I have some personal news to share. I am going to write a book. Yes, a book that you can physically hold in your hands, or download to your Kindle. Though many people who know me came to know me through my writing on blogs, I don’t consider myself a writer — rather, it is just the way I interact with the world around me and just a byproduct of the work I’ve been doing, either at companies, in venture capital, and as an independent investor. Yet, about a month ago, on a Sunday morning tailgating before a football game with a bunch of colleagues, we had a few beers and got on the topic of an idea that turned into a longer conversation.
And, since then, I couldn’t shake the idea. The more I thought about it, and the more I socialized the idea with friends, they too agreed it would be a good idea and that my background, more diverse than deep in any one category, could provide an interesting lens with which to write this book and share the associated ideas widely. I am going to put my name on the line and use my little platform to market the book. My intention is to make the book an organic extension of this blog, with more organization, and to share the story in an authentic, civil manner and attract the proper audience for it.
“OK, OK,” you say, “What’s the book about already!?” My answer: “Uber.” For lack of a better title, for now, I’ll call it: “The Uber Effect.”
Over the past year, I noticed that I would write more and more on this blog about Uber, and then when I searched the history on the site, I noticed it came up much more than I had imagined. And, recently, it has come up in conversation more, and when people I’m talking with realize the company is a big deal but have a harder time imagining how big the company can get and what type of influence it will collect and exert, those conversations turn into debates that touch on many aspects of how we organize society today. The more and more I think about the company and its growth potential, the more I’ve come to realize it will not just be a financially powerful company, but Uber will hold all other sorts of power related to data, mobility, logistics, commerce, transportation and more. Like Amazon, Google, and Facebook before it, it is a once-in-a-lifetime company, it is on the verge of going public within the next two years, and I have made a personal decision to commit some of my time to organize and tell that story as the drumbeat gets louder.
“What will the book cover?” you ask. I am still sorting that out, but expect it to touch on how mobile devices help create the largest technology market our society has ever witnessed, how humans are migrating to cities worldwide, how centralized systems (like governments) are being challenged by decentralized networks, a citizenry more willing to pay by the mile rather than pay more taxes and the subsequent effects on public transit infrastructure, a bifurcating labor market between high-skilled and not in an age with automation on the horizon, the distribution of knowledge via cloud-based servers and mobile devices, just-in-time inventory management powered by mobile devices, and how autonomous vehicles may turn this all upside down again.
Truth is, I’m still sorting this out, talking to an agent and publishers, but I want to commit to it, so I’m publicly sharing it, and I will need to really sharpen the scope and focus. That’s what the holidays are for, I guess!
All that said, here’s what will not be covered in the book:
One, this book will not be a hit-job on the company, nor an excuse to be an academic cheerleader for the company. I am an Uber “bull” and would love to own stock in the venture, but I have no financial connection to the company and I do believe Uber will face some bumpy times ahead. Uber is also a company which has been described as “unscrupulous” by many, and I will look into those stories. I want to write a fair book.
Two, the book won’t be unnecessarily long — rather, I want to write it in a style that a smart person can dig into it for a few weeks, let it marinate and digest, and then talk about it with other people.
Three, the book won’t go into gossipy detail about the company’s formation or startup competition — nothing wrong with someone else taking up this angle, and I’m sure there’s an audience for it, but it doesn’t interest me personally.
Four, it won’t be an excuse to show off data porn — I don’t want to be reliant on getting proprietary data nor do I want to get into academic debates about how one labeled a graph and such. There will be people who disagree with the book, and that’s great — heck, right now, many smart people think the company is grossly overvalued.
Five, my goal is to not make it the typical business or strategy book — think of the brilliantly short “Holidays On Ice” book by David Sedaris that you can read every holiday season with a heavy dose of the type of writing that’s on this blog already, but much more organized.
And, Six, this won’t be an “official” account or the “official” book on Uber. I won’t have that kind of access nor would make that claim. It will simply be my point of view on the company, in greater detail than could afford on this blog, and something tuned for the more casual reader who is interested in issues like globalization, mobile technology, new business models, labor markets, and reimagining cities.
Anyway, that’s it. I’ll share more details as I organize them. Will probably start with a Table Of Contents. Also, there will be many people reading this and on Twitter with a much better grasp of the company than I have — I want to write this book both for the technology early-adopters who have seen the Uber tidal wave coming for a while, but also for a more general audience who may have not yet. I hope that I can set expectations here and write a book that will appeal to both. Thanks for reading, and thanks to friends already who have listened to my idea and offered feedback and guidance. (And, yeah, there are probably typos in this post, so I’ll have an editor and fact-checker clean up the book.)
Earlier this week in NYC, I was invited to participate on the investor panel at the SVB Marketplaces Mashup. In short, it was an outstanding event. At the bottom of this post, I’ve embedded a hashtag search from the event, and if you touch on marketplaces in your work, I’d recommend scanning the timeline. Before I dig into the meat of the event, I’d like to give a shout out to friends at SVB (like Shai) — I’ve now been to about 5 of their events, and each time, it’s outstanding. They care about the framing of each speech, panel, and cocktail hour. I learn a ton at these events and would highly recommend them as high-signal. (I know this sounds like an ad, but it’s how I feel.)
The main point of this particular event was to talk about marketplaces. And the deck was stacked. Execs from Airbnb, Uber, and the founder of oDesk all gave keynotes sharing key stats and best practices for the cutting edge of marketplace design, growth, policy, and management. The presenter who stole the show was Todd Lutwak, of eBay fame (and now at a16z) — if you can get your hands on his slides, it’s a business school course right in there. As they usually end these events with the investors up on stage, I spent the day going in and out of sessions, catching up with friends, and trying to wrap my own head around marketplace issues that matter in my line of work. And, that is, specifically, that the word “marketplace” is defined by different people differently and, moreover, used to describe specific businesses in a somewhat apt yet not precise way.
After the event, I was hanging out with Andy and we talked about how, on one hand, marketplaces are going to increase in number. Of course, they’re antifragile! And yet, on the other hand, how we don’t have a good way of classifying them. So, below is a more structured recounting of our chat. I don’t share this framework as an absolute, so I’d love your feedback and thoughts on what makes sense and what needs work. At a high-level, I see four (4) types of businesses than one could classify as a marketplace, though I do believe resiliency is a function of how pure the marketplace is:
Pure Marketplaces: Connecting buyers directly with sellers. These are the eBays of the world, using the web to find equilibrium between supply and demand of goods and services. There are very few of these that don’t need much curation or policing, but ones that get big in this category get *really* big. See: Airbnb. And if the web spawned an eBay, imagine what mobile could create — see: Uber.
Curated Marketplaces: Some marketplaces need curation. Ride share companies need to vet drivers and conduct background checks, for instance.
Other Business Models With Marketplace Dynamics: Companies I’m involved with like Instacart and DoorDash are sometimes called marketplaces, but I don’t think that’s quite right. To me, they’re e/m commerce companies that contain a marketplace dynamic, like metered pricing, and having their drivers pick times and jobs to claim.
Marketplaces Plus Subscription Services: This was brought up at the panel and I was curious to hear of these models. I asked Andy and he too hadn’t heard of them. Josh from Sigma West wrote a great post on this hybrid model (click here), and I’d love to see more of these, if anything that all investors, private to public, love the resilience of marketplace models and love the predictability of SaaS business models. (Josh is a great thinker on this subject, I’d also point out to this post he wrote about slicing marketplaces startups yet another way.)
After my last mobile gig ended, I also took some time to reevaluate what firms I was working with. While I’ve had a bumpy ride into the world of venture, I have also been super lucky to work with friends at great firms. As Labor Day rolled around, I had the chance to deepen some of those relationships as Venture Advisors to two firms — GGV and Bullpen Capital. They’re both at very different stages of the market, so it works. And, it’s a blast. I’ll write more about the transition and experience soon.
In my work with Bullpen, we work in the early-stages of the market, right before companies are ready to talk to the larger, more traditional funds. You may have picked up people using all kinds of labels, and even I’ll admit, it’s tiring and hard to keep straight. There are folks who invest early, folks who invest a bit later, and plenty of folks who invest when things are working. Over the summer, my colleague Paul Martino had an idea — convene a conference on this very topic, and let’s discuss it, and figure it out. As is the case with many moves, Martino was right — I’m pleased to announce that on Tuesday, December 2 in San Francisco, Vator, Venture51, and Bullpen are co-hosting the first-ever “Post Seed Conference,” gathering the best and brightest minds on the current state of early-stage financing for a one-day, single-track event for investors, founders, limited partners, and members of the startup, technology, and financial press.
Learn more here and buy your tickets now: beta.postseed.co (contents in this link is evolving, but you can order tickets now; we also created a ticket for founders priced at $349.)
When I say the “best and brightest minds” with respect to early stage financing, I mean it. We have three (3) keynote 1:1 sessions lined up, and these folks are some of the best in the game: One-on-one fireside chats with Keith Rabois, Naval Ravikant, and Chris Dixon. We are going to dig into every contested aspect of the early-stage ecosystem today — notes, caps, signaling, upstream financing, syndicates, and more. (I’m going to close the event with a 1:1 with Naval, which I’m of course really excited about. We all know Keith is going to say some awesome stuff, and Chris is certainly one of the most original thinkers on financing out there. And, these are just the keynotes.)
Additionally, we’ll have a number of panels as well, and among the topics we’re set to cover (full agenda will be posted soon):
How are leading early-stage VCs thinking about the gap between seed and Series A, and navigating through it?
Crowdfunding platforms are helping to create this gap, but can they also help to fill it with capital?
What does it take to get a true Series A round done in 2015?
Will $5 million be the new $500k in the Internet of Things and Wearables Era?
Learn whether pro rata is a right or privilege.
If there’s a bubble, how do you not pay up?
I’m happy to answer any questions if you have ‘em. If you use AngelList, invest in early-stage companies, are a founder or thinking of starting a company, if you’re a limited partner in the asset class or thinking about investing in the category, or if you cover the early-stage startup world, this conference will be a great way to not only dial into today’s current issues, but also meet with a great set of speakers and panelists and press to meet face-to-face. On behalf of Bullpen, hope you can make it.
A few weeks ago, I was invited to Cendana Capital’s & SVB’s annual “LP/GP Summit” at the Bloomberg offices in San Francisco. I asked the head of Cendana if I could briefly summarize my takeaways of the event (without ascribing any comments made on stage to anyone in particular), and Michael graciously agreed. As I am new to the investing game and the smallest player by every standard, these types events are really impactful for me. Please note, Cendana is focused on early-stage VC or microVC, and less so on the bigger funds. I’m like a sponge trying to soak up everything I hear. So, here are “The Big Takeaways” for me:
[Before I do this, a few big disclaimers as inevitably people will read this with all different perspectives and points of view. What’s below does not necessarily apply broadly -- rather, it’s based on what I’ve observed. Many funds have different relationships with their LPs. Therefore, these are my observations, and only that -- my perspective on what I’ve noticed, and it’s likely to be at odds with what others may have seen.]
Today, everyone wants to invest directly./ This was the biggest theme of the day, and as I’ve been mentioning on Twitter, everyone and their parents want to invest directly into private companies. Crowdfunding, AngelList, Kickstarter, and so on. By now, we all now private companies can stay private longer, so as the opportunity set in the private sector grows, money on the sidelines is getting hungry. And, I mean HUNGRY. LPs increasingly want to not just follow-on into their GP investments, they want to co-invest at the time of the original check. // The inverse of “everyone wanting to invest directly” is that what people are saying is: “I don’t want to pay fees.” This can cause tension between LPs and GPs, and brings up all sorts of issues around which LPs are shown opportunities from which GPs, and so forth. There’s something broken in the VC fund model (fees or carry, or both) that’s aggravating LPs at a time when the real growth of new companies is captured by private investors.
LPs expect GPs to design their funds to be ahead of the curve. / It’s 2014. Venture has been through a few industry corrections and every smart person I talk to about this expect a few more. In a somewhat similar fashion as GPs scout the landscape for founders to back, so to do LPs scout for GPs to invest with (and alongside of). What does this mean in reality? It means larger funds (over $100M) might be expected to have budgeted fees instead of fees based on a percentage of total capital managed. Some larger firms have done this a while ago, and we should expect more will. LPs are looking for GPs to commit even more of their own capital to the fund. // On top of this, LPs seem to be digging into just “who” are GPs they’re partnering with, how they interact, how long they’ve known each other. One LP said that a common mistake in meetings was to notice GPs talking over each other. I chuckled at that one.
***A few other observations***
A dollar travels far before it reaches a founder./ Overall, now a week or so after the event, I find myself still thinking about how far a dollar travels to reach a founder. This stuff is all over the Internet in detail if someone wants to dig into it, but I’ll offer up a basic example to illustrate: Consider back to when you were in high school, working over the summer to earn some money toward college tuition. Those tuition dollars (along with other university revenues, like donations) go into the school’s endowment, which in turn hires sophisticated investment professionals to manage the endowment and grow it. One of the ways an endowment management team can grow the pie is by allocating a portion of its assets into riskier categories, such as venture capital. From there, they allocate funds directly to VC firms whose names you’d recognize and/or into “Fund of Funds” (FoF) which in turn invest those dollars (for a fee and carry rights) to VC firms. The VCs take fees on the money they manage and then allocate that pool to founders — though “some” also invest in smaller funds, if you can believe it. // In the previous example, you can replace a university’s endowment with a range of institutions or organizations which manage big sums of dough — corporations, sovereign wealth funds, pension funds, hedge funds, governments, wealth families, and so forth. However the dollar reaches these funds, it then is allocated and depleted a bit with fees every time new hands touch it. In the event a single dollar isn’t returned, it’s OK because it’s usually a small portion of the overall cash the original lender manages; but, when a single dollar put into Facebook when it was worth $100M is returned, it’s the type of money multiplier rarely seen.
Given that context, here are few things I’d point out that happen in the world of venture that may not be totally obvious to folks who observe, especially the founders who are busy team-building, product-building, and growing the company:
It’s easy to assume VCs are just investing other peoples’ money. There’s some truth to it, but in most funds, the LPs have the GPs also commit their own money to the fund, and that number seems to be increasing.
When there’s a big exit or uptick in the price of a company, the press and chattering class can easily latch on to what the estimated stake of a fund’s rake is. For instance, when Facebook was creeping up to $50Bn in the private markets and equity shareholders were selling some stake, people may have thought Fund X owned $Y because of some estimate of percentage ownership. That’s only part of the story — those proceeds are mainly sent to the LPs, usually 80%, and the GPs can take home the remaining 20%, give or take.
Investing is definitely easier than founding and/or building a company, but that doesn’t mean it’s a cushy or easy job. Yes, there are perks, but there is a lot of pressure, uncertainty, long feedback loops, and if someone doesn’t do well, the post-VC career options can taste a bit overripe. I don’t think anyone needs to feel sorry for a VC, but saying it’s an easy job doesn’t match reality.
Historically, lenders aren’t viewed favorably. In today’s climate, investors have become more public to share their thinking but also to help differentiate their offering beyond the same dollar everyone else has. That, combined with all new classes of early-stage investors and more diverse pools of financing available to founders combine to put a bright spotlight on VC firms that are not performing and/or not behaving well and/or who can’t raise future funds. There’s probably a ton of legacy stuff that still needs to shake out, a lot of which likely originated way before I became interested in this stuff. And, while I would welcome things getting better, I do find the chatter online against investors to be different from the reality I’ve seen firsthand. Yes, there are unsavory actors and plenty of time-crunched distracted VCs, but overwhelmingly I see professional investors who work basically around the clock to help their companies, to help out people in the ecosystem, and to advance the careers of the executives and recruits around them. That story isn’t often told, but maybe that will change as time carries on.
Part of my “time-off” this fall is to travel and explore a bit. I’m still working a bunch but trying to take a few days here and there to catch up, unwind, and help with stuff around the apartment. In October, I’m lucky to be traveling to a few events I’m really excited about it. I’ve never done this before, and it’s rare for me to travel and speak like this (especially with a kid at home), so I figured I’d share the events/links in case any of you were attending or in the area. If there’s any video of the talks after the fact, I’ll try to post them here.
Oct 7-8 | Venture Alpha West, Half Moon Bay, CA [link] [I'll be on a panel about early-stage hardware investing on that Tuesday, in the afternoon. Interesting side note is that former 49ers Quarterback Steve Young will also be speaking there.]
Oct 13-15 | Marketplaces, by Silicon Valley Bank, New York, NY [link] [This is private event on marketplaces and investing in them. I'll be in NYC the day before hanging out.]
Oct 19-20 | Rutberg Mobile Influencers, Los Angeles, CA [link] [This one is about 30 minutes south of LAX, a more private event but I think lots of CEOs are going. I'm moderating a panel on on-demand services with Tri from Munchery, Kevin of Shyp, Basti of Postmates, and maybe one more guest TBD. It's gonna be good fun.]
Oct 26-28 | Stocktoberfest, San Diego, CA [link] [I am so pumped up for this. Have heard great things about Howard's event, and I'll be on a panel about mobile technology and also (potentially) giving a talk about using startup insights to play the public stock market -- something I like to dabble in. Mostly, I'm going to meet other folks in the Stocktwits community who live and breathe this stuff and learn from them. And have fun.]
And, for a more local event I’m helping organize…if you’re in the Bay Area, pay close attention to this one…
Dec 2 | The Post-Seed Conference, San Francisco, CA [link] [In my work with Bullpen, the firm is organizing a one-day conference on Tuesday, December 2 in San Francisco. The event will be solely focused on the changing landscape in early-stage funding and finance. You can read more about it on the site. There will be many draws to this, but in particular, our keynotes for this are amazing -- a16z's Chris Dixon will be interviewed by Bloomberg's Cory Johnson; Khosla Ventures' Keith Rabois will be a featured speaker 1:1;, and I will close out the day's events by hosting a fireside chat with AngelList's Naval Ravikant. If you're an early-stage founder, investor, or writer covering the area, you should definitely explore attending. Registration information is here.]
There is a certain excitement, a certain uptick in pace, in the Fall around these parts. This year, I feel like I’ve seen enough interesting early-stage founders and companies (so much of it falls into patterns) that I sort of have a picture of what we may be talking about as September and the final months of 2014 unfold. Keep in mind that this list is about the Series A level, when bigger institutions get involved — and is by no means an indication of overall success for anyone involved, investors included. (Also, of course, we will all be chattering about Apple and the other big tech giants, as a given.)
In no particular order, here’s what seems to be entering either the echo chamber and/or mainstream conversation:
Parking: Yes, I’m obsessed with parking startups. No good reason other than I can’t wait to see the #Parkageddon hashtag spread.
Apps That Support On-Demand Economy Companies: See a company like Checkr, which helps the Ubers of the world perform better background checks and processing of labor. These startups and companies will likely need a whole set of services and have likely built their own, as well.
Apps That Support On-Demand Economy Workers: This is a category where I’m seeing tons of startups. Like Mailbox clones designed for “the enterprise,” I’ve passed, but I’m just waiting for one to have a clever hack around distribution — most likely to be the preferred vendor of a company like Instacart or Postmates, etc. There’s an opportunity for a new Intuit for 1099′ers out there, but it has to grow like a weed.
Block Chain Apps: There will be a few companies that get bigger institutional funding which leverage the block chain to handle business processes, most notably the creation, enforcement, and settlement of contracts. Yes, some of these can be mediated in Bitcoin, but it’s not required to do so.
Mobile Commerce: This is the area I’m most excited about, even more than parking! If you’re working in this space or have an app you love, please tell me. I like mobile commerce experiences that either leverage a phone sensor; or have a clever logistics angle; or leverage a proprietary data set; or even those that hold inventory in inventive ways. Of course, I’ll rarely turn down any mobile marketplace, and my old fears about mobile platform fragmentation crippling liquidity is now gone. iPhones, all the way.
Consumer-Grade Artificial Intelligence: This totally snuck up on me and I will admit I missed it, even though it was right under my nose. For the first time, I saw an app/service that uses a combination of AI and ML to do a job better than a human and solve multiple problems in the process. Then I started to think — if it can do it for this one task, why not other mundane tasks? I see no reason why not.
Interactive iPhone Notifications: No real surprise here. Borrowing from Android, iOS developers now have the power to allow users to take action on an item directly from push. Let’s go back to Uber. The app knows you’re about to leave work (you’re a pattern). The app pushes to you — “Call an Uber?” You gently slide over the push and tap “Yes.” Never go into the app itself. That is huge, and apps like Wut, Yo, and others, as well as the push notification ESP equivalents like Kahuna and AppBoy, are well positioned to secure their place in this new landscape.
Welcome to the 11th Sunday Conversation — on a Monday. While I want to name these videos “Sunday Conversation,” I came up against an opponent — the NFL ;-) Anyway, since I do these only once in a while now, I’ll likely just post them at different times. I hope you understand. In Round 4 with Keith, we revisit Bitcoin (again), we talk about the rest of the Khosla team, YC’s latest Demo Day, the motivation founders need, chatter about parking startups, and much more. Note that full audio of the conversation is at the bottom, via SoundCloud. Also, Keith and I will likely do one more (maybe in November?) and then starting in 2015, we will have a new guest for the year. That person is TBD, but the short list is awesome. Keith is a tough act to follow, no doubt. ♦
Part I, Revisiting Bitcoin And Stellar (7:23). I give Keith an opportunity (again) to revisit his statements on Bitcoin both as a currency and as a protocol, and he discusses a few investments in the space, primarily leveraging the block chain. He also discusses the relationship between Stripe and Stellar, which is worth watching.
Part II, Identifying Potentially Great Founders (8:28). Rabois goes in-depth about what intangibles he looks for in founders. This is notable because Keith is one of the few investors who will just invest in a team before any product. In this chat, he talks about how to leverage asymmetric information about people, how picking founders can be a bit like scouting athletes, and why it’s important to have a differentiated model in investing.
Part III, The Rest Of Khosla Ventures (3:28). It dawned on me that aside from Keith and a few conversations with Vinod, I didn’t really know about the rest of KV. Keith gives a brief overview, describing the firm as “irreverant, broad,” and talks about the portfolio in alternative energy, sustainability, and food/ag tech.
Part IV, “Peak Sports” Or Bubble? (6:15). Rabois explains why real-time sports dominates at aggregating consumer audiences and changing behavior given the passion (or addiction) society places on sports.
Part V, Thoughts On Y Combinator (2:51). Rabois shares his views on the latest YC Demo Day. (I had written earlier that YC is kind of a like a growing startup.)
Part VI, (Over) Optimizing In Fundraising (2:16). We discuss the pros and cons of split caps in seed rounds, and why changes in the macro environment don’t matter with respect to startups and early-stage investing.
Part VII, Parking Startups Frenzy (3:04). I’m obsessed with this lately. It’s a thing people hate, it’s expensive and inefficient, destructive. We look into why it’s happening now.
A special thanks to the team at Scaffold Labs for sponsoring the Sunday Conversation series on Haywire. Scaffold Labs is a boutique technology advisory firm based in Silicon Valley which designs and builds scientific and predictable talent acquisition programs that helps technology startups hire great people. Scaffold Labs has previously partnered with companies such as Cloudera, Appirio, and Nimble Storage, among others. For more information, please visit www.scaffoldlabs.com
Here’s a brief thought that’s come up in conversation quite a bit this week, about where consumer attention is:
In venture capital, the one of the biggest categories is consumer, because consumer-facing products and services at scale present the greatest possible market. This is, in part, what drives valuations for early-stage hot consumer deals up — the upside always has huge potential. On the web, consumer products and services could grow and scale based on the network effects of the open web itself.
But, today, we live in a different world — a mobile world. All consumer attention is on mobile, but on mobile, growth and scale are confined to a few “growth pipes” which present their own issues. For instance, gaming is an expensive category to compete in, photo and location apps are usually chased by investors after the fact, messaging apps create network effects but those options have largely been set and regionalized, and then there’s the hottest category out there today –> mobile on-demand services.
I’ve written about mobile on-demand services often here. We all get the picture. In a world where mobile scale is near impossible, better to aggregate consumer demand on the phone, but fulfill that demand through offline logistical prowess. Hence, we have Uber, Instacart, and many others. But, consumer web products could scale with much less friction. In the world of mobile on-demand services, there is significant friction — expanding geographically, hiring and training reliable labor, and so much more. As the coefficient of friction rises, so does the risk. This dissuades some investors from jumping into the space, but it also highlights the importance (or advantage) of having investors with real operational experience in geographical expansion, logistics, delivery models, and more.
There is an inherent friction to this new consumer mobile opportunity. With mobile growth elusive, entrepreneurs have shifted to transactional businesses, and with each transaction comes friction. This is both a challenge and opportunity — a challenge to those founders and investors who are concerned about friction (which is a real concern in venture investments) and an opportunity for those who can identify the categories (and the people behind them) who can overcome any coefficient of friction.
Each August, as the Fall approaches, I try to quickly jot down my “field notes” and tips for folks who enter the marathon fundraising season from Labor Day to Thanksgiving. This Fall is a bit different. More companies, even more money, and new capital sources like the crowd and private equities. For Fall 2014, no long preamble or disclaimers, I’ll just launch right into it, in no particular order:
The Jump From Seed To Series A Is Big: I hear many people in their seed round already talking about their A Round in the next year. Optimism is great, but if that’s the goal, everyone needs to be clear about how to put the seeded company on the right path. If the institutionalized seed folks are looking for six months of trailing data, imagine what the billion dollar funds want.
Don’t Get Tripped By Outdated “Round Name” Terminology: What are seed rounds? What are Series A’s? Who on earth knows anymore. Yet, I see so many folks getting hung up on what to call it that it clouds their vision and judgment. I’ll paraphrase a line from PG: “Series A is when the pros do it and call it that.”
Optimal Ratios Between Branded And Unbranded Money: Every founder is different here, no rights or wrongs. The trap is to get stuck. Some founders want some level of branded money, and some just want money. Know where you stand on this spectrum and execute accordingly. Those who want a mix of branded and unbranded can likely close quicker (as opposed to rolling closes) and save time, as fundraising is quite a distraction to product and company development.
The Trick With Introductions: I’ve seen 100s of founders do the rounds for random intros to investors they want to meet. Those rarely work, in my experience. Rather than play a numbers game, 4-5 targeted introduction requests from people who BOTH you and the investor know will be much better received. It’s really about the strength of the connection between the nodes, that’s what sets up an introduction to be timely, awesome, and potentially game-changing.
Own Your Process: Dorky as it sounds, running a fundraising process is a way for investors to see how a CEO runs process. Investors like to see someone in control, this gives them confidence. Give them something to believe in — like running the process.
The Uber Effect: Uber is the hottest company on the planet now. It’s first round was pegged at $5m, and I believe it was on AngelList. People even questioned the $30m B round from Menlo. Now everyone realizes it was under their noses, so they’re looking for not only breakout ideas, but breakout people — Travis already had a startup he slogged through for six years and was determined to the bone. Motivation reveals itself.
Conversations, Not Pitching: Speaking of conversations, the best advice I received from a mentor in graduate school in preparing for interviews was to turn any Q&A into a conversation. If you can do that, it breaks up the unnatural interrogation and allows an investor to see the range of your thinking, as well as personal characteristics. Also, I just fundamentally believe that people want to have conversations rather than pitches or business meetings — they want to be heard, they want to listen, and they want to feel as if they met someone new that they can work with. That is what creates excitement.
Start The Conversation With Traction: Here’s a bold idea — After your cover slide in the deck, have the first real slide be about traction, usage, metrics. If you don’t have traction, say that upfront and explain where you are. People will still fund things pre-traction (and even pre-product), but just be upfront about that.
Speaking Of Slides, They’re Meant To Attract Others: Slide decks are a way for investors to determine if they want a meeting. Some don’t like slide decks and want to just try the product. Either way, if you have an app — send the investor the app. If you have a deck, make it simple and attract others to want to meet you. The deck or app is just a means to a meeting where you can have a conversation in real life.
Part Of The Pattern, Or Part Of The Portfolio: When a space gets hot, investors want to meet everyone in the space. This helps them develop a thesis, meet the players, and build a pattern. When you’re talking to an investor, try to determine if you’re becoming part of their pattern or can be part of their portfolio. If things don’t move in a manner that has momentum, take it as a “no” and move on…believe me, the investor will rush to get back in touch if they come to a decision later or change their mind. I have done this too — waiting by the phone — and it’s just a bad place to be. Don’t do it! (Tangent: Read this post on “Turf Signaling” – the location of where you meet reflects power dynamics often overlooked.)
Hard Problems or Timing Inflection? A fun criticism of investors is that they (and some founders) don’t “solve hard problems.” It’s a misguided critique. These kind of investment dollars are to be applied to hard problems, yes, but what really drives this is traction, market timing, and potential for inflection. Some do it by chasing after it’s obvious, and others are able to predict when something is on the precipice of inflection. Again, there are plenty of patient investors and capital, but with companies staying private longer, secondaries available but not predictable, and so many investment opportunities around them, investors are going to naturally pick up on things that are already working — where the question isn’t “How big will it grow?” but rather “How big will it grow and how fast?”
Sophistication With Stats: A bad place to be in an investor meeting is when the CEO does not own the metrics. The metrics should be like oxygen to a CEO. Also, the way in which stats are presented (month by month rather than cumulative, properly labeled graphs, etc.) show a level of business sophistication that will be noticed.
Alternative And New Capital Sources: VC firms have used social media and content to convince you that you need it. In some cases, you do; in many, you don’t. There are now tons of alternative funding sources (you know the ones). Additionally, for companies who are growing, there is even more new money coming into late-stage private financings. This is an increase even from last year as companies stay private longer and mutual funds, hedge funds, corporates, and even SWFs are getting into the game with direct investing. There lots of money out there (some may say too much), so make your plans accordingly.
I was in a meeting the other week where someone started talking about “The Efficient Frontier.” I had heard of the phrase, but wasn’t able to immediately recall the exact definition, though it was made clearer as this person charted out the different portfolio mixes the following groups take: founders, private investment funds, and incubators. The optimal place to be on the curve, he argued, was right above the point where the return on investment would be inefficient.
As I read more about the term, I realized it can be different things to different people. Here’s the Wikipedia definition:
The efficient frontier is a concept in modern portfolio theory introduced by Harry Markowitzand others. A combination of assets, i.e. a portfolio, is referred to as “efficient” if it has the best possible expected level of return for its level of risk (usually proxied by the standard deviation of the portfolio’s return).Here, every possible combination of risky assets, without including any holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios defines a region in this space. The upward-sloped (positively-sloped) part of the left boundary of this region, a hyperbola, is then called the “efficient frontier”. The efficient frontier is then the portion of the opportunity set that offers the highest expected return for a given level of risk, and lies at the top of the opportunity set (the feasible set). For further detail see modern portfolio theory.
So, it makes sense that angels, VC firms, and the like want to be on the efficient side of this frontier. But, what then of the folks who are beneath it? It is cliche to say founders take on extremely concentrated risk, but taken within this particular framework, the majority of founders are on “The Inefficient Frontier.” The word “inefficient” isn’t a good word. It implies friction, sub-optimality, and rewards that may not be properly tied to performance. Seen in this slightly different yet powerful perspective, it is a good reminder for me (having been through one of these myself) that a founder’s frontier is often inefficient to begin with, and getting to that point of efficiency requires significant energy to overcome the brutal laws of gravity.