're known as spammy or annoying, it's hard to change that perception.
“Gaming” platforms is good for optimizing that top-line number like “total number of users” but not optimal for engaged, long-term users. That depends on the community you cultivate and the value you create over the long-term.
[Endnote 1] To give you some perspective, when Google first launched, it relied on painstakingly long and complex deals with partners like AOL and Yahoo! to get distribution. These took months on end and required complex negotiations and machinations among lawyers, finance, engineers, etc. But this was the primary way to get distribution (i.e., users) at scale.
[Endnote 2] I may be wrong here. Could be some revisionist history by me.
Getting “featured” in the iTunes App Store or Google Play is a boon for any mobile app. It can lead to thousands or even millions of downloads in a matter of weeks. Even better, it can zoom an app to the top of the “Top” charts (most downloaded, most favorited, etc.).
Therefore startups naturally covet this. It can add significant lift to any startup's trajectory.
But this seems more significant 2-3 years ago. Back then, there was a real urgency to get featured in the App Store (Android wasn't around then). Even better, getting featured on an Apple television commercial was the holy grail. If you became one of The Chosen, the sky was the limit. Getting featured was virtually necessary and sufficient for success. It correlated very highly to (or even caused) a top ranking.
And that was generally the only way users could 'discover' apps. Social media distribution channels (i.e., word-of-mouth) barely existed - Twitter was a curiosity to most. Now it's a mainstream phenomenon. Back then, most people just looked to the “Top Rankings.” And there was a wave of clever developers who figured out how to 'game' the system to stay at the top once they got there (a topic for another post).
Now there are more ways to 'discover' new apps. More people have smartphones; apps get publicized in mainstream press and blogs. And social media/word-of-mouth channels are now stable and robust. Facebook Open Graph and Twitter OAuth create immediate network effects but also make switching apps easier (i.e., your social graph is portable).
So today, “getting featured” is neither necessary nor sufficient for success. It's obviously hugely helpful for any app to get featured. But if your app is good, people will find it. Conversely if your app gets featured and it can't stand on its own, you will hear about it. We've seen many apps get featured - and zoom up the rankings - and then fizzle thereafter. It only highlights the importance of building something great and that speaks for itself.
The only (and obvious) takeaway is to build an app that delivers long-term value. Something that people use every day (i.e., a “first screen app” as we douchebag VCs might say). People are less forgiving of apps that don't deliver long-term value. Don't worry about getting featured. That's a second-order effect. Getting featured can get asses in the seats. But it's no good if those asses leave.
I wrote earlier about how we observed virtually unprecedented exponential growth from companies in the past few years and how some start-ups in the consumer world leveraged the concept of the 'atomic unit' or 'trivial gesture' to achieve this growth. We also observed another common characteristic or trend in apps/services that got early, rapid traction. These apps got their 'fit and finish' right from the get-go - they were impressively polished and did one or two things cleanly and elegantly. As Jack Dorsey would say, they tried to get every detail perfect and limit the number of details. Some of the companies who fall into this bucket (IMHO) are Batch, Orchestra, and Oink.
Looking back, this seems to make sense. Social media or “word-of-mouth” channels like Twitter, Facebook, Tumblr and others get your app out to literally millions of people within months or even weeks. Viral marketing and mechanics have become standard best practices. Notifications on phones have become the standard default. And for better or worse, these channels effectively act as amplifiers for the word-of-mouth zeitgeist. If your product doesn't doesn't have the right 'fit and finish' or is deficient in some other way from day one, then you will hear about it quickly and loudly.
When Google launched “Google Talk” back in 2004-2005, it seemed easier to field-test publicly. You didn't have to get your 'fit and finish' down tight. There was a relatively small number of people online (compared to today) and the 'word-of-mouth' channels discussed above weren't as robust and stable (or didn't even exist, in most cases). You could launch a rough product; iterate; update + tweak; iterate; etc. without damaging lash back. You could stay in Beta forever. It's not clear you can do that anymore, and some companies who experienced exponential growth in 2011 demonstrated the power of getting the important details right from day one.
I talk to a lot of young people about career advice.
I used to tell them to “follow their passion.” I now think that's not the best advice. Or at least, not the most practical. I think it's too stressful. There are very few people who are lucky enough to “follow their passion.” If I followed my passion, I'd be a either a homeless professional golfer or a homeless television watcher.
I found that a better - or more practical - heuristic is doing what interests you or piques your curiosity. Or generally, what just feels “right” for you. Not what you're supposed to do - as dictated by peer pressure, family pressure, or self-inflicted pressure.
I made many career changes in my life - aspiring professor, engineer, lawyer, businessman, startup advisor. I made a lot of choices that I was “supposed to make.” I bet that a lot of bright, young people make choices subconsciously driven by what they're 'supposed to do.' For me, those generally led to a state of being “not unhappy”, which is an even more insidious consciousness than being flat-out miserable. It's like a frog in slowly boiling water. They don't know they're dying until it's too late.
When I started making choices dictated by interest and “what felt right” to me personally, then it usually led to better outcomes. It didn't always result in better outcomes. But it was never costly. Learning new stuff or being happy is never costly.
I came across this great quote on Pinterest and it really struck a nerve with me.
When I was 25, I had Hodgkin's Disease, a form of lymphoma (or the “Good Hodgkin's”, as Larry David once said). It has an unusually high cure rate but I was an outlier. My case was particularly bad. The cancer was relentless. My lowest point was when a doctor bluntly told me that I had a 10% chance of survival.
That one statement put me in a funk for about 2 years even after I came through my bone marrow transplant and deemed “cancer-free.” Most cancer patients who come out “cancer-free” after their treatment still have a long road ahead. If you're still cancer-free after 1 year then your chances of being 'cured' rise linearly; after 5 years, exponentially and so forth. The magic number is 10 years. If you're cancer-free after 10 years, you're effectively 'cured.' As many cancer patients know, you are never really cured but after 10 years, you're effectively out of the woods.
When the caretaker told me that, I remember thinking that I would give anything to be 35 that very day. I wanted life to fast forward 10 years. i wanted to know that I'd be ok. I went through treatment with some people who didn't make it. I was scared shitless. I knew I would have to live with this shadow for at least 10 years. It affected everything I did.
I'm 42 now. Out of the shadows. I have a wonderful wife and a great daughter. I am beyond lucky in many ways. There are days that I complain (mostly in jest) about my slower metabolism, taller hairline and marbled (with fat) physique. And like every joke, there's a grain of truth. I'm approaching middle age and have many of the typical existential crises.
The downside of moving beyond my “10 year mark” is that it's harder to remember 'what's really important'. I don't just feel lucky just to be alive and happy. I want more. I think about what I don't have. I treat everything in my work life with a seriousness and anxiety that's not appropriate to the real stakes involved. And this quote really slows it down for me. It reminds me of how truly privileged I am.
I was misquoted by Silicon Alley Insider yesterday. They corrected it. The original headline was disgusting, and antithetical to what I said and what we believe. I was embarrassed to have my name near it. I thought their correction was the end of it. But there are still old versions being syndicated through other channels so I want to clarify what I said.
I spoke at the Lerer Summit a few days ago to a group of their portfolio founders and friends. I gave a 10 minute snapshot of what was on founders' minds in Silicon Valley. When I spoke, a reporter misread my slide and ran a story based on that error. The slide read (in part):
Acquihire != Signing Bonus
She missed the exclamation point. ('!=' means 'not equal' in computer science jargon.).
We're seeing a lot of founders reach the inflection point of raising more $$ or doing an 'acquihire'. My main point was that this was a special time for this type of transaction. Fast-growing companies like Dropbox, Twitter, and Fab have done these types of deals in addition to Facebook, Google and others. It's a unique opportunity to be an early member of a team that has a huge impact on the world. By definition, they will be early and fast-growing only once. If you wait a few years, and the same company is interested, the money may be the same but the opportunity most likely will not.
And if “maximizing impact” is why you started your company, doing the acquihire can be the most leveraged way to do that. Don't just view it as a 'signing bonus.' Think about what happens after the deal closes, not what happens on the closing date.[FN]
I can't unring this bell. No one will read this post compared to the people who read the original headline. I'm probably being overly sensitive (and narcissistic) in thinking that anyone even read it or gives a shit. But I just wanted to set the record straight.
[FN] If you are the Nth engineer at BigCo, then maybe a different analysis.
I wrote this on 12/8/11. Just moving over to svbtle.com.
Like many investors, we often get asked “what we look for” when evaluating startups. I recently did an interview (humblebrag) with Tarang Shah for his new book, “Venture Capitalists at Work” where he asked me that question. (Incidentally the book is a great read to hear investors' stories and how they approach and work with founders.) In a nutshell, we look for “founder/market fit”, which is an obvious play on Marc Andreessen's concept of “product/market fit.” We look for founders who personify their product, business and ultimately their company. This can come in many flavors - building something for themselves; having a deep understanding of the market/industry dynamics; being a big-brained engineer and working on a super hard, challenging technical breakthrough, etc. Anyway, here's the excerpt:
What do you look for in the companies you back? What really stands out when you meet with these promising start-ups?
Lee: Our preference is for founders solving a problem for themselves. It’s more of a bottoms-up approach than looking at a market and saying, “There’s a big market.” There’s a lot of debate among investors whether markets or founders are more important. We look at founders first and hope that we back the ones that are only interested in solving interesting or hard problems. And those, in our experience, usually lead to big markets. Another advantage of a founder building a product or service to solve her own pain point is that she doesn’t have to do market research or focus groups—she is the target market.
And so I think what stands out in the promising founders is this genuine authenticity. It’s like the Supreme Court justice’s definition of pornography— you know it when you see it but you can’t define it. When a founder tells a life story about how they approached the problem, what it means to them and their vision for the future—that’s what we’re usually drawn to. It’s not always sufficient for success. There are many founders we backed who built something for themselves and didn’t succeed, but it could be sufficient to get an investment from us.
A couple of comments:
One thing I'd say is that solving interesting or hard problems doesn't always lead to big markets. In fact, in the majority of cases they don't. Probably a better way of saying this is that building for large, growing markets usually involves really hard problems to solve and that hard, complex, interesting problems attracts a certain type of personality.
Finally, the “you know it when you see it” idea is really pretty much spot on for us and so is best illustrated by example. Listen to Jack Dorsey talk about what inspired him to create Twitter, or Dennis Crowley talk about his vision for Foursquare and how that evolved over the past ten years, and you'll get a good sense. It can be deceiving though to look at these two because they are the outliers - there are both many founders who are wildly successful and didn't fit this profile and many founders who absolutely fit this profile and didn't succeed.
Another great example for us is Daniel Gross, founder of Greplin. He's not as well-known as Jack or Dennis but his story was just as vivid for us when we first met him:
“I had this very long list of things I thought would be cool. Greplin was always near the top. But my mistake at Y Combinator was not listening to my own intuition enough. There's the line "Wouldn't it be cool if this thing existed?” but those aren't often good ideas, because you're not the ideal user. It's also very hard to make a product when you're not the target audience. Because you have to make decisions along the way, and unless you would be the target user,, you're going to make the wrong decisions. Understanding that fact was my “a-ha” moment. Greplin was the one project idea I had for which I was the target audience.“ (link)
Again, there are a ton of limitations to this approach. It's virtually impossible to measure a person's drive or passion; the "scratch your own itch” heuristic doesn't always lead to - or even correlate with - large markets; and this “founder/market” fit isn't sufficient to build the business and the company even when you've found a large market. But it's the approach that I've learned from Ron over the years, and the one that really resonates with us.
Seth Levine wrote about one wrinkle to the “VC Seed Signaling Problem.” The crux is that some founders actually ignore or cut out the VCs who invest in seed financings. We've seen this happen at SV Angel too.
This is probably the worst possible outcome. Not only is the VC not “value add”, they are actually “value subtract” because they're forcing you to behave in sub-optimal ways.
There's no categorical rule on VCs investing in seeds, IMHO. When founders ask, I offer a simple “cost/benefit analysis.” When a VC invests in a seed round, there is signaling risk. Higher risks equals higher costs or higher prices under basic finance theory. Thus the VC's seed money is “more expensive” because it has higher risks.
If you can identify the tangible, concrete benefits that outweigh these additional costs, you should take their money. The example I always use is Reid Hoffman of Greylock. He started LinkedIn and angel invested in Facebook, Zynga and Twitter among others. If I were starting a consumer internet company and got even a few hours of his time, I'd do it. Other examples of tangible value add: introductions to key customers, help with recruiting, etc.
How do you determine this? Just ask them what you can expect. Most will be surprisingly open about what they'll do. Some will say that they can't provide the same attention as their Board-level investments but you can expect 'n' number of hours (or minutes) per month. Then you can determine if benefits > costs. Thanks to Zao Yang and Adam Smith for this last point. Both are advisors to SV Angel.
Some entrepreneurs view timeliness as 'value add.' There's no question that VCs act quicker. So do individual angels. I'm not sure that this overrides the added costs though. As John Wooden says, Be quick, but don't hurry.
If the benefits don't outweigh the costs, you are taking expensive money. It's like using a high interest rate credit card when 0% financing is available.
SV Angel is an investor in Twitter. Many friends work there. My best friend (@gracelee) works there. I have never been more proud to be involved with Twitter than today.
Today they announced the Innovator's Patent Agreement. It is a radical statement against the patent trolls and the damage they've inflicted on the tech industries. Instead of lobbying government to address this (also an important technique) they took the matter into their hands by acting in the commercial market.
Twitter VP of Engineering Adam Messinger (@adam_messinger) summarized what this means:
“This is a significant departure from the current state of affairs in the industry. Typically, engineers and designers sign an agreement with their company that irrevocably gives that company any patents filed related to the employee’s work. **The company then has control over the patents and can use them however they want, which may include selling them to others who can also use them however they want. With the IPA, employees can be assured that their patents will be used only as a shield rather than as a weapon.” (Link to blog)
In a nutshell, Twitter won't be a troll.
If other companies adopted this, you would have a state of detente instead of the current climate of mutually assured destruction. It also affects startups. Many startups go belly-up. That means they go bankrupt. Trolls often troll in bankruptcy court for patents that go into bankruptcy court. Like any other asset sold in bankruptcy, you can get them on the cheap. Trolls aggregate these patents as part of their war chest. So you as a startup have the potential in actually helping these trolls. This kills that loophole. Patents in bankruptcy become benign.
This is an unbelievably good thing. More powerful and effective than any legislation. We will encourage SV Angel companies to adopt this policy. Patents were meant to protect, not penalize.
Congratulations to @twitter for making such a bold statement on a regrettably critical issue for tech companies.
Recently we've seen more entrepreneurs invest in startups. They run their company and invest in others at the same time. An old colleague from Google, Brian Axe, calls them 'angepreneurs.' This isn't a new trend but definitely one that has ramped up.
I have mixed feelings about this. I learned from Ron Conway that “dabbling” (as he likes to call it) is generally frowned upon. Doing anything outside of building one's company was frowned upon, for that matter. I felt the same way. When you take other people's money, you have a moral - if not legal - duty to devote all your time and energy to building a company. My Dad started his own company. I learned from my Dad that it requires a certain level of single-mindedness.
I also realize that it's a different environment than even 5 years ago. More openness and transparency. Founders share their experiences and 'best practices.' It's a way of giving back and also probably informs their “day job.” Running a company and investing in others aren't mutually exclusive. And it's great for us when a portfolio founder invests in another portfolio company. Active founders are frequently some of the most value-add investors.
I thought about this recently when I heard a few Facebook folks make the same observation about Mark Zuckerberg. They effectively said that they don't think he's socially awkward as the press likes to portray. He's just so focused on Facebook and that's all he thinks about. So even when he's talking to you, you can almost see him thinking. That gave me chills. That level of single-mindedness and competitiveness. I have never seen Zuckerberg at a social or tech event (uh, probably because we run in different circles). I've never seen him on a cap table except his own. There are rumors that he's not even going on his IPO roadshow.
I ended the first draft of this post here. My first thought was that even though I wasn't crazy about it, it wasn't going away. But I've heard too many stories in the past few weeks to change my mind. With that said:
One risk of lots of individuals investing (ie, a party round) is the bystander effect. A founder asks for help, and no one responds. There's either no incentive to do so or they think “the other guy is doing it.” We have seen that happen often and that factored into my first thoughts.
But I'm now hearing more stories where founders say that the most value-add investors are other active founders. More so than the “professional angels” or VCs. It's happened enough where I think this trend is definitely a welcome one. It's up to the entrepreneur to decide the composition of their investor syndicate. It's great they have more choices.
