Monday, November 12, 2012

Takeaways From The 100 Largest Public Companies

As an entrepreneur about to start another company, I thought it would be interesting to take a look at the largest companies by market cap.  What can be learned from them?  Raw data is here.

1. Some takeaways from the top 100 public companies by market capitalization [1]:

A. There Are As Many Tech Consumer Companies As B2B In The Top 100 By Market Cap
The original emphasis for tech was on the B2B side with the pendulum swinging over to consumer in the 1990s through today.

Shockingly, the most recent B2B tech company to crack the top 100 by market cap was Cisco Systems, founded in 1984 - 28 years ago.  The other companies are all from the 1970s or earlier, or were acquired by the remaining survivors.  Will we finally see a B2B renaissance in tech (shout out to Box & Workday)?

B2B tech [2]:
#5 Microsoft ($240 billion) - founded 1975
#10 IBM ($221 billion) - founded 1911
#23 Oracle ($149 billion) - founded 1977
#53 Cisco ($96 billion) - founded 1984
#64 SAP ($83 billion) - founded 1972

Consumer tech:
#1 Apple ($570 billion) - founded 1976
#8 Google ($223 billion) - founded 1998
#40 Amazon ($108 billion) - founded 1994
#85 eBay ($64 billion) - founded 1995

Near misses: EMC (#104 at $51 billion, founded 1979), Facebook (#127 at $41 billion, founded 2004)

B. It takes time to build a massive company.  Only 2 of the 43 companies worth $100 billion or more were founded in the last 15 years (Google & Amazon).  It takes time to build a valuable company.

C. New markets create outsized value.
The youngest companies to crack the top 100 are consumer Internet companies - most of them from the 1990s when the Internet was an entirely new canvas for entrepreneurs to address.  Similarly, the largest B2B tech companies largely all date from the 1970s, when a new industry was being formed around micro-computers.

What are markets today with outsized new opportunities?

Is it genomics?  3D Printing & DIY?  Mobile Internet?  Something else?  Or is it still core Internet?

D. Distribution And Commerce Are Key Consumer Web Primitives
Of the 5 largest consumer tech companies, 2 are distribution switchboards (Google and Facebook) and 2 are horizontal commerce platforms (Amazon and eBay - which started off more vertically focused but then went horizontal).

This raises two interesting questions:
I. What other companies are primary distribution platforms (Twitter for sure, maybe Pinterest?)  What companies can move from vertical to horizontal commerce platforms (AirBnB and the shared economy?)?  These are areas of outsized value creation.

II.  What are other web primitives beyond commerce and distribution?  E.g. is file sharing / storage a web primitive?  If so, Dropbox will be a multi-$10 billion company.  Are there other fundamental components of the cloud/internet yet to be uncovered?

2. Looking at the 1882 public companies larger then $1 billion in market capitalization[1]:

A. Companies Worth More Than $1 Billion Follow A Power Law
As you can see from the data below there are large drop offs with each step in company size.  Getting past $10 billion in value, and past $50 billion in value seem like large hurdles

(The elbow in the curve seems to be around $45 or $50 billion, although I have not done the math, but if anyone wants to do it the raw data is here).

Close up on companies worth $1-5 billion:

[1] I pulled this data on October 20th, 2012, so it is already a little out of date due to e.g. earnings calls.
[2] I am not including semi-conductor companies - e.g. Intel, QCOM etc. in this definition of B2B tech.  Also, MSFT is a bit ambiguous as it has both consumer and enterprise revenue.  Similarly, former high fliers that have since been acquired (e.g. Sun) are not reflected

You can follow me on Twitter here.

Related Posts:
The Road To $5 Billion Is A Long One
How Can You Tell If Your Market Is a Good One?
What Wave Are You Riding?

Friday, November 9, 2012

How To Choose The Right VC Partner For You

Many people confuse the value of a VC firm (e.g. Sequoia) with the actual partner who joins their board.  If your co-founder is your spouse, your board member is like your mother or father-in-law.  Unhappy, inept, or troublesome in-laws can be a disaster.

Here are some of the criteria to consider for the VC partner joining your board.

1. Network and Access
What network can the specific partner bring to bear?  Brand name partners typically have more weight and can get more important people on the phone.  More junior partners have less pull on average, but might have a stronger network of potential non-executive hires if they just left a company with lots of talent (e.g. Google, FB etc.).

2. Understand Standard "Startup Problems"
All startups are messy.  You want someone on board who has either (a) started something themselves or (b) seen a lot of early companies as an investor or employee.   Newer partners who have not started or worked at early companies (e.g. ex-bankers or ex-consultants) have a higher likelihood of inappropriately freaking out if something standard goes wrong, and things *always* go wrong at young companies.

3 . Seniority in Firm
Having a senior partner join your board is usually better then having a junior[1] partner, although trade offs exist in both directions.

The drawbacks of a junior[1] partner largely center around their knowledge, network, and incentives.    A junior partner is trying to climb the partnership ladder at their firm and may put their career before your startup.  This can lead to split incentives (and finger pointing) if your startup runs into trouble.  A junior partner may not know what they don't know and give bad advice ("You should make it look more like Pinterest") or over-react to a simple issue.  A senior partner has nothing to prove to the partnership, and has seen a lot of twists in the entrepreneurial road before, so they can just focus on fixing the problems.

The senior partner's weight in the firm and in the industry can go a long way.  Do you need to raise another $10 million as an inside round?  A senior partner may cajole the rest of the firm into approving the investment while a junior partner might not.

The downsides of a senior partner is that they may be checked out, too busy, or out of touch.  Senior partners may overly pattern match or focus too much on what worked 15 years ago.  Alternatively they may aggressively push the latest blind fad ("You really need to hire a lean startup mobile growth hacker") without knowing what it means.  In general, a senior partner will have less time for you than a junior one.

4. Personal Chemistry
Would you actually enjoy seeing the VC partner regularly?  Do they have insights you will benefit from and comments you will respect?  Do they respect you and your abilities?  Can you ask them dumb questions without repercussions?

5. Past Experience, Smarts and Insights
Does the person have unique insights or creative thinking that can really help you?  Can they be a good sounding board to help you quickly identify what to focus on?

Do they have relevant past experience in the industry?  Can their knowledge help you get where you are going faster?  Do they have operating experience you can benefit from in building your company?

6. Hunger/Drive/GSD
How hard does the VC partner work for the company?  How hungry are they to make the company succeed?  Are they available on the weekends and late at night?  What will they tangibly do to help the company?

7. Board Seat Number
How many boards does the VC partner sit on?  Will they have time to help your company?  Alternatively, do they have enough board seats to prevent them from focusing too much on you (and showing up unannounced during the work week)?

8. Firm
The venture firm's brand the partner comes from can help with hiring or deals.  Institutional knowledge can help with industry trends / pattern matching and relationships in to potential customers, partners, etc.

Reference checks.
You should reference check anyone associated with the company.  This includes the specific VC partner you are considering for your board.  Some questions to ask:
  • How has the VC been most helpful?   What is the single thing they have done best for your company?
  • What are the specific areas they have helped with? (hiring?  company building?  introductions?  strategy?  product?  something else?)
  • What resources has he or she brought to bare?  How has the rest of the VC firm been of help?  How does the VC partner interact with the rest of the VC firm?
  • How do they react to bad news?  Provide an example of when something went terribly wrong.  What did the VC partner do?
  • What is the partner weakest at?  How does it manifest itself?
  • How much do you have to manage the VC partner?   Do they e.g. ask you for meaningless data all the time?
  • How would you improve the VCs involvement with your company?
  • Describe a situation where the investor has gone above and beyond to help the company.
  • How would you compare them to the other board members?  How do they interact with other board members?  Do they create a constructive environment?
  • How do they interact with the entrepreneur?  How do they interact with the company's executive team?
You can follow me on Twitter here.

[1] Don't confuse "new to the firm" with "junior".  There are a handful of newer VCs who have had a great operating career so far and made lots of money - so they have less pressure and incentive to push their career at the venture firm at your company's expense.  They often have a pre-existing relationship with the venture firm they joined - either as an entrepreneur the firm backed or an operating executive.  This means they have more pull and respect from the senior partners then a junior partner does.  They are new to venture and to the firm, so are still learning e.g. what makes for a good investment (unless they have been an active angel).

These people are usually a better choice for your board then a true junior partner and will have more pull with the partnership, as well as stronger operating insights.  They will also have a clean slate and have the time to do more investments.

Wednesday, October 24, 2012

Startups & Miracles

You know a startup is likely to fail when its product strategy or business plan includes multiple miracles.

What Is A Startup Miracle?
A startup miracle is the key difficult thing you need to pull off for your startup to work.

It could be hitting product/market fit, a key business deal, a specific regulatory change, or the like.  If your startup needs zero miracles to work, it probably isn't a defensible startup.  If your startup needs multiple miracles, it probably isn't going to work - with every miracle, you are multiplying in another low probability event to get an even smaller expected outcome.

Single Miracles Are Hard To Pull Off
Miracles are by their nature difficult to achieve.  Every successful startup has at its heart a miracle.  For AirBnB, it was getting to market liquidity in supply/demand for rooms & spaces in a repeatable way.  For Microsoft, it was the IBM O/S deal.  Most startups die before they ever attain their miracle.

Multiple Miracles Should Be Avoided
Entrepreneurs often fail when they define an end goal and then come up with a multi-step, multi-miracle driven logical chain to get there.  

An example would be:  Our goal is to become the replacement for Yelp.
Step 1: Launch a mobile app, focused on concerts and music.  We plan to get to massive distribution for this mobile music app. (Miracle #1)
Step 2: Once we have millions of users using us for concerts, we can add other types of local content, including businesses.  Since we have millions of users, they will undoubtedly use us for local content as well (Miracle #2).  This will allow us to beat Yelp.

In this example, the concerts product has nothing to do with beating Yelp.  It is viewed as a leverage point to get to the situation where, maybe, you could add a Yelp-like product.  Given how hard it is to get to any sort of product/market fit, the company is likely to die trying to win at concerts.  It will never get to the point it can try to overcome another obstacle and compete with Yelp.  The first miracle is likely to kill the company before it can even try to fulfill the second miracle.

This is very different from "we are going to beat Yelp by providing a better local content experience on mobile" and then focusing excruciatingly on this singular goal.  Product/market fit is still equally hard to achieve, but you only need to achieve it once.

Only Work On Single Miracle Startups
If your startup needs multiple miracles to succeed, you need to go back to the drawing board and come up with an idea or product that has only one miracle.  Otherwise you are multiplying out multiple low probability events and are extremely likely to fail.

Many people delude themselves on whether they are a one-miracle, or multi-miracle startup.  They way to tell is to ask yourself what your product or business end goal is.  Is your approach directly focused on achieving that end goal?  If not, you may have a multi-miracle plan without realizing it.

Follow Me On Twitter
You can follow me on Twitter here.

The initial phrasing around "minimizing miracles" for startups is from Todd Masonis, a co-founder of Plaxo.

Related Posts
The Long Road To $5 Billion

Monday, October 22, 2012

The Road To $5 Billion Is A Long One

I was talking with Brian Singerman and he raised an interesting question: How many software companies have been founded in the last 10 years that are now worth more than $5 billion?  Or more than $10 billion?

The list we could come up with is shockingly small:

Software Company started in 2002 or later, >$10 billion market cap:
(all valuations from 10/21/12 unless otherwise noted)
Software Company started in 2002 or later, >$5 billion market cap at last news:
  • Workday ($8.8 billion)
  • Skype ($8.5 billion acquisition by MSFT)
  • Twitter (~$8 billion at last financing in 2011)
This has serious implications for the companies raising money at a $1-$3 billion valuation.  In order to 5X they would need to achieve what only 5 companies have been able to achieve in the last decade.  

Even if you assume YouTube as a stand alone would be worth more than $10 billion today, this list is surprisingly small.

There are two reasons this list is so short:
a. It take time to build real value.
Amazon, was 6 years old in 2001 when it reached its last low of ~$2.5 billion.  It took it 11 additional years (17 years total) to grow to ~$100 billion market cap.

If you look at the Forbes Billionaire list as a proxy, you notice it is mainly full of old people :) .  It takes a long time to build something really valuable.

b. Few companies do anything sufficiently valuable.  Most companies serve a niche, or don't monetize very well.  Business that can truly scale to the revenue that justifies a $5 billion+ market cap are rare (indeed, across *ALL* industries, there are only <800 companies with market caps >$5 billion).

There are a few companies founded in the last 10 years that are closing in on $5 billion or who sold within 50%.  This includes Palo Alto Networks ($4 billion), Splunk ($3 billion), SuccessFactors (acquired for $3.4 billion by SAP), Palantir (I think the last round was $3-$4 billion), Dropbox (last valuation at $4 billion), Square (last valuation at $3.25 billion), and potentially Spotify.  

Finally YouTube, if still stand-alone today, may be worth more then $10 billion.

Did I miss any companies?  Let me know in the comments.

You can follow me on Twitter here.  

Friday, October 19, 2012

How To Win As Second Mover

First entrants into a market can have a number of advantages if their product has a network effect or other lock-in mechanism.

If you are the second mover into a market, how do you win?  Some approaches:

Build Something 10X Better or Much Cheaper
When Apple launched the iPod, and then the iPhone, it had 10X better products then existing MP3 players or cell phones.  Similarly, most SaaS business have a large cost differential relative to the existing enterprise software model.

Go International First
As your competitor scales they will be so focused on the US market that they will be late to internationalization.  For example, GroupOn bought  CityDeal (a GroupOn clone) to get a faster position in the European market.  I am guessing some international first movers will get bigger then their US competitors (and maybe end up buying the US version of the company).  While I am not advocating becoming a cloning shop, sometimes going International first can give you an advantage as the first mover in international markets.

Play A Different Strategic Game (Your Strengths / Their Weaknesses)
Post-iPhone, Google was second to market with Android.

However, Google took the strategy of (1) opening up the OS for modification/customization by operators and handset OEMs, (2) widespread distribution (versus the more measured carrier by carrier deal with some market exclusivity of iPhone) and (3) maintaing the brunt of handset economics for carriers and OEMs.

Google fundamentally viewed the handset OS business differently from Apple (more as a distribution point & strategic asset for ads, search, maps, other apps) which meant it played a fundamentally different game from Apple.  Its early products where crappier from a user perspective, but it grew much faster.

Blow Out Distribution To Lock In Share
In the early days of the Facebook platform, Zynga projected out the ongoing rise of LTV for social gaming users, allowing it to pay significantly more for user installs than its competitors.  Once it had massive market share, Zynga cross promoted games it developed - effectively using its distribution to bootstrap more distribution.  Zynga could then more or less copy competitors' games, launch a month later, but still win on market share via aggressive distribution.

This approach of blowing out distribution channels in a market share grab can be very effective if products are reasonably interchangeable from the customers perspective.

Sell While The Space Is Hot
Sometimes it is clear you lost as second mover, but the market is really hot for a brief period.  Rather than raise a monster funding round and get locked in, it might be wise to sell while valuations for your niche are out of whack.

Wait For The First Mover To Get Bought (Or Kill Itself)
Alternatively, if your market is undergoing consolidation there are times when being the last independent company standing can be to your benefit.  Acquirers often screw up mergers or destroy products.

Furthermore, your competitors may take themselves out via poor execution.  For example Cisco's two early competitors were Synoptics and Wellfleet.  The pair merged to form Bay Networks with the idea that the combined forces would outgun Cisco.  Instead, the merger led to ongoing corporate infighting, factionalism, and cultural clashes, leading Bay to defocus on execution.  This cleared the competitive arena for Cisco to become the huge player it is today.

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Related Posts:

Monday, October 1, 2012

Snap Out Of It!

"We were so used to trying not to die, that we didn't realize we were winning." 
-Entrepreneur and friend who sold his company right as they hit a steep revenue ramp.
Startup founders may have 2 mindsets:
1. Trying not to die.
2. Trying to dominate.

Early in the life of a startup, the founders dream of dominating their industry.  But things may take a wrong turn.   The founders may shift from being ambition-driven into "try not to die" mode.  Founders may run into issues like - How do you meet payroll?  How do you keep the two key engineers from quitting?  What should you do if you can't raise any more money?  Many companies go through a period of holding on the edge of a cliff with their fingernails, before pulling themselves up to safe land.

While this crisis mode can be focusing short term, it can often lead to a startup to fail or to sell too early relative to its trajectory.  A founder can get stuck in "try not to die mode" even after the crisis has passed.  This mindset of weakness or crisis leads to poor behavior - growing the team too slow (or continuing to shrink the team once the crisis has passed), bad negotiation with partners, or selling the company when you don't have too (or too early).

As an entrepreneur, you need to consistently take a step back and ask yourself a few key questions.  Get a third party's opinion on this if you have trouble being objective[1].
  • Should I be in crisis or growth mode?  How do my recent numbers *objectively* look?   
  • How have key metrics been growing over the last  few months?  Is the team also growing fast enough to capture the opportunity?
  • If I didn't go through hell recently, would I interpret the *current* state of the company differently?
  • What is my cash position?  How much time do I have left if I project burn and growth?
  • How can I 10X my business?
If you just came out of a really rough patch and are in the wrong mental space to ask the questions above, take a few days off.  Yes, you.  You can take a few days off.  Really.  The crisis is over.  Regain some perspective.  You have a lot of fire in your belly.  Recharge the fire, get back at it, and do great things.

If you decide you are just too worn out after a few tough years and want to wrap up your company, that is OK too. But it is worth taking the time to take an objective assessment of what is going on.

Avoiding perpetual "try not to die mode" is the only way to rediscover the ambition and drive to shoot really big.  Not every crisis needs to have long term existential implications for your company.

You can follow me on Twitter here.

[1] I think this is an example of where a good advisor, investor, or board member can be helpful.

Related Posts:

Wednesday, September 26, 2012

Fundraising Will Take You ~3 Months

A number of entrepreneurs I have met with lately seem to have unrealistic expectations about how long it takes to raise a seed round of funding.  Everyone has a friend of a friend who raised their first round "in a week or two".  The reality is that with the exception of a few hot company outliers, each round of funding should take 2-3 months from start to close.  So what takes up all this time?

1. Honing Your Pitch.
Your first few pitches will likely suck.  Take a few days to practice your pitch on advisors, other entrepreneurs, or on angels you really don't want to raise money from.  Else you may spend a few weeks getting nos before rev'ing the pitch anyways.

2. Scheduling.
It can take 1 to 3 weeks from an intro to actually meeting someone in person.  For a seed round you will get rolling intros over many weeks or months.  Angels you meet with will refer you to other angels,   or VCs will want you to meet additional partners at their fund.  This tacks on additional weeks to the process.

3. Follow ups.
A subset of investors will ask for follow ups (data, team bios, references, etc.).  It will take you a few days to pull together the information requested and for them to reply or clarify.  If an investor asks for too much follow up with little investment on their side, cut them loose.

4. Putting together the syndicate.
Once you have a set of interested investors, you need to:
a. Gauge valuation.  What valuation will get the best people on board without you giving away too much of the company?
b. Determine allocations.  How much should each person invest in the round?  E.g. do you want any one investor to control the voting privileges of an equity round?
c. Close the first dollars in.  The first few committed investors are always the hardest.  Once the round starts to come together, everyone will fall in quickly.

5. Rolling in the stragglers and late-comers.
Sometimes it is wise to leave a small amount available at the end of the round to roll in a few really valuable investors you meet in the end.  Alternatively, collecting wires from everyone may take a week or two.

If you are raising a Series A or B, it will likely take 2-3 months as well.  The process for raising the round is different and outlined here.  However the timeframe needed is the same a seed round.  This means you should plan to start raising your series A when you have 6 months or more of money left in the bank.  Anything less, and you might find your back up against the wall.

You can follow me on Twitter here.

Other Fundraising Posts

Monday, September 24, 2012

Employee #1 Is The Toughest Hire

It take significantly longer for most companies to hire their first employee than it does to hire subsequent ones.   Reasons & mitigation:

1. It takes time to build an initial pipeline.
Hiring is a numbers game.  Just like any other sales pipeline, you need to build up a series of potential prospects.  This takes time.  Additionally, the first employee is crucial in terms of culture fit, team quality bar, and early company network.  Many people wisely take their time to find a great first hire.

Mitigation: To shorten the time needed to hire employee #1, you will need to spend as much as half your time building a hiring pipeline.  There is no magic bullet for hiring - you need to grind through it (LinkedIn, Facebook, friends of friends etc.).  Many founders allocate insufficient to hiring early on and as a result take many months to hire their first employee[1].

2. You may screw up the first few offers or negotiation.
If this is your first time hiring, it may take you time to hone your pitch for why someone should join your company.  You may also mis-negotiate equity or compensation with the first few candidates.

Mitigation:  Ask other entrepreneurs, advisors, or investors for tips on selling and closing candidates.  There are specific tactics that go a long way in closing or negotiating with hires.  You can also ask investors or advisors to help close candidates, or for the market on compensation packages.

3. Employee #1 has higher equity expectations.
Many people interviewing for an employee #1 role will claim they could just as easily go start a company.  This is false.  Starting a company is harder then most people think and can be brutal.  Given this misperception, many candidates for employee #1 have unrealistic equity expectations (e.g. 10%) that don't surface until you make an offer.

Mitigation:  If possible, softly pre-screen people based on their expectations.  Do they keep talking about how they are taking on as much risk as you?  If so, they will probably ask for an unrealistically large chunk of the company.  Circle back to these candidates 6 months later when they are still working at large company X and have not started anything - they will be easier to hire at that point.

4. More people = more energy and more social proof.
Each additional employee adds more energy to the space your company is working out of.  Potential candidates can sense this energy level - which is hard to recreate with just 2-3 founders.  Similarly, as you add people social proof accumulates - more smart people have made the bet to work at your company.  Joining your company feels less risky.  Therefore, the more people you already have on board, the easier it is to hire.

Mitigation:  To provide additional social proof, have employee #1 candidates meet with your investors and advisors.  Provide external social proof via people who have already bet on your company and are part of your network.  To increase the "energy feel" of your work space, sub-let from another startup or let friends working on their own company crash at yours.

5. As you add employees, your company network grows and building a pipeline is easier.
Each of your employees bring with them an additional network of ex-classmates, co-workers, and friends.  The larger the company, the larger the extended network.  People often want to work with their friends or people they respect, so your company has more warm leads for its pipeline.

MitigationWork it.  Mine the network of everyone you can think of to build an initial pipeline for employee #1.  Hard work is the only way to get this done.

Any other ideas?  Discuss on Hacker News.

You can follow me on Twitter here.

[1] People often find it hard to understand that at a 2-person company hiring one person = 50% more productivity.  So rather then coding, you are actually more productive in the medium term spending your time on hiring then you are just working on things yourself, tempting as it may be.

Other Hiring Blogs:

Wednesday, September 12, 2012

Enough With This "End Of Silicon Valley" Nonsense

It seems like every 2-3 months recently there has been a new post about the end of Silicon Valley[1], or related, about how software as a category is over and done with [2].  I think the arguments made that Silicon Valley is not innovating are far off the mark.

The arguments being made (and why they are wrong) are:

Argument A. "Social, mobile, and other internet products are not creating real societal value."
The social media and mobile applications that are being poo-poo'd are actually dramatically transforming the way society buys things, discovers information, and organizes itself.  This includes big changes in industries such as hotels (AirBnB), transportation (Uber), and news/communication (Twitter).  To say that the founders of AirBnB should have been working on a nano-materials startup instead of changing the economics of un-utilized space is kind of vacuous.   

Argument B. "Software is easy.  People need to work on things that are "harder" that involves, like, you know, physics or advanced materials or something."

Counter-argument B1:
The whole point of technology is to make innovation faster and easier - software enables this.   In the last 40 years, we have moved up the stack from hardware to the software abstraction layer.  Software lets you innovate faster and drives down costs, disrupting multiple industries [3].  Rapidly dropping cost curves are what drive large scale societal transformation (e.g. steam energy and the industrial revolution, processor & bandwidth costs and the internet revolution).  Similar cost curves or other key market shifts are starting to happen in genomics and hardware.

Counter-argument B2:
It is more important to work on something valuable than something that is "hard".   "Valuable" means that someone, somewhere, is willing to pay for it.  Strikingly, two of the most successful companies in clean tech to date are a software company using social mechanics (Opower) and a financial services company (SolarCity).  The hard science companies in energy are largely failing (e.g. Solyndra) due to industry economics or an inability to bring product to market [4].  Early stage startups exist to commercialize technology, not do massive research explorations.

Counter-argument B3:
Hacking society is actually quite hard.  It is possible consumer internet companies have the highest failure rates of any technology category.  This is due to both (a) a huge influx of entrepreneurs given the low cost and glamour of starting a consumer internet company and (b) getting traction for social products is hard.  The people who win, win big (Wikipedia, Facebook, etc.).  But there are lots of dead consumer companies.

Counter-argument B4:
Innovation in Silicon Valley is thriving.  Internet and mobile still have a long way to go with their own innovation cycles.  Additionally, most new waves of technology are built on the fringes and then emerge from the shadows with success.  (How many article did you read about SpaceX before ~2010?  The company was founded 10 years ago in 2002!).  There are multiple startups taking on healthcare, education, food, consumer hardware, and other industries.  These startups are not covered by techcrunch but will get lots of press in a few years as they get so large you can't ignore them.

Argument C. "People are working on a lot of stupid ideas instead of changing the world."
While I agree with the overall premise on this, I don't think entrepreneurial talent is zero sum or fully fungible.  The random person building an Instagram clone for cat owners is not necessarily the same entrepreneur who would find success revolutionizing our energy infrastructure (their choice of "Instagram for cats" as their startup sort of says it all).

Intriguingly, a lot of the entrepreneurs I know who had a small success with a consumer startup are thinking big for their second startup.  Personal financial stability and past experience can go a long way for people to take big bets.

Argument D. "Venture capitalists should be placing bets that may take 10-15 years to succeed."
I do believe most venture capitalists are generally risk averse herd-seeking 'me too' types.  There are a handful of notable counterexamples to this.  However, I dont agree with the premise articulated by Steve Blank in his post:[6]
"If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick?"
A 15 year time horizon for an exit is simply not the venture capital model, and it never was.  Even Genentech, a highly speculative company at the time, was founded in 1976 and went public in 1980 - just 4 years later.  Public markets, as well as corporate customers or investors, often end up funding value-creating companies with longer time horizons.  A more recent example is SpaceX, which is benefiting from a combination of Elon Musk's personal wealth, venture funding, customers paying up front for space delivery and government funding[7].

If you can not find a source of funding or liquidity for your idea 10 years down the line, you are not starting a company but rather doing research.  This is not a failure in the venture capital model, this is a failure in your ability to chose something people will pay for.


To sum it all up, innovation in Silicon Valley is alive and well.  The Internet and mobile will continue to transform multiple industries, and in parallel new technologies and companies will emerge from the shadows over time.  Venture capital has its issues, but does not, and should not, exist to fund research projects with open-ended times to an exit.

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[1] Really this should read "the end of Silicon Valley or its venture model", since many of the posts spend a lot of time on the venture capital side of it.

[2] Ironically, most of the people arguing software is "too easy" made their fortunes and reputations off of the exact type of Internet or enterprise software businesses they now consider lower value.  I can't think of a single pundit who made their name building a biotech, energy, or transportation company.

[3] This point was first raised to me by Naval Ravikant, co-founder of AngelList (and a bunch of others cos) and one of the smartest guys in the valley.  If you look at the evolution of tech, it has been a long climb up the stack to try to abstract away the hardware and underlying software layers as much as possible.  Why?  Because at the higher abstraction layers (e.g. application & presentation layers) you can both iterate quickly, but that is really where the value lies for multiple industries (retail, finance, government, etc.).

[4] When I was at MIT for my PhD, I would frequently run into people trying to commercialize science projects that had no underlying customer need.  Often these people were graduate students or professors who had created really amazing technology (e.g. complex MEMs devices) with no short term commercial application[5].

So, you ended up with lots and lots of university spin outs without a clearly defined customer need raising large amounts of capital to "commercialize" a hard technology.  Much of this money went to R&D (with an emphasis on the "Research" part of R&D) and many of these companies flamed out and failed.  Just because something is "hard" does not mean it meets a market need.

In general, I don't think basic scientists *should* be trying to spend time on customer visits or product/market fit - basic science has its own enormous long term societal value.

[5] By the way, there are all sorts of interesting commercial applications of MEMs (e.g. the accelerometer in your car's airbag which tells it when to deploy).  I am just raising this as an example I have seen in the past of a technology looking for a market.

[6] Blank typically has one of the better startup blogs out there.  On a side note, Blank also did an amazing job building the technical team at E.piphany.  At Mixer Labs, I tried to recruit a number of ex-E.piphany folks who, as a class, were stellar.

[7] Obviously SpaceX is unique in that Elon Musk was able to start the company with his personal wealth versus needing initial funding sources.

Friday, August 3, 2012

Ask Before You Intro

One of the most time wasting moments in a persons professional life is when you open your email and get an unsolicited, out of the blue message like this from someone you know:
"Hey Becky, 
Fred is CC'd on this email and is working on a new startup.  You should connect soon! 
Lets meet up for a drink sometime!  Sent from Hawaii![A]
Why is this email bad etiquette?

Blind Intros Are Bad For Everyone Involved
The email intro was unsolicited aka a "blind intro".  In other words, Ivan did not warn Becky he was going to intro her to Fred.  This implies:

  • Ivan is implicitly stating that he does not value Becky's time enough to ask in advance if she wanted an intro.  He is assuming she will make time for Fred, even if she is really busy or completely irrelevant to the request.  No context is provided on why she would want to talk to Fred, what Fred wants from her etc., and no opportunity is given to decline the intro before it is made.
  • Ivan is trying to show Fred that Becky is part of his network and will help him with random requests.  It allows Ivan to "add value" to Fred by taking advantage of Becky's time.  Many VCs or angels make these blind intros a lot to demonstrate value to an entrepreneur they are courting.
  • Ivan is making Becky the "bad guy" if she does not have time to meet with Fred post-intro.  Becky is in a tough spot.  She can reply to Fred saying she is too busy, but that will make her look bad to both Fred and Ivan.  Or, she can ignore Fred or treat him poorly when they do talk, which makes both her and Ivan look bad.  (All else being equally, you should just reply saying you are too busy if this happens to you if you need to make the trade off).
  • Ivan is setting Fred up for a bad experience with Becky.  This also reflects badly on Ivan in Fred's eyes in that:
    • Becky may never reply to Fred.  Fred may waste time re-pinging Becky over and over.
    • She may not be the right person for Fred to talk to.  
    • She has no context on why Fred wants to talk.  It is possible she could have directed Fred to someone more helpful, but Ivan never gave her the chance.  Does Fred want to talk about fundraising?  His product?  A partnership with Becky's company? Does he need an intro to someone else Becky knows?  What is the purpose of the intro?
  • Ivan is burning useful social capital.  Becky is less likely to help a friend or co-workers of Ivan who really needs help if Ivan burns up her bandwidth/time inappropriately with random blind intros.

The Right Way To Do It
Before doing an introduction, you should ask both sides if they actually want one.  You should set context and provide someone with an "out" in case they are not interested or able to make the connection (e.g. if they have a conflict of interest, a lack of relevance, or the like).  This sets you up better for the future - if you tell someone you really need them to talk with one of your contacts, they will believe you and make the time.

Example good email:
"Hi Becky, 
I met Fred at a hack-a-thon last week.[1]  He is working on a really cool iphone app, Dogatune, that lets you autotune your dog's barks[2].  I have been using it the last 2 weeks and love it.  Before this, Fred was at Facebook working on the newsfeed and Ron Conway / SVAngel has already offered to fund his company if he raises money [3]. 
I know that you just raised a round of funding and really like working with SVAngel, so he was hoping to chat with you about your own experiences working with them [4]. 
Is it OK if I do an intro?[5]  I know you have been really busy lately with your own startup, so understand if you don't have time to chat with Fred [6]. 
[1] Context on how you know the person and for how long.  How important of a connection is this for you?  Is this one of your closest friends, a former boss or employee, or some random person you don't really know or care about?  This helps Becky prioritize the request based on how important it is to you.

[2] Context on what Fred is working on.  This helps Becky filter whether she can be of help.

[3] Social proof is always helpful.  It provides context on how legit Fred is (or is not).

[4] Specific context on what Fred needs help with.  This is key.  It allows Becky to assess if she can actually be helpful here or not as well as the purpose of the potential intro.  Notice that Ivan also explained why/how Becky is relevant to  the request (she worked with SVAngel before).

[5] Ask explicitly if you can do an intro.  You will be surprised by how many people say no if given the choice.  They will thank you for it, and take your future intros much more seriously.

[6] An easy out is provided.  It shows you value the person's time.

How To Respond To A Blind Intro

  • Politely ask the person who did the blind intro to stop making them to you.  This can be phrased nicely - e.g. "I am really busy and want to help people in your network.  If you intro me to someone and I don't have time to reply or I am irrelevant to, it may reflect poorly on both of us.  Can you please ask me before making an intro in case I can direct the person to someone who may be more useful or relevant?"
  • Ask for context from either the introducer, or the introduced.  E.g. "Fred, nice to meet you.  Can you please provide context on what you want to discuss?".  I have found a pretty large number of blind intros either (a) are not relevant to me (I can say as much, which means it is a polite decline) or (b) unexpected for the other person too (who has just been put in the same spot as me!  I.e. a double blind intro).

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[A] For some reason, I have noticed people who do lots of blind intros also tend to travel a lot, often on exotic boondoggles.

A few people mentioned their heuristic for intros was to ask themselves if both sides of the introduction would derive real benefit from it.  If so, they would make the introduction.

Related Post

Monday, July 30, 2012

Signs A VC Is Just Not That Into You

"It’s a classic single... scenario: you really like this guy, but he’s giving mixed messages. You make excuses..."(but) he’s just not that into you. 
Stop kidding yourself, let go and look for someone else who will be. After all, as Behrendt sensibly puts it, "if a (sane) guy really likes you, there ain’t nothing that’s going to get in his way."
Publisher Weekly Review of "He's Just Not That Into You".
So you are in the midst of raising your series A.  You have done a great job of running a series A process - you have 10 or so firms you are talking to and need to decide who to drop from the mix and who to focus on.

Many venture firms will take a long time to get to a "no" with you.  While I have seen some firms got to a really fast "no", others will drag their feet.  It is just like in dating, some people are obviously into you, some clearly not.  But it is the ambiguous people who are the killer (and unfortunately, often the majority of VCs).  Here are some signs a VC just isn't that into you.

If you see these signs, you may want to drop the VC from consideration and not waste precious cycles chasing them down:
  • Doest not suggest next steps at the end of your meeting.
    • A VC who is interested in your company will usually define specific next steps at the end of the meeting.  E.g. "Why don't I get you together with 2-3 of my other partners later this week?" or "I will follow up with you quickly by Wednesday and we can discuss the data I need and next steps".
    • An uninterested VC will not suggest anything tangible to happen but will talk more in generalities.  E.g. "We should definitely keep in touch on this - I love you guys and your model".  This is a no, even though it sounds sort of like a yes.  Vague, positive-sounding generalities from VCs are almost always nos.
  • Makes endless data requests, without any in-person follow up set up.
    • The most ambiguous situation is the data request without any further in person meetings.  In some cases, this is a legitimate request so the VC can quote data to get their partners interested in investing in your company.  Unfortunately, it may often be a way for a VC to learn off of your experiences without any real interest on her part in your company.  Beware multiple data requests without any future meetings or clear next steps defined!!!  If this happens, you should stop sending inside information to this troll and move on.
  • Only has you deal with a junior associate.
    • Some firms use associates to screen their deals before a partner meets with your company.   If you can get to a partner directly from day one, you should.  If you are passed on to an associate and never hear from a partner again after meeting with the associate, the VC just isn't that into you.
  • Is not responsive to your emails
    • If a VC is into you she will prioritize your emails for reply.  This means you should hear back on many emails within the same day, and the rest of the emails within at worst about a week if they are e.g. travelling.  If it takes a VC more then a week to reply to most of your emails, she just isn't that into you.
  • Does not try to sell you on her firm.
    • If the VC does not spend the last 5 minutes trying to sell you on her firm, or offer introductions or help, she may not be that into you.
Any other signs a VC is not into you?  Let me know in the comments.

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Other Fundraising Posts

Tuesday, April 17, 2012

VC Signaling Coming Home To Roost

"I believe they have seed money from [VC FIRM NAME REDACTED]. We generally don't talk to startups that have taken seed money from institutional VCs – we think its a bad idea for the entrepreneur and it creates a tough dynamic for us (either we are a stalking horse for the existing investor or there is some reason the existing investor doesn't want to invest)." 
- Recent email from a senior VC partner to me.
Dear Entrepreneur - remember that TechCrunch story you placed about your funding round that mentioned the VCs who invested in your seed round?  Unfortunately that TechCrunch (or VentureBeat, or PandoDaily, or GigaOm, or AllThingsD) announcement may be about to bite you in the ass, big time.

While this will not occur to all entrepreneurs taking VC money as a small part of their seed (and in some cases the VCs may be quite helpful), I have seen a number of situations lately where the VC signal has hurt the entrepreneurs ability to raise a Series A.  The key is to be thoughtful about who you take money from, how they will help you, and ultimately, ways to mitigate the signaling if you do end up taking VC money.

I have previously written about the costs and benefits of letting a VC into your seed round.  Over the last 18-24 months a number of VCs [1] have started making small investments ($100K to $500K) in a large number of early stage companies.  Some individual VC firms have made (my guesstimate) on the order of 50-100+ of these.

Unfortunately, a number of the startups who took VC money in their seed stage are now running into signaling issues - which makes it much harder for them to raise a series A round.  A number of companies I know have had their series A round fall apart due to VC signaling.  Other smart investors such as Chris Dixon have pointed out this increase in signaling as well.

Why VCs Make Lots of Small Investments - Option Value
VC economics suggest that a small amount of money does not matter much to a VC with a large fund.  For example, for a $500 million fund, making 100 investments of $100K each is only $10 million, or 2% of the fund.

In contrast, only a dozen or so startups started each year really matter to a VC from a financial return perspective.  A VC needs to own a large percentage (e.g. 20-40%) of a company with an exit in the hundreds of millions of dollars in order to have a chance of returning the money in their fund (much less making the bilions of dollars that is the multiple of the fund they aspire to return).

To a VC, having the inside scoop or relationship to a large number of startups is therefore worth a lot more then the $10-$20 million more and more funds are putting aside to make dozens or hundreds of small investments.  Getting to know the founders, being on the startups investor update emails (and learning who is doing well or poorly), or alternatively, having transparency into when the founders are raising their series A round are all type of relationship and information access the VCs crave.

By making lots and lots of small investments, the VCs have these relationships and more information access.  The VCs are basically buying a bunch of options on a big part of the Silicon Valley startup scene.

While this trend is great for VCs, it is on average bad for the entrepreneurs taking their money.  Short term, it seems great ("higher valuation??  fewer people to raise money from?? great!") but long term it backfires ("no one will fund my series A??")

The unfortunate issue for entrepreneurs is that having a VC invest in your seed round can come back to haunt you when you raise a Series A.

Once you go out to raise a series A round, there are three potential scenarios in terms of the state of your startup:
1. The company has true breakout traction.  This is like 1% of startups.  These startups can set whatever terms they want irrespective of signal.
2. The company is doing OK, but not breaking out in any obvious way.  This is most startups.
3. The startup is obviously failing.  This startup will soon die and is irrelevant for the purpose of this post.

For companies in bucket 2, which is most companies, any sign of weakness can ruin the company's ability to raise more money.  Not raising more money means a startup either dies, becomes profitable, or needs to sell.  For most company, this means death or early exit.

Unfortunately, having a VC in your round creates that signal of weakness that, all else being equal, may get in the way of you successfully closing a round.  In particular, if the VC who invested in your seed does not pursue you for a series A, then all the other VCs will view this as a sign that your company is not good.  The reasoning is that the VC in your seed should know you better then anyone else.  If your seed round VC is passing on your company, then other VCs think it is probably a bad investment.

Now, the numbers are against you.  If a venture fund does 30 seed investments a year, but only 10 series A (including companies they did not seed invest in), then this means AT MOST 1 out of 3 startups will get a follow on investment.  This means the majority of companies that take VC money in their seed will have negative signaling.

1. A top tier venture firm investing.
As Dixon points out,[4] top tier firms send larger negative signals than lower tier VCs.  If one of the better known firms passed on you, the lesser known firms will be more likely to pass too.  This does not hold as true the other way around.

When raising a series A, most venture funds don't know whether a VC has passed on you or not. However, if a TechCrunch post has been published with your seed funding announcement mentioning your VC investors, all the other VCs will see this when researching your company.  They will all call up your seed investor VC to ask about the company and whether that VC is trying to invest in you.  If the answer is "no", a strong negative signal has been sent to everyone else.  Remember VCs are constantly calling each other for opinions [2].

2. Having multiple VCs in your round.
Having one VC from you seed pass on you is something you can explain away (see below).  Having 3 VCs in your seed all pass on your series A is not explainable.

3. The VC investing larger amounts in your seed.
If a VC invests $100K in your seed, you can try to explain it away as so small an amount that they never spent time with you.  A $500K investment suggests the VC spent more time with you.  This means that the VC passing on your series A is sending an even bigger signal that your company is not worth pursuing.

1. Claim the VC has made a competitive investment.
If the VC has to pass on you due to a competitive situation, then the signal goes away.  Find something in the VCs portfolio that helps explain why the VC can not invest in you.

2. Point out the VC has spent zero time with you.
The VC signal is driven by the fact that the VC knows you well and has still decided to pass.  Given the large number of seed investments these VCs are making, it is often truthful to point out that the VC really spent 0 time with you and has no proprietary information. (Which raises the question - why did you have them invest again?).

You can also point out that the VC has done a very large number of seed investments, and the partners are thus way over committed.

3. Get the VC to say they are still considering you for investment.
If you can, get the VC to agree to a pro rata in your series A [3].  This will allow you to truthfully state you are still talking with them about investment (even if they don't plan to lead).

4. Raise a bridge.
Raising a bridge round from angels or smaller funds helps wipe the signal clean as your latest round will no longer inclue the VC.  Downside is that bridges often occur at a lower valuation and are more dilutive.

As an entrepreneur, you are usually tempted to take VC money in a seed round for one of the following options:
  • Round size.  As seed rounds have grown from ~$500K to >>$1 million in size (in part due to valuations going up) it is harder to find enough people who can write large enough checks to fill your round.  Some entrepreneurs add venture firms to the round to fill the round quickly.
  • Price insensitivity.  VCs are really price insensitive in a seed round.  They are viewing your seed as a way to get the inside scoop on your eventual series A, and $100K really does not matter to them from a fund perspective.  This means the overall valuation of your company will often go up if VCs participate.
  • Brand.  Some entrepreneurs get enamored with the VC brand and the bragging rights that come with it, or think the brand association of the VC will help them hire people.  In some cases this can be helpful, in some cases not (depending in part on how many seeds the VC has done).
  • Connections and help.  VCs promise connections and company building help.  Unfortunately, if a VC has made 30 or 40 or 50 investments all of $100K size in the past year, they will not be able to help all the startups equally.   Many VCs are also more likely to prioritize their "day job" of startups where they sit on the board and own 20% of the company over a startup where they own a few %.  Some VCs actually come through on connections or advice in a big way, but many don't (this is also true frankly of angels with a lot of investments).  Do your diligence to see how helpful the VCs have been in the past to companies that they make small investments in.
  • Pre-emptive bids.  Sometimes, having a VC in your seed leads them to overpay early for your series A, sparing you the pain of having to run a full blown fund raise.
A large number of seed rounds in the last 12-18 months have included traditional venture funds as investors.  Sometimes having a VC in your seed can be super helpful.  However, a number of the the companies who raised from VCs are now regretting it, as having a VC in your seed round can backfire.  There are a number of ways to mitigate this signaling risk.

[1] By "VC" I mean a traditional, large venture capital fund that invests in series A-C rounds and will compete for a series A against other VCs.  I think that the "super angels", which are really early stage VCs, are safe to take money from for a seed round.  Although they compete with each other on seed rounds, they typically do not also do series A, so there is no signaling risk associated with them.

[2] VCs call each other a lot.  This is odd given that they are all competing for the same financing rounds.  In some cases, this is professional courtesy - e.g. to offer an existing investor a pro rata.  Or it could be that they already sit on another company's board together, and your company comes up while they are talking about shared business.  But fundamentally it is also often a way for a number of people with herd mentality to compare notes.

[3] "Pro rata" means the VC invests enough in the new round to maintain their original ownership stake in the company.  E.g. if they bought 5% in the seed, they invest enough money in the series A to not get diluted, and thus they maintain their 5% stake.

[4] I find that sometimes I will have a blog post written, not post it, and then Chris Dixon will publish something with many of the same points (often, better written).  This signaling post is a good example of overlap in perspectives, that took me a while to actually post.

Thanks to Hiten Shah for suggesting I go ahead and publish this post anyways.


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