A startup idiom can go something like “stealth mode is overrated” or “counterproductive” or just plain “dumb.” Lately, however, there are more and more companies I’m seeing which remain stealth, don’t announce funding, or their investors, or much of anything. Here, the conventional reason given is: “Press and coverage no longer drives attention and, therefore, conversions or customers.
But, I think that’s not entirely it. I think a deeper force is at play.
Over the last few years, companies couldn’t wait to announce funding, their backers, and work the PR angle. Investors fueled this further writing on their blogs about new investments alongside press events. Nowadays, not a day goes by when someone tells me about a new stealth company that has been funded by a great investor, for around $3m or so (give or take), and there’s little or no trace of the company, the founders, or investors. All carefully cloaked.
My theory — people are afraid of competitive forces and ruthless copying. Working in the dark now may preserve all sorts of advantages, such as the ability to focus, the protection from recruiters or poaching behavior, and not giving ideas to overfunded teams of talented souls who are clever enough to pivot 180 degrees into your neck of the woods. I should underscore here this has been so common over the past year that when I see tech headlines on Twitter, it just feels like an entirely different universe. I should also underscore that these companies are often on a different level from what is publicly discussed about other companies. A growing but derivative company may get people chattering online, but some of these new companies — if public — would make for great blog posts, discussions, and debates about what our future may hold.
That gives me hope but also puts me in a bind. I have survived here by being open and public, but also working very hard to work with several competing interests while maintaining confidentiality. And, I like to distill what I see happening and then write about it here, as a way to deepen my understanding and learn from others. But as more things go stealth, I will hear about things less, and even if I do, like I did this week, the information can’t go anywhere but patiently wait to launch or seep quietly into the mainstream one day. From what I’ve seen, I hope they do.
About a year ago, a close friend of mine told me to get back in touch with @lg, and I did immediately — and that was a good choice. I had known Larry before and wanted to invest in Envoy on the spot. (You can read the Envoy story here.) As Larry and I reconnected, he graciously introduced me to this guy who was leaving one of my favorite startups to create his own product and company. So, of course, I took that recommendation seriously. And, I’m glad I did.
Larry recommended that I met Henrik, one of the earliest employees at SoundCloud. I love SoundCloud and have been friends with Alex for a while. Henrik was in town from Stockholm and I rushed to the city to meet him. We walked around the city for about 90 minutes. I was definitely going to invest and just was hung up on one detail — creating for the iPad vs iPhone. I was stuck on iPhone, he was bullish on iPad for music creation.
Auxy is iOS software that allows anyone to create their own electronic sounds, to stitch them together, to change the tone, pitch, tempo, and beat to create their own electronic music. Check out the video above and make sure to download Auxy for iPad — Henrik convinced me of why the iPad is better for this to start, just like good entrepreneurs do. Aside from that detail, I believe electronic music is the music of today’s and tomorrow’s generation, and is a lingua franca to connect people around the world in a common belief or experience. [Product Hunt discussion on Auxy.]
Henrik lives in Sweden. It’s the first international investment for Haystack. It was a quick decision in a product that’s built many miles away. But, like electronic music, our shared belief in the power of music makes that distance a minor footnote. Now, I have a friend in Stockholm, and I wonder what new things I’ll learn from him.
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.)
Back in 2012, right before the Facebook IPO, CRV’s George Zachary sat down with me to discuss the history of bubbles in economic history, including Silicon Valley. Zachary has been through a few tech cycles and he’s studied the history of bubbles, so this is an interesting time to revisit his thoughts. Video above, transcript below. Again, bear in mind this conversation happened in June of 2012.
@semil: We’re in the TechCrunch studio today with George Zachary, partner at Charles River Ventures and an early investor in Twitter, Yammer and Millennial Media. George, welcome to the studio.
George: Thanks for having me here.
@semil: Very soon, Facebook is going to go public. There’s a lot of talk about bubble talk in Silicon Valley and the tech world. You’ve been around the block a number of times. How do you view the world right now in terms of technology and the whole scene?
George: I’ve been in tech personally since ’77. In venture capital, I’ve been an investor since 1995. The plus side is, I’ve studied the history of bubbles. There’s actually 600 years of human history with bubbles. It’s actually a human phenomenon. It’s not just a short-term thing over the last 20 years.
@semil: Tell us a little about that. I didn’t know that you studied bubbles.
George: There’s some great books to read if people are interested, such as Manias, Panics, and Crashes. It reads like a description of a bipolar person. It also talks a little bit about a bipolar society. The tensions that get created are basically socioeconomic in nature, where people feel like they’re missing out and that fuels the end of the bubble.
We’re not quite there. We’re getting there, but there are just some fantastic books about how bubbles start. There’s the South Sea bubble, where people give money to the adventurers on boats, and then you get this bubble of people over-funding the boats. There’s also the tulip bubble. There are plenty of bubbles, and it’s just driven by the fact that people are seeking treasure.
@semil: Walk us through an earlier bubble that the Valley went through and what that looked like. Start to explain where you think we are now.
George: To preface this, if you look at the last 150 years of stock market history, you see an annualized return of 6.7 per year. That’s on a real basis. Without dividends, it’s closer to five-ish.
One of the things you’ll see is that the bubbles come in waves. You see 15 years of sideways appear in the stock market with this up and down volatility, and then 15 years of up, with up and down volatility. In the year 2000, I told my partners, “We are in it for another 13 to 15 years, where the market’s going to be tough.”
We can talk about that later, but we’re nearing the end of this bearish period. We’re starting to see a bubble emerge. For me, this Facebook IPO has a lot of similarities with the Netscape IPO of 1994, and a lot of differences.
At that time, no one was saying it was a bubble. People weren’t going around saying, “Oh, my God. Netscape is going to go public. It’s a bubble.” Actually, people were looking forward to it. People didn’t know how it would price. It went out. It priced. The price jump was astronomical. That started people talking about that there might be a bubble.
The real bubble in the ’90s really didn’t start until the late ’90s. While people call it a dot-com bubble, it was actually a bubble fueled by the Fed. The Fed pumped a ton of liquidity into the system towards basically the guarding of the catastrophic meltdown of the United States due to the year 2000 problems, in terms of people’s clocks resetting.
It pumped the market full of liquidity and that came out into the market in 2000-2001. It actually caused a catalyst for the final part of the bubble up and then, it’s basically popping. It always pops when there are no more buyers. Boom and bubble is basically that last phase where it starts to become unsustainable. You see exponential and ballistic rises in stock prices. You see it across the entire landscape, from the leaders in industry to the seed-stage company.
We’re not quite there yet. To me, there’s a Netscape feeling about it because people feel like it’s a brand new era. Back then, people weren’t talking about a bubble. People now are talking about a bubble. I think the question is, “How do you define a bubble?” That something is over-valued? Value in monetary systems is only really relative. There’s no idea of an absolute wealth. Bubble value is really relative value.
I do not think we’re in a ’99 kind of bubble time period this way.
@semil: It’s a different beast.
George: It’s a different beast. The end of all bubbles is always marked by people borrowing money and taking on debt to buy equity or to buy assets. The last time we saw this was 2007-8 with the end of the real-estate bubble. We just ran out of buyers. The last ones of those buyers were people who were faking their liar loans and making unsustainable commitments. There were no more buyers after that so it just ended.
To me, there’s a little bit of talk about that going on, but I don’t see founders, I don’t see investors, I don’t see landlords or service providers basically borrowing money to buy equity.
@semil: They’re using their own.
George: They’re using their own capital, which they have, to put into equity. I don’t see the individual investor increasing their margin account at stock brokerages. In the last week, we had a reduction in terms of the investor sentiment to the lowest suggested amounts of holdings of NASDAQ tech companies.
There’s enough fear in the market that it tells me that we’re not at a bubble yet. When there’s no fear, that’s when we’re near the end of the bubble.
@semil: Here in mid-May 2012, at what phase or at what point in the curve are we in your mind?
George: If you look at the phases of tech bubbles, the first phase is when a leader in the space does something breakthrough and gets an extraordinarily high valuation. That was Facebook in one of its first rounds, when they decided to not take the buyout offer and raise money at a higher price.
It wasn’t the Greylock offer when Greylock offered $500 million valuation, because that was high but it wasn’t ridiculous. It was when Yuri Milner and DST invested and everyone said, “Whoa, it’s a bubble.” It’s when Microsoft invested in Facebook and people said, “Whoa, that’s a bubble.” How can this ever be worth $10-15 billion?
Now that characterizes the first phase,where the first leader has this very high valuation and people say, “Oh, it’s a bubble.” It’s not really an indicator that the bubble is about to break. Usually when the bubble is about to break is in the second or third phases.
The second and third phases look like the following. In the second phase you have the competitor companies. I’m an investor in one, which is Twitter, where people apply a high valuation to Twitter and they say, “Well, relative to Facebook, it should have this valuation.”
You have this set of leading companies. They have good metrics, they have good users, they have real engagement, and they carry a mark-to-Facebook, a mark-to-leader kind of valuation. That’s when you know you’re in the second phase. At the end of the second phase, you start to see that a couple companies get bought.
The one that’s very obvious to me that defines this delineation between the second and third phase is the Instagram purchase. It wasn’t an irrational purchase. It looks irrational. Why is it worth $1 billion? It’s worth one percent of Facebook, which is different from it being worth $1 billion.
You’re starting to see some mark-to-market of the companies that were not the leaders but became the leaders, and then you saw this transaction that happened. The ideal point to being an investor, is still now, and actually still is for awhile. The reason why, is that there a set of follow-along companies, the HootSuites of the world and other people that are saying, “Hey, we’re going to raise money at a $500 million price tag.”
Why? Because these other companies which aren’t Facebook or Twitter but may be right underneath them in terms of leadership, they have valuations. You see this cascading multiple that goes to the leader, to the second tier, to the third tier, then to the fourth.
@semil: So, you’re saying that there are a number of companies underneath layers above the leaders and since they’re not having real revenues, or you can’t really price, select and value the user, you’re marking it to the market leader, which in and of itself, isn’t being priced according to the public markets.
George: That’s right.
The Instagram purchase really reminds me of the same feeling I had when Microsoft acquired Hotmail, in I think January of 1998. People said, “Microsoft, the leading software company, bought this webmail thing for $400 million?” A lot of people were astounded.
They thought, “It has no revenue. It just sends messages to people. People use it to communicate with one other…” People were astounded. People said, “Oh, that’s a bubble. I’m so pissed off that Hotmail got bought for $400, my message being…” I heard the exact same things with Instagram.
Instagram is interesting because the leading web company, Facebook, is now trended by the leading mobile app player. You can debate whether it’s the leading mobile app player. I see that it’s incredibly parallel.
Back in 1998, we were still not in this full-fledged bubble. We were still in this boundary between second phase and third phase. That Hotmail transaction is what started it. When you look back at it, Microsoft doesn’t complain that it bought Hotmail for $400 million because it was a great customer acquisition tool for them.
@semil: Now, the Facebook IPO is going to happen very soon.
George: Next week. No, this week?
@semil: Yes. I am going to ask you a two-part question. What does the rest of 2012 look like to you as an investor? Then, what does 2013 look like?
George: What does 2012 look like? We’re in this eye of the hurricane period, where everyone right now is just battening down the hatches, and wondering what’s going to happen the day of the IPO and what’s going to happen after the IPO. How are people going to price this? That’s going to be the second part of the hurricane.
I don’t know how people are going to act. But looking at the public market, you can see that the small cap stocks have started to lose some relative power, relative to the whole market. That’s usually a sign that you’re in an aging bull market. But it’s not always a sign, statistically.
I think what we’re seeing is that there is still reluctance on the part of the public to believe that everything in the world is fine. We’re climbing that wall of worry. The wall of worry is not over. People still have worries. As long as there are worries, you’re not at the end of the bubble.
My belief is that the Facebook IPO will do well. I don’t know if it is going to go to a $200 billion valuation. I know lots of people I know, and myself, we all have biases wanting to believe that because then, cash will be raining from the sky.
@semil: Let’s rephrase the question a little bit differently. For other startups out there, other people with companies that have gained some traction, how should they be thinking about 2012? Some of them are going to be going for financing, some of them are going to be looking at M and A. How do you think that leaders should be thinking about that?
George: It matters what stage you’re at.
@semil: Let’s say early stage.
George: Early stage, so past seed stage.
George: But they might have a million users or 10 million users.
@semil: I’m going to assume that for the best founders and best companies, seed capital is always going to be available.
George: That’s right.
@semil: Let’s say between A and C.
George: I think what you’re going to see is that financings are still going to be strong, they’re still going to be taking place. There are lots of public market investors and limited partner investors that will invest into venture capital. That’s going to continue. You’re seeing a winnowing of the amount of firms that are profitable.
Out of 800 firms in technology venture capital, 30 are profitable over the last 10 years. But remember, in Hollywood, there are lots of movie production studios that are unprofitable for a long period of time, but they don’t go out of business because people still want the dream of funding the next big movie.
This phenomenon is going to continue for a while. People are chasing these legends and myths. Not even myths, they’re the realities of “this could be the next humongous thing.”
@semil: Maybe the players will change, but the money will always be there.
George: That’s what I think.
I think the rest of the year, if you have any traction, you should be able to be financed. But people are looking for growth on growth transaction. People are looking for the exponential curves because the exponential curve is a strong indicator that you have product market fit. If you have product market fit, you should be able to monetize it in a certain way. If you don’t have an exponential curve, either you won’t get a valuation, or it’s not going to be good.
@semil: Understood. Here’s the final question. With the last breakout social application, let’s say Pinterest or some of the communication apps or what’s going on with Vox or things like that, do you think the next one will be mobile?
George: Yes. Mobile is the platform that we will be with for quite a long time. Whether it is going to be a mobile phone or a Google Glasses kind of thing, it’s still going to be mobile because it goes with you wherever you are. You don’t have to be chained to your desk.
@semil: But I’m talking about the next exponential breakout, where you see the user growth kind of go like this.
George: Yes, it will be mobile. We’re going to have more people come online in the next 10 years than are online right now. That’s a huge opportunity.
I think we’ll see Twitter have a billion users in the next couple of years. That’s the ratchet of how many users you have and what’s successful. When I got in this business in 1995, there wasn’t Web 2.0 or even, really, Web 1.0; it was like Web 0.1. If you had 50,000 users, that was considered awesome.
Now, to be considered awesome, you have to have some amount of millions of active, engaged users. Not downloads or registrations, but people who love the product and are engaging in it. You look at the ratio of DAUs, daily active users, to monthly active users, you get a sense of that excitement.
You also look at the churn rate. We’ve done some work, and we see that there’s a correlation between churn rate and exits.
@semil: Actually, this is an interesting question. Do you think that some of the companies right now, let’s say on the communications side or on the social video side, that’s what everyone is talking about right now in terms of applications? Do you think that growth is organic or sustainable? Or, are they piggybacking off of Open Graph and Twitter?
George: I’m inclined to believe more of the latter, which is, you’re likely to have these impulse waves up and another competitor can come by with a slightly better product and you can have an impulse wave down. Founders should be looking for how to implement switching costs into the product, how to build network effects into the products that shut down the users’ desire to switch out.
@semil: All right, George. Thank you for coming in and sharing your knowledge.
Rumors are that on Monday, Microsoft will announce the $2.5Bn acquisition of Mojang, the maker of Minecraft. This is a big, big deal and was sort of overshadowed by all the Apple news and tech media events last week. Let’s quickly unpack why this move is in and of itself a big deal, as well as a potential harbinger of what to expect from Microsoft in the near future:
First, some light but required background reading. I would guess many of you reading this either know Minecraft well or have at least heard of it. Either way, I’d strongly recommend reading this essay on Minecraft by Robin Sloan, it is just excellent [click here]. Additionally, a short post by John Lilly, who knows a thing or two about how folks interact with the web, summarizes some of the challenges and opportunities in this move.l
Second, let’s hope it remains independent as long as possible. In more and more M&A, absorbed companies are sometimes remaining independent a bit longer. Of course, those companies now have parents and eventually integrate in some way. With Minecraft, such a treasure of creativity and organic use, let us hope Microsoft views this first as an investment and empowers Mojang to keep doing what it’s doing.
Third, Minecraft is a kaleidoscopic network. By now, we all know about many of the users building servers, and how folks across the web and mobile are addicted to creating and playing in Minecraft worlds. What we all know a little less about is how those networks fracture a bit into folks who post and watch videos the game (like Twitch), folks who chat with others in vertical networks like Amino.
Fourth, I wonder why Facebook wouldn’t win this deal or compete for it. Maybe they did and felt the price was too high? I don’t know, but Minecraft is both a social network (like Facebook) and a playground for future developers (which Facebook values greatly). With Facebook stock soaring (it could hit $300Bn market cap by the time we have our next president in office), it would seem to be a good time for Zuck to absorb Mojang and be highest bidder.
Fifth, an amazing time for game absorption at The Big Five tech co’s. Twitch is now part of Amazon, Oculus is now at Facebook, and soon Minecraft will be a part of Microsoft. What will Apple and Google do, if anything at all? (Nintendo???)
And sixth, the big takeaway — get ready for Microsoft to get acquisitive. Many signals point to a new Microsoft that’s on the block, blessed with a new CEO, a new mandate, hoards of cash, forthcoming layoffs, and the appetite to acquire more and more small teams in the Bay Area along many fault lines (mobile, infrastructure, and new platforms), and potentially some bigger M&A coming down the pike. VCs are hoping for this, too, as having another big acquirer stalking portfolios is never a bad thing. I believe Nadella has a big mandate and we can therefore expect him to make some big moves.
Let’s start with the bad news first: Twitter, no matter what you do to it, will no longer ever be a hyper-growth product. That time has passed. Yes, I know public investors expect this of you, and I know that’s what all other social network companies strive for, but it won’t happen. Twitter has hit a local maxima, and that’s nothing to be ashamed of — in fact, Twitter’s mainstream success to this point is quite incredible for such a geeky, complicated, niche product. But now, messing with the feed, degrading the design, and all those other copycat changes will not solve this core growth problem.
But, this is only bad news because Twitter is responding to the wants of the outside world. It is listening to others instead of itself. For success, all the answers are inside. Instead, Twitter should double-down on what does work and chart its own path.
This is the good news: Twitter’s hyper-addicted daily active users comprise of some of the most valuable minds and wallets on the planet today. Instead of trying to degrade their experience in favor of growth (which is, in my opinion, not attainable), why not turn that huge, active, valuable base of Twitter addicts into money? Right now, millions of smart Twitter users take actions on feeds like RTs and favorites — why not “Buy” or “Share” to other channels? Why not show me ads that are product endorsements from credible Twitter users? Why not open the API to developers again and have them experiment with new ways to monetize and grow? Why not make Tweetstorms part of the product and get more journalists and bloggers to write on the platform instead of linking (as we know clicks are down for many)?
I write this open letter out of concern and love. For over two years, I have used Twitter without touching native products. Twitter is the service I use the most, and I never go to www.twitter.com or use Twitter for iPhone. I understand I’m a power user, so this doesn’t apply to all, but I do believe it gives me the platform to share my views on the likelihood of success of Twitter in its current form. Twitter, you are now public, embedded into the fabric of society, both complex and simple at the same time. Now is the time to ignore the outsiders, and look within; now is the time to harvest your loyal user base to take the product to the next level. I’m happy to help any way I can.
Streaming media is the future, right? Broadcast is dead, right? Well, streaming dominates many forms today, and I don’t see that trend stopping. Streaming has many benefits. We don’t have to download media to a client. We can just search, select, and ingest. For audio, the data rates are quite cheap. By streaming from a server to a distributed base offers many benefits — the ability to leverage networks, personalize content to a recipient, and so forth.
Yet, there’s something I miss deeply about broadcast media. I haven’t had Cable TV anymore. Netflix and YouTube (and Twitter, as a filter) empower me to watch what I want, when I want. When Swell was around, I consumed media (streamed) at the tune of about 25 hours per week. No more traditional, terrestrial radio.
In theory, it all sounds great and more efficient, but I noticed something was missing: The feeling of being connected to my local surroundings. When I have local sports on TV or the radio in the background, moving around the house, I feel like I live in the Bay Area. I noticed this when I travel back to NYC for family events, I always leave the car radio on 880 AM, which if you know, is the same local news nonstop. It makes me feel connected to the area for a brief moment of time. Now, I realize that other personalized tools have come in to help us feel more connected, such as Twitter and Facebook, which can surface information in real time, but this doesn’t work in the car, and when at home, there’s no ambient service which can do this in the background.
So, with Twitter, I do feel more connected to the people that are relevant to me, and while I like that decentralized approach on many levels, there’s something about the non-personalized, centralized signature of old-style broadcast media as it pertains to location. It helps me connect to my physical surroundings, and I know that many people around me are also tuning in at the same time. I’d be curious if you ever felt the same?
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.
A few brief nuggets of interest re: today’s outlier outcome, which is Amazon’s nearly $1bn all cash acquisition of Twitch:
Seven Years Post-YC: Justin.tv (the original) company went through Y Combinator in 2007 and then made a hard pivot. You know, a 7-year over night success. (This is also the largest acquisition of a YC company to date.)
Concentrated, Risky Bets @ Series A: Alsop Louie invested close to $8m to help Justin and his team handle video server and storage costs, and because there was electricity in the house that they were building it. He had to visit the company’s office to find that out, he told me over lunch last year. It was a concentrated, highly risky bet — exactly what a proper Series A should look like.
Gaming = Media = Attention: The act of playing games, and the act of watching games, are media. Building Minecraft servers are the new legos. This is just the beginning of this wave.
Low-Key Founders: I’ve come in contact with various Twitch founders here and there, and they were all very quiet in their own way. Limited social media presence, quite reserved in the settings I saw them. Maybe their minds were on something else ;-)
Amazon’s Motives: Amazon paid an all cash sum amounting to a seriously non-trivial percentage of their total cash on hand (especially relative to what Google may have wanted to pay). In this light, we could view Twitch as a gaming portal, a streaming base for other media, and/or even a social network. They probably also had all sorts of inside data on how Twitch was scaling their cloud services. Let the theories fly around! Either way, we have to believe there is something deep in this for Amazon, perhaps across all three areas, which made this deal vital.