Thursday, May 9, 2019

Markets Are 10X Bigger Than Ever

Over the last few years the number of people and businesses online has ballooned. Spend on the Internet has grown rapidly as you can now reach billions of people, and hundreds of millions of businesses, in a frictionless way. While in the late 1990s people were scared to put their credit card number into a website, today people use their phones to pay grocery stores and order Ubers. Growth of the internet has spilled over to all classes of software including enterprise SaaS and SMB segments.

This in turn has yielded much larger outcomes than anyone expected for online software companies. The large IPOs of the last year, and the ongoing growth and scaling of prior generation SaaS companies, reflects massive growth and scale of the internet and its usage.

Market caps of some SaaS companies:

Salesforce: $120B 
Workday: $44B
Atlassian: $29B
Shopify: $29B
Stripe (private): $22.5B
Zoom: $19B
Twilio: $16B
Okta: $11B
Dropbox: $10B
Slack (private): $7B (TBD as public company)
Github (acquired for $7.5B)

A similar trends has existed in consumer companies, with a recent slate reaching massive market caps:
Google - $809B
Facebook - $539B
Uber (private for one more day) - $80B
Twitter- $29B
Lyft - $15B
Pinterest - $15B

In general, software markets and businesses are 10X bigger than they were 10-15 years ago. This is due to the liquidity provided by the global internet. A company that would have been a $10-$20M subscale revenue business is now a $100M revenue company, which means many more companies can now be worth $1B or more, and many more SaaS businesses have the potential to be $10B+.

This post reviews some of the numbers showing how much larger the internet is now than it used to be, then the implications for startups and their eventual market caps, and geographic distribution.

First some background.

1. Markets Are Bigger Than Ever In The History Of Humanity.
The images below are all taken from the Internet Trends slides from 2017 and 2018.

Point 1: There are now >3.5 billion people online. This means businesses can reach more customers than ever before via a single channel (literally billions of them!).


Point 2: Almost 3 billion people have smartphones. So people are not only online, but always connected. This make communications applications and products part of day-to-day use, and has also created enterprise pull for related products (Slack, Zoom).
Point 3: WiFi is everywhere. It is now standard for people and businesses to always be connected.


Point 4: People spend so much time online, they expect to do the same for both their personal, and business applications. More people online + always online = more internet customers and bigger than ever services.


Point 5: People spend money where they spend their time. So more money has also flowed online over the last 10 years at a massive rate.

Point 6. Online services can grow at a massive rate due to the global market access of the internet. Below is an image of Zoom meeting minutes per year.

2. Since online markets are bigger than ever, more $1B to $10B software companies can exist.
A big side effect of humanity-scale adoption of the Internet is that businesses can get bigger, faster, then ever before with the internet as the catalyst. Never before have so many people been so accessible in a low cost, low friction manner. This means startups and products can be adopted faster than ever.

The old standard for a software as a services (SaaS) company to go public was $100M in annual recurring revenue, which would imply a $1 billion market cap assuming a reasonable ongoing growth rate.

a. There will be more $1B to $10B+ software companies.
In the past, many niche software companies would tap out at $20M to $50M in revenue. Since markets online are 5-10X bigger than they used be, these same companies will now scale to $100M+ in revenue and a $1B+ market cap. Companies that in the past would have been a $1B market cap company, are suddenly supporting $10B to $20B market caps per the current slate of IPOs.

This does not mean there will be more outliers worth $100 billion or more, but rather that the base revenue a random company can achieve is a few fold higher than just a few years ago due to the growth and liquidity of the Internet.

b. While tech clusters will only grow in importance, there will be more $1B+ companies outside of tech clusters.
Since "niche" software companies can now reach $100M revenue scale more easily, there will be more $1B market cap companies outside of the major tech cities (Bay Area, Bangalore, Beijing, etc.).

This will be confused in popular press and media as "you can start a tech company anywhere" (true) and "Silicon Valley is over" (false). While you can start a $1B+ company most places due to the recent mega scale of the internet, it does not negate the network effect that a tech cluster, or industry town like Silicon Valley has (more on this in a future blog post). The true outlier $10B to $100B+ companies will continue to be started in tech clusters like the (San Francisco) Bay Area, Bangalore, and Beijing (the "3 Bs of tech").

3. Startup Companies Will Grow Faster Than Ever
The growth rate of a company is really just a reflection of its market size and ability to scale its go-to-market. In other words, how many people can I reach in a repeatable fashion? Given the scale and liqudity of reaching people online, and their willingness to buy good and services via the web, companies can now grow to massive scale faster than ever. Not only will companies be bigger than ever, they can get there faster.

Slack is a good example of rapid ramp by a SaaS company. "Bottoms up" distribution, where any employee with a credit card can buy a SaaS service will also accelerate new SaaS adoption.
Note - this trend also holds for DTC product adoption acceleration (see image below).
3. There Is Still A Lot Of Room To Grow



Ecommerce as a category has grown from ~5% to 13% of retail sales since 2007. While not all commerce will move online, there is still massive tailwinds to the Internet.

Summary
The last 2 decades have seen the shift of behavior online + commerce online. The next 2 decades will see a further shift in buying behavior and expansion of the Internet as the motive source for startup expansion. In other words, startup companies will continue to grow in scale, and get there even faster. Markets are bigger and faster than ever before.

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Monday, April 1, 2019

Founder Investors & Scout Programs

A major trend of the last few years has been the rise of first time founders (or ones early in their startup career) investing their own, or scout fund money, into other startups. In the past, many founders would not become angels until they had either a prior exit under their belt (and therefore cash to invest) or the company was many years into its journey and they were far enough along to have a large salary or some secondary-stock-sale-based liquidity. Many early founders are now being given their own micro venture funds, or money from other funds to invest.

For founders starting to invest, there are a few key things to consider:

A. Being A Good Angel Investor Takes Time
Part of being a founder CEO is spending time with other entrepreneurs. Founders often exchange tips on hiring, distribution and other areas, gossip about which investors are good or bad, or provide each other with moral support or cross-coaching [1]. The nice thing about founder to founder time is it is optional. If you get really busy, you can more or less drop these activities.

If you are an angel, you are pledging time and help to the people you back. While not all angels are able to help all the founders they fund, you should generally pick up the phone if they call or reply to emails and asks.

When you have 1 or 2 or 4 companies you are involved with as an investor, it does not feel like a big load. You can manage the interactions with a limited set of investments. Once this number gets to 10 or more companies, it really starts to add up. While 1-2 companies is a hobby, >10-20 companies starts to feel like a part time or even full time job (depending on how involved you are).

Companies you back will need help with fundraising, people issues, hiring, M&A offers, and other events. Angel investing can start eating into your time in a deep way. The extra hour you should be spending on your own company to work on the strategy roadmap you keep procrastinating on will suddenly go to help a founder instead. The default path may become to pick up the phone to help a founder, which is easier to do than focusing on your own startup work.

The best way to counter this time sink and mode switching is a few fold:

1. Is now the time to start investing? What do you hope to get out of it?
Is it worth waiting on your company hitting some moment of momentum before starting to give others advice and capital? Is now the right time for you to invest your own money or that of a scout program (or raise a fund)?

In my case I took a small number of advisory roles while starting my first company (MixerLabs, acquired by Twitter) but did not do much real investing (in part for focus, and in part because I didn't have much money). I am not sure if scout programs had been more extensive then if I would have participated, it is quite possible I would have - however I am happy I had time to focus on my first company. Startups are always hard, and first time startups are extra hard. By the time of my second company I had been investing for a few years and continued to actively do so.

The positives of investing include giving back to others, broadening your network, information access (for example, what new distribution approaches are working for others), and the potential for financial return (although you should plan to lose any personal money you invest - so do not invest if you can not afford to lose the money)[2]. The cons include investing can become a big distraction, can irritate your cofounders or employees if a lot of your time goes to it (and your startup is not working), and the potential to lose money.

2. Time box investing.
If you do decide to invest, carve out the time you are going to spend on investing and stick to it. Is it every Tuesday and Thursday night? Your Saturdays? Treat it like a hobby. If you would not drop out of work mid day regularly to go do yoga teacher training or collect model trains[3], maybe you should not spend that same time on other people's startups. Your own startup should come first.

3. Set expectations up front.
Give founders you back realistic expectations - how fast can you reply to calls/text/emails? Are you only available to meet live certain nights and weekends? Or just breakfasts? You can write a guide to working with you as one approach.

4. Don't spray and pray.
The more investments you make the harder it will be to manage time. Make sure each incremental investment is better than the average of all investments you have made so far. If you are not moving the average up with each investment you are probably investing badly (or your first two investments were Stripe and Airbnb).

5. Focus on investments that will come to you, versus hunting.
If you have just left a key network (Stripe, Facebook, etc.) to start a company, you are part of a unique cohort. Lots of your friends are probably also starting companies and you know who is good. Similarly, if you work in Fintech or another market, you will know who the best companies and founders are in your market. Invest in people or products you already know, do not need to diligence as deeply, and who you planned to help or informally advise anyhow. This will be differentiated access and also will prevent investing from becoming a massive time suck.

6. If you get extra busy, stop investing.
If your startup goes through an especially intense period, you will need to put investing (and all hobbies) on hold. If you are investing your own money, it is easy to ramp things up and down. If you are in a scout program or have raised your own angel fund, make sure expectations are set that there may be long periods of time (even years) when you may go dormant. One way to avoid pressure to invest is not take a management fee, or only take fees on capital you have deployed. No matter how you do it, make sure you can pull the breaks if needed.

B. Scout Programs and Your Personal Track Record: It is not free money!
In the last 5 years, a large number of venture funds have started scout programs, in which they give a set of founders or executives money to invest on their behalf. For example, a VP engineering at a company may be given $100,000 by a venture fund to invest, with the VP and the venture fund splitting the upside. Some scout programs have gotten quite large, with one notable one including 30+ of people.

I have heard a number of people in scout programs say that they treat scout money as pure optionality - they have no personal skin in the game - so they do not diligence or really care where the money is going. One person told me "I like to learn new things, so the scout money allows me to pay to learn something - its not my money so its OK." Another told me "I am investing in my friend's company which isn't great, but its scout money so it doesn't matter".

While not all scouts think this way, some do. So it is important to consider a few things when investing other people's money:

1. You are building an investor track record. Don't ruin it early.
While you might not realize it now, if you ever want to become a professional investor (raise a fund or SPV, or join a venture firm), people will want to see your track record. If you invest badly as a scout it may be hard for you to do either of these things. Effectively you are destroying your reputation as a good picker of companies by thinking the scout money is free. Reputation is the highest value thing you own. Is it worth trading future reputation and opportunities for a $10K check in a bad company?

Similarly, other investors look to your portfolio as a quality signal of referrals you make. If you angel invest in a lot of bad companies early, VCs will be less likely to react quickly to companies you refer for series A or B. Effectively, people will view your past taste as a guide to your future referrals.

This means you should not treat scout money as free money. Rather you should view it as a way to generate returns for yourself and for the fund that is backing you. You should also view it as the track record you are laying down that create optionality for you to some day join a venture fund or start your own fund.

2. You are a fiduciary of someone else's money.
If someone gives you money to invest, the goal is to make them money. The venture capital funds themselves raise their money from large institutional endowments, family offices, and other sources. For example, the dollars you are investing may ultimately belong to a teacher's pension fund, or an anti-cancer philanthropy. Your goal should be to make these institutions money to keep them funded.

Some scout programs are nuanced in that venture funds are using scout programs to build information access and network. However, if you make people money they tend to like you more than if you don't. If you want to eventually work at a venture fund, the VC partners will look at your scout track record.

Thanks to Naval RavikantGarry Tan and Suhail Doshi for feedback on this post.

NOTES
[1] In general I have found founder to founder coaching to be dramatically better than most self styled executive coaches. A few are actually good, but I would make sure to define what you plan to get out of the hiring of one.

[2] Most founders I know eventually end up with a tight circle of other founders they are quite close to and speak to each other very regularly (in some cases more or less daily or weekly). So informal founder to founder networks are quite strong and can provide the network and information access without the investment. That said, some founders have made more money from a friends startup as an advisor or investor than from their own.

[3] I do not know anyone who collects trains, so it is a hypothetical.

[4] You can also see this Twitter thread started by @suhail.

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Wednesday, March 6, 2019

For YC Companies Raising Seed Rounds

In the weeks before demo day, a number of YC founders will reach out to me for advice on fundraising or early customer acquisition. In general, the same set of questions come up from the founders. Below are a set of links and takeaways that I hope will be of help to founders.

1. Fundraising.


Some takeaways (usually items discussed live with founders):

  • Every company is unique and edge cases may emerge for you. When in doubt talk to a trusted angel or advisor. If you are in YC, talk to your YC partner (they see a ton of parallel fundraises!) to get another view.
  • If your company does well, you will be working with your investors for the next 5-10 years. As such, you should optimize for (i) who can help your company and (ii) who you have good personal chemistry with. It is a long road.
  • Over optimizing for valuation and brand tends to be a common first time founder thing. The specific partner at a fund, or set of angels you work with is more important than a bit more dilution or a brand name firm with a partner you don't really gel with.
  • In reality, there is not that big a difference between SAFE notes and equity raises. SAFEs tend to be easier and faster and most (probably 70-80%) of seed companies do those. But an equity raise is OK too.
  • Ask your investors to commit time to help as part of their investment. Even the busiest people are more likely to carve out time to help you if you ask as part of them investing.
  • You usually do not give up a board seat for a seed round, and almost always do for a series A. If you add a board member, make sure to vet them with other founders. In particular focus on how they help, and also how they act if things go badly.

2. What to do once you have investors.
You spend all this time raising money, how should you make use of your investors?



Hope this is useful!

Thanks to Avichal Garg for a quick sanity check look at this post.

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Tuesday, January 8, 2019

Interesting Markets: 2019 Edition

Every year I take a step back and ask if there are common themes in technology. Sometimes this creates a very backwards looking view, as the most obvious signals are in companies that have been working well for a few years and the trend is really over. Other times the signal turns out to be false or speculative. Many people five or six years ago probably thought consumer IoT was going to be driven by startups-when in reality big companies have been the key for most (but not all) consumer IoT applications.

Here are some areas I think are especially intriguing for 2019:

1. Devsumer* Products. AKA Software Eating Accenture.
One past wave of technology innovation was the rise of the professional & consumer market for tech, or the "prosumer" market. We are now seeing a new merger of the developer & consumer markets, or "devsumer".

If you are an operations or business team at a tech company, or basically anybody at a non-tech company, it is hard to get any engineering resources to help build the workflow or productivity tools you need to be successful. Companies will spend hundreds of thousands, to literally hundreds of millions of dollars, hiring the Accentures of the world to build simple applications and tools, or to perform API integrations for them.

In parallel, the average knowledge worker has gotten more savvy and hands on. A lot more people have grown up with a computer in the home, have taken a CS class in college (now the most popular major at a number of universities), or gone to a coding bootcamp or school like Lambda School. While not all people exposed to CS end up as full-fledged developers, people on average are more savvy about elements of software and simple code. People are more willing to build things, if they have simple tools available.

Just as there was a prior prosumer wave as part of IT productivity 1.0, we are experiencing a new "devsumer" wave, where consumers are more likely to take on lighter versions of developer-like work and products.

A number of products have emerged that allow people to build simple software applications, or to use templated applications for their own work flow or productivity. You can think of this as taking a SQL database or excel spreadsheet and turning it into an app platform. These companies include Airtable and, in a vertical way specific to internal tools, Retool.

In a different market segment, Notion and Coda are focused on the future of docs & productivity software, while other companies, such as Zapier and IFTTT allow you to simply stitch together APIs into workflows. There is the old saying that money is made by either bundling or unbundling products or services. Devsumer companies are virtually re-bundling disparate productivity tools into single companies.


By allowing any person to either use an off the shelf template or tool, or create their own by stitching together existing applications, the power of programming is suddenly available to anyone in an enterprise or SMB. These tools can also be used for personal productivity or enterprise productivity.

Devsumer products are driven by multiple megatrends including the overall shift to cloud based applications and platforms leading to accessible APIs for integrations plus a savvier white collar workforce that expects software tools to be an integral part of their work and personal lives.

There will be multiple $5B+ companies in this market (with Airtable already raising a round at a $1.1B valuation).

2. Real estate tech. Software eating real estate.
One of the largest TAMs in the world is real estate and much of an individuals' net worth is tied up in their home. In some sense, Airbnb was one of the earliest real estate tech disruptors in that it allowed people to monetize their most expensive asset by renting it out to others.

A new wave of real estate technology companies have emerged with Opendoor at the vanguard. Real estate technology companies are experimenting with fractional ownership (DivvyHarbor), new ways to build homes and neighborhoods (Mosaic, Katerra) and new ways to find rentals (Bungalow). There are also multiple services for home buying finally moving online - for example Qualia for real estate closings or Compass, which has been buying local real estate brokerages in a hybrid online/offline model.



3. Machine learning / AI silicon & systems.
 Every major technology shift creates a $20B+ semiconductor company.
Most major technology waves result in a new $10B+ semiconductor company. For example, the rise of the microcomputer led to Intel and AMD, networking to Broadcom, graphics processing and video games to NVIDIA, while mobile technologies resulted in Qualcomm and ARM.

Machine learning / AI is a new technology wave with its own silicon & hardware needs. While NVIDIA GPUs are used today by many in machine learning, the underlying hardware is not optimized for the fast I/O and matrix multiplication that would optimize for machine learning. Google launched custom ASICs for ML called TPUs (tensor processing units) but Google is unwilling to sell the hardware externally - in part to give its own cloud services a competitive advantage. This, plus the potential medium term rise of potentially ubiquitous AI models running in autonomous vehicles (self driving cars, drones etc.) yields a massive market opportunity**.

Companies like CerebrasGroqGraphcore, and others are potential contenders for ML market cap.

4. Transportation and logistics. Software eating transportation, logistics, and supply chain.
The way physical goods will be moved around the world is changing. The entire transportation and logistics stacks is being eaten by software. The base layer for this - autonomous vehicles is still years away from the mainstream, but has promising early signals. Companies like Embark, Kodiak, Starsky and others are building self driving trucks. On top of this, firms like Convoy and Uber are building load market places and logistics networks for trucking while KeepTruckin and Samsara deal with fleet management and compliance. Companies like Flexport are driving global freight. New robotics companies are trying to automate the warehouse and allow for small urban distribution centers (CommonSense Robotics). Finally, companies like Shippo help with the end user shipping process.



5. Crypto. Programmable money and Store of Value.
Cryptocurrencies and the underlying set of companies creating the new financial stack promise to be incredibly valuable. Bitcoin and Ethereum still hold immense promise as new forms of programmable money / store of value, in part due to their resistance to seizure and censorship. Despite the crypto winter, new protocols like Chia, Celo, Coda, Oasis, and Thunder are looking to re-invent compute and money while protocols like DIRT ask how to move data onto the blockchain. While a subset of these approaches will undoubtedly fail, there is immense room for innovation.

In parallel, a new financial stack is being build to to trade, custody, and derivative crypto in the form of Coinbase, Anchorage, and dYdX with Coinbase acting as one of the very regulatory compliant fiat/crypto on ramps. In parallel, efforts to create new ways to securitize hard assets (Harbor) or for capital formation (Coinlist) are driving other aspects of the early market forward.

I am still quite bullish that a basked of cryptocurrencies will be worth in the trillions within the next 10 years. The primary short term driver for crypto value with be the generational replacement of gold as a store-of-value for a specific subset of the population. The longer term drivers of crypto value will be new forms of programable money and on-chain securities.

6. TBD: Legal tech. Software eating law firms.
While more nascent, a new wave of companies are focused on eating away at the legal world. Atrium is the world's first tech-driven law firm, while companies like Klarity apply machine learning to legal contracts. In parallel, Stripe's Atlas allows companies to incorporate via API. Carta provides cap table management as a basis to branch into other services. It is early days in legal tech but it is possible these early seeds will form deep roots.

Given the degree to which legal services have a series of highly repetitive tasks that lawyers and para-legals would prefer not to do, it is surprising more software has not come to this vertical.

7. TBD: Defense? Big company employee politics creating a market opportunity.
Silicon Valley has its roots in the defense industry. A good overview may be found with Steve Blank. The recent Trump election helped to further radicalize US politics and this political divide has found its way Silicon Valley as well. While a strong national defense matters for the USA irrespective of who the president is, it is suddenly unpopular at a number of companies to accept defense related work. Google shut down project Maven which met with a negative employee response, and employees have protested defense contractors at Microsoft, Google, Amazon and others.

The rise of the radicalized worker has created an opportunity for startups to pursue defense work. The defense and intelligence community wants to work with major brands like Google. However, if Google is unwilling to lend its AI expertise, for example, to assess defense video feeds, startups will emerge take on this work.

To date, Anduril may be the defense company with the most interest although others like Shield.AI are also in the market. There is an opportunity here to build a next-generation defense company.

Summary
In sum, there are 5 core markets (Devsumer, Real Estate, AI hardware, Transportation and Logistics, Crypto) and 2 emerging ones (Legal, Defense) that seem quite exciting to watch in 2019. While there is a potential darkening macro economic environment, software continues to eat the world and to remake it.

NOTES
*To coin a term.
** The public market caps are from November 2018 as I wrote this blog post a few months ago, but took a while to finish and post it. Since then markets have come down but these companies are all still worth a ton.

PS numbering does not imply ordering of opportunities. It was just a way to organize this post.

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