Wednesday, August 16, 2017

Big Banks And Blockchain

After the crypto run up of 2013, every major bank decided it needed to do something about cryptocurrencies and blockchain. The way many banks responded to this disruptive technology was:
Step 1. Set up a special internal "blockchain group". 
These groups were supposed to explore how banks could make use of blockchain. The cryptocurrencies themselves were largely viewed as speculative and the "interesting parts" were blockchains and distributed ledgers as technologies.

Step 2. Have the blockchain group focus on building private chains. 
Focus at most banks was on private chains and more recently some smart contract work. Nothing was adopted or launched, it was more R&D and prototyping.

Step 3. Have the CEO brag about blockchain group, then do nothing.
When asked by bank's Board of Directors about crypto, the CEO could point to the largely impotent blockchain group and say "we are all over this blockchain thing!!". The Board would break into polite applause and the topic would quickly move on to something more important, like FX risk being hedged and what fancy restaurant to convene to for martinis post-board meeting[1].

It's the Currencies Stupid!
In the last 6 months, large banks & brokerages have started to wake up to the other side of crypto - in particular the currencies themselves[3]. This is largely driven by high net worth clients, pension funds, and others, starting to ask the asset and wealth management divisions of banks how they can participate in BTC (bitcoin), ETH (ethereum), and other cryptocurrencies.

Banks now have an incentive to adopt cryptocurrencies - if it becomes part of the basket of assets they manage for a client, they can take an annual cut. For example, if a bank charges 0.5% of AUM (assets under management) and a client wants to put 5% of their assets into crypto, the bank has a strong incentive to manage it for their client. If the bank pushes the client out to third party sites or wallets, the bank is loosing the 0.5% a year they charge for assets directly under management.

In order to be able to meet the demands of their clients, banks are looking for solutions that allow their clients to participate in BTC et al. in a way that the bank directly manages and controls (or, at a minimum, that the bank can charge for).

The following products need to be built for financial institutions to fully adopt cryptocurrencies:

Mutual funds and ETFs: Financial products that allow people to easily buy a basked of crypto currencies.
Major banks would love to enable their interested clients to buy into a mutual fund or single currency tracking fund as part of their AUM basket alongside various baskets of stocks, bonds, and gold. This prevents the need for them or their client to think about the new crypto hotness and instead the mutual fund can add or drop positions over time. Recent funds for high net worths include Grayscale, ICONOMI, PRISM, the Token Fund, and others.

In parallel a number of efforts to create the first crypto ETF have been ongoing.

Crypto custody / wallet / cold storage.  When talking to private wealth managers about their crypto needs there is strong interest in a wallet where they can store their client's cryptocurrencies, track changes in value for clients, and of course charge their % of AUM. Obviously Coinbase has done amazing work in providing a wallet and cold storage for individuals and have made some interesting moves like their recent Fidelity integration. In parallel, companies like Xapo were founded with the original intention of provided a bitcoin vault. However, from discussions I have had with the wealth management community, there is still not a comprehensive solution in this area.

Hedge funds.
The pioneering early hedge fund of the industry Metastable, and more recently Polychain, have pioneered the crypto hedge fund market. There are a dozen new entrants coming, many of them likely to be crappy.

The banking and brokerage industry would benefit from additional high quality long funds as well as algorithmic trading funds that their clients can participate in, and can be sold to high net worth investors as part of a basket of goods.

Intriguingly a lot of the crypto trading at hedge funds started as young employees trading crypto for their own accounts. This will likely change soon with bank's internal hedge funds also participating directly in the crypto market.

Derivatives exchanges.
As people buy and sell different cryptocurrencies the ability to create complex hedges, options and derivatives becomes increasingly important. This can both dampen volatility in a position as well as create leverage on capital. For both market liquidity to accelerate, and hedge funds to thrive a strong derivatives broker and market needs to emerge. As an example, LedgerX recently received US CFTC (Commodity Future Trading Commision) approval to move ahead in this market. There will likely be more entrants here soon.

With the above product areas fleshed out, we will see an accelerated adoption of cryptocurrencies due to accelerated (and finally real) adoption in the banking and brokerage world.

[1] I tend to imagine board meetings at global banks always ending with martinis for some reason[2]. At least I hope this is what happens, in which case I would be interested in joining a top 5 bank's board. As an aside, New York tends to have much better martinis than San Francisco. I guess most people drink bourbon or rye whiskey these days so this point is moot. As an aside to this aside: Boston has a surprisingly good martini tastiness/per capita ratio.

[2] I also picture all the board members wearing pin striped suits and monocles, sort of like the Monopoly Man.

[3] Blockchains and smart contracts will still change our financial system outside of core cryptocurrencies, it will just take longer.

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Monday, August 14, 2017

Unequal Cofounders

One of the big myths in Silicon Valley is that co-founders should be equal. However, if you look at the most successful tech startups of the last 50 years, almost all of them had a dominant co-founder for most of the life of the company. This includes[1]:
  • Amazon. Jeff Bezos.
  • Apple. Steve Jobs famously split equity unequally versus Wozniak. 
  • Facebook. While Zuck had multiple co-founders, the website used to be called "A Mark Zuckerberg production" and he had multiple times the equity and power of his co-founders.
  • Instagram. Kevin Systrom as dominant founder.
  • Intel. Robert Noyce for 7 years and then Gordon Moore for 12 years[2].
  • Intuit. Scott Cook as dominant founder.
  • LinkedIn. Reid Hoffman had multiple co-founders but was really dominant in terms of equity and control (despite hiring a CEO to take over pre-Jeff Weiner).
  • Microsoft. Paul Allen stepped down after a few years leaving Bill Gates as dominant founder.
  • Oracle. Larry Ellison as founder.
  • Pinterest. Ben Silberman has driven the success of the company.
  • Salesforce. Marc Benniof.
  • Uber. Travis Kalanick as primary force until recently.
  • WhatsApp. Jan as dominant founder and equity holder.
Apple, Facebook, Intuit, LinkedIn, Oracle, etc. are all also examples where both power and equity splits between founders were unequal. While people tend to fixate on equity ownership and equality, what really matter is whether there is equal power sharing between founders. In general equal power sharing yields worse outcomes than having an (eventually) dominate cofounder.

The limited set of counterexamples with more equal co-founding partnerships includes Google (confounded a bit by Eric Schmidt being hired as CEO early in its life). Having an equal co-founding relationship is not impossible, just rare for the most successful companies.

Harj Taggar has a great point on this - "Another interesting way of thinking about this is reversion to the mean. Startups need to be outliers in many ways to be an outlying success, one such vector where I think this helps is in product decisions. Any time you involve multiple stakeholders in these decisions (whether it's cofounders/customers/anyone else) you risk having your product revert to the mean (i.e. no one particularly hates it but no one loves it either). Having a product dictator is probably actually optimal for chasing outlying success."

Early Days Are Different
In the early days of a company, it may only be two or three co-founders working together for an extended of period of time before you know what to build. If you have two co-founders and no employees, it may feel natural to always get to consensus and make decisions together. Its just the two of you, and each of you has to be fully bought in due to the giant leap of faith you are taking. While some founding teams always have a clear CEO and decision maker, some do not. As you hire people and raising money, you will need to shift how you think of decision making.

As you grow, you need someone in charge
The two biggest reasons startups fail is running out of money, and co-founder conflicts. Co-founder conflicts tend to arise when there is a lack of clarity on decision making, product vision, and overlapping founder roles. For example, if more then one founder wants to be CEO, or make final decisions on product or other areas, conflict will be inevitable. Alternatively, if founders are willing to truly share power a startup may not be as aggressive due to the need to find compromises versus charge ahead. In these situations you may end up with a product or strategy designed by committee instead of making a single choice on what to build. 

Unequal co-founder relationships are a way to dampen future co-founder issues. By making it clear how decisions are made and who is in charge early, you decrease the likelihood of a founder blow up. This is separate from how you divide equity - ultimately you want to compensate someone for the tough times and many years of pain ahead that comes with starting a company.

This does not mean you will always agree. It is constructive for co-founders (and executives once you have them) to challenge the CEO and each other. There are bound to be lots of disagreements, and the non-CEO may often be right. As the CEO co-founder you need to pick your battles on when to make the final call and override everyone else. All else being equal, most specific decisions are often less important than actually making a decision. As the non-CEO co-founder, you need to understand the importance of falling in line and backing whatever decision is ultimately made.

As an investor, a clear warning sign of future co-founder conflicts is when the founders say they are "equal but own different areas". E.g. "I make all the calls on business, and my cofounder makes all the calls on engineering." But what if a business issue and a product or engineering issue overlap? A company needs a single person who is clearly in charge and can make a decision across all areas. The worst version of this is co-CEOs, which suggests an almost inevitable blow up.

Cofounders may claim "we make all decisions together, and have not fought before, so no need for a single decision maker." This is a recipe for disaster. Startups are hard and the right strategy is usually ambiguous. You can not defer organizational and decision making clarity for later. It is important to decide up front which co-founder is in charge (i.e. the CEO) and that person needs to be able to make decisions without being second guessed.

Making decisions
This is not meant to argue against making important decisions with your co-founders. You are working with them because they are smart, capable people. Their opinions are important and they may be right when you are wrong. They should own areas of the company and be able to make decisions on those areas without micromanagement. However, at some point there needs to be a clear owner who can make a final call if there is an impasse or lack of agreement. Once a decision is made, the non-CEO co-founders need to get behind the decision and make it successful.

Equity splits
As mentioned above many of the most successful companies of the last 20 years had unequal equity splits among co-founders (Facebook, LinkedIn, Twitter, etc.) while some have had equal splits (e.g Google[3], SnapChat). Equal equity does not need to be the default and in some of the most successful companies is not.

Sometimes this is counterintuitive - for example the CEO co-founder does not always get the most equity (e.g. look at the Twitter S1). The key is to be pragmatic and to think through the long term value each person brings to the table, the relative leverage each has, and investment made in different ways.

Other perceived value
One common point of co-founder jealousy and conflict is who gets to meet investors or talk to press. Usually this is the role of the CEO, and early on having multiple people involved in every conversation is not time efficient. As the company scales, there will be plenty of opportunities for multiple co-founders to have external exposure. As CEO, you should also watch out for your co-founders and make sure they also get some exposure if this is important to them.

Thanks to Harj Taggar for feedback on this post.

[1] A number of private companies also do not have equal co-founding relationships or equity splits but since these companies are not yet public it is harder to talk openly about them.

[2] An underreported phenomenon is the number of times one co-founder is replaced by another as CEO. This happened at Intel, Logitech, and other companies.

[2] Google was in reality slightly unequal with Larry Page having slightly more equity when Google went public. It is unclear if this was due to share transfers by Sergey or if it was set up that way.


Monday, August 7, 2017

Feelings of Failure

As the founder of a high growth successful startup, you may feel like you are constantly failing. You are not alone in this. Most startup founders I know feel like they are screwing up on a weekly or monthly basis, even if their business is growing well[1].

Feeling of failure tend to come from:
1. You are constantly learning and doing new things.
For many startup founders, your CEO job may be your first time managing people, hiring and firing across various functions, raising money, selling a customer, managing your board of directors, or signing a business partnership. There is a lot to learn in each of these areas, and no matter how smart you are you are going to make mistakes.

When a startup grows from 10 to 100 to 1000 people, you have to relearn basic parts of the CEO job. How you communicate to a 1000 person organization is very different from a 100 person organization. So even if you learn how to manage at one scale, each step up in organization size is a whole new learning curve.

This constant learning curve means that even if you are doing well, you may constantly feel lost. You may also feel imposter syndrome or like a con artist. How can people think you are good at running a company when you have never done it before?

Take a deep breath - you started this company in part to feel stretched. Realize that other founders are in the same situation as you. Specific tips on how to deal with this are at the end of this post.

2. Absence of real feedback.
The higher you go up in an organization, the less real feedback you will get. People will laugh at your jokes and defer to your judgement whether deserved or not. As it gets harder to get real feedback, you may feel blind to whether you are performing well or not.

3. Humans inability to understand compounding.
If a company is growing 5X per year, it will grow by >15,000X over 6 years![2] $100,000 in year one revenue will equate to $1.5 billion in year 6. However years 1-3 will feel existentially bad to you. E.g. at $100,000 revenue year 1, $500,000 in year 2 and $2,500,000 in year 3 revenue you may feel that your company is on the brink of failing, even if it continues to grow at a brisk pace.

People find it hard to relate to compounding. One startup I invested in sold early just as they were hitting profitability. I thought for sure they could have been a $1 billion+ company within a few years. When I asked why they sold, the founders told me that they started the sale process 6 months earlier, and by the time the acquisition closed they were profitable. They had been growing at a compounding rate and hit profitability faster then expected, but had not properly anticipated the future.

They were so used to struggling and feeling like they were failing, they did not notice when they were actually succeeding.

4. Rocketship next door.
Silicon Valley has the occasional crazy fast exit where someone sells their company for $1 billion after a few years. This is not the norm, but if your expectations are set on these outliers you may feel like a failure even if you are doing great.

5. Constant crisis mode.
Startups are hard. Even the savviest teams face constant crisis and battles. This can cause founders to feel that they are doing something wrong or screwing up when growing pains are normal. There are ways to add process and executive bandwidth that will smooth out and delegate out these crisis points (see below).

How to deal with feelings of failing.
To mitigate feelings of failure (or prevent them to begin with) you can:
a. Find a series of mentors. Your investors or external industry executives or entrepreneurs can help coach and support you on managing, leading, and various functional areas. As you learn how to manage different team sizes, feelings of failing will decrease. Similarly, it may turn out that your instincts and actions are correct. There are certain things you will need to do at work that will never feel good (e.g. firing someone) but will be necessary. As you gain experience and feedback you will grow more confident in your abilities.

You should also do your homework. If you are hiring a general counsel for the first time, go and interview 3 great general counsel's at other companies to learn what they would look for. People in Silicon Valley are open to helping each other learn - take advantage of this network. Going in blind will both increase your feelings of inadequacy (and rightly so) but also increase the chances of hiring the wrong person or doing the wrong thing.

You will likely need new mentors and new sources of help as your company grows. At each scale of business, seek out new people for feedback, ideas, and support.

b. Hire competent executives. Having great executives in place to own functions decreases stress on you and allows you to focus on the areas you excel at. Startups are team sports and you do not need to be great at everything, you just need to hire a team that is.

Similarly, great executives will decrease the number of fires that both (i) exist and (ii) that you as CEO need to deal with directly. A deep bench is the best way to get leverage on your time, free you up to work on the things you enjoy and are good at, and to decrease feelings that you are screwing up.

c. Institute 360 feedback. Learn what you do well and poorly and have a basis for improving. Just as you may track a net promoter score for your customers, you can track what you are doing well and poorly. Do not assume you will ever be great at everything - no one is. Figure out what your strengths are and lean on your executive team for your weaknesses.

One of the great fallacies of business and management is that people think they should be great at all skills (analysis, management, organization building, strategy, deal-making, engineering, etc.). In reality, most people tend to be good or great at only a few key areas. Eventually you need to learn to play to your strengths instead of developing your weaknesses. Once your company scales, you should be able to hire people who can cover your weak spots.

d. Take a "monthly moment". Take a half day once a month to assess where the company is strategically and how it has advanced since the prior 6 months.  In a startup, a lot can happen over 6-12 months. Many entrepreneurs lose sight of this in the moment. Think through how much progress you have made and what you have accomplished. If your company is growing quickly, you will realize how far you have come in little time.

e. Get some sleep and take a break. Running on fumes makes the world seem bleak. Take a break and prioritize sleep and exercise. This will put things in perspective. Similarly, if you are making progress on another area of life (e.g. running goals, dating) it will smooth out the ups and downs of startup life.

[1] This post is meant to help with feelings of failure when things are actually going well (whether you as the CEO realize it or not). Often, a startup is indeed failing and you need to decide whether to shut down, exit etc. That is the subject of a future post.

[2] This is meant as an example. Usually high growth companies grow at e.g. 5-10X per year for the first 2-3 years and then slow to e.g. 2X at some point.

Many first time CEOs feel that they are screwing up or failing on a regular basis. This is driven by circumstance (you are thrown into new challenges every month), the difficulty of running a startup, the need to build an executive bench, and a lack of perspective. By building out an executive layer, pursuing 360 feedback, and getting sleep and perspective, you can mitigate these feelings of failure and focus on the task at hand.

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