There’a a lot of bubble talk again. I’m so confused now I don’t know what to make of it. Here’s what I do know: This is a big up market. There’s a lot of money in the angel and seed and crowdfunding markets. Depending on what stats you believe, the number of microVC funds with $50M or less has exploded in the last few years. And, we have all read that there’s more money moving into the late-stage private markets, with institutions like hedge funds, sovereign wealth funds, and all sorts of people clamoring to get a piece in the next Airbnb — including Airbnb.
Yet, on the other hand, we are living in a time of (1) technology proliferating into the real world and (2) the simultaneous development of groundbreaking platforms….we all know this, but consider that mobile phones are making the largest market the world has ever seen; or that Uber, Snapchat, and Apple’s iOS ecosystem and mobile efforts are pushing technology out into the real world, all around the Earth; and that besides mobile computing spreading with better and fancier sensors, we have drones (an estimated $100B market over the next 8-10 years); innovation in financial technology and automation, like the Blockchain, which despite the ups and downs, could be incredibly disruptive; we have crowdfunding across a number of verticals. I could go on and on.
I personally tend to agree w/ Albert’s assessment, here. I’ll quote his closing paragraph:
Because [this period of private growth] is happening gradually and because the logic looks internally consistent (and add to that the low interest rates), this could continue to go on for quite some time. This strikes me as the classic case of Nassim Taleb‘s point about fat tailed distributions where it is the higher order moments (kurtosis) that really matter. So the process looks very smooth and gradual for quite some time until there is a sudden and fairly violent swing.
All this said, we are all analyzing what we know. What about the unknowns. What about an exogenous shock to the system, even if the system is resilient? I know we cannot predict that, but it is a part of life, and any analysis should also include those potentially known unknowns the exogenous shocks:
Geopolitical, general unrest could foment in parts of the world as it has for the past 4-5 years. To date, the U.S. has been isolated from this.
Macroeconomic, like how the price of oil just dropped. People say “the macro” doesn’t affect technology innovation, and that is true, but it does affect capital markets, and that could have an impact on crowdfunding, smaller funds, and IPO markets.
Natural Disasters, a calamity on the scale of Sendai/Fukushimia (let’s hope not) on the west coast would rattle business as usual.
Adjacent Bubbles, such as student loan debt could mount and cause instability in other financial institutions.
Shifts In Power, as in what we will have next summer in America, leading into the 2016 election.
The phrase “consumerization of the enterprise” feels a bit tired, but certainly has merit as it applies to consumer design and strategies to infiltrate larger organizations. Lately, I’ve noticed something taking afoot with entrepreneurs, especially those who are building local, mobile service offerings — they’re offering their customers a new service (like ClassPass) but slapping on a subscription model at the end. No more piecemeal transactions. This has been on my mind for a few days, and finally had the time think through why this is happening:
Investors are tired of piecemeal transactions: I could rattle off 10s and 10s of consumer startups which were either p2p or some distributed model where the company had to grind out transactions (usually for physical goods), and things went ok for a while and then just tapped out and flattened. Unless there’s one transaction a week (at minimum), ideally looking for 2-3 per day (hence, food) it seems investors would rather back models like Spotify where the consumer feels he/she cannot live without the service and charge on a monthly basis.
Subscriptions enable bundling: Every businessperson loves a good excuse to bundle. If done correctly, the consumer pays extra for they actually use, even though they have the right to use more. Startups can then also tweak the pricing and tiers to offer specific bundles and create even more options around how to segment customers, thereby (theoretically) extracting the most revenue from them.
Consumers demonstrating a willingness to subscribe: And, maybe investors are pushing this a bit, but well, consumers are responding. Look at ClassPass, growing like a weed and not even yet two years old. Rather then offering freemium models, these startups are just going right for the monthly or annual subscription. Maybe it’s that these early services are focused on cities and customers with disposable incomes. That is certainly a factor for why it’s being adopted. (For instance, I pay a monthly fee to Gmail, Dropbox, Boomerang, Sanebox, HelloSign, Spotify, Netflix, etc….I now wonder if any individual transaction that I make is on the table for a “subscription bundle.”
Consumers also willing to pay more for convenience of subscription: My theory is that having the subscription, even if it may cost a bit more, reducing the cognitive load for customers to not be burdened with each transaction piling up. It removes that disincentive and in turn creates loyalty to the service.
Subscriptions fit nicely with services versus most physical goods: I have been forced to try some physical products on a subscription. I get why they do it, I’m sympathetic to that. But, I rarely end up needing it. As a service, though, it’s easier to subscribe and know that I could use a service once in a month, or maybe 5x that month. It’s nice to not have to think about that.
“Consumerization of the Enterprise” is one of those phrases that now feels old, in part because it was used so much without real examples. That was then, and this is now — we are now starting to see enterprises adopt design-oriented products like Slack and Zenefits, to name a few. Looking back now, it shouldn’t be a surprise that products designed with principles to suit everyday consumers are preferred by workers at larger companies.
This got me thinking — what about other prevalent consumer business models today? Could concepts like “on-demand services” or “collaborative consumption” take root inside older, larger, perhaps stodgier, less sexy industries? I wrote about this with respect to on-demand services here. While I didn’t find many on-demand services with consumers as the end customer (except for Boomtown), I did start to see some interesting companies in the sharing economy, but now applies to other industries, specifically related to industrial equipment.
Growing up studying economics, textbooks beat into your head that western economies were stronger in part because they were fueled by consumption. Buying things drove GDP, and that had a strong, trickle down effect. Then, 2001 and 2008 happened, and went the tide went out, the people (and industries) who were naked had to scramble to find new places to eek out efficiency and lower their own operational and capital costs. We’ve seen what’s happened to consumer markets, with the success of companies like Airbnb (full list of “sharing economy” companies on AngelList) — so, can larger industries benefit from the trend?
What I found out is: Yes. The first company I found is Cohealo, based out of Boston. When I found them and finally met them, they’d already well passed me by as an early-stage investor, and they’re well on their way to the big time, helping hospital networks share their high-end equipment which requires high, upfront capital expenditures but often just sits around waiting to be used. Cohealo found the white space between centers which own these and those which need them, and now the sky’s the limit for them.
The next two companies I found, I invested in them. The first is Asseta, which provides an aftermarket for industrial parts for semiconductor companies, a capital-intensive business which Asseta helps provide more financial efficiency.
And the second company I found was Getable. There’s a fun story behind it. I had been tweeting about this subject after posting about it, and Kevin from Getable jumped into the conversation. I knew construction, like medical equipment, was a huge industry ($40B+ industry), big enough for a concept like sharing to pervade. It took a while for Kevin and I too schedule our meeting to talk more about this, and I had no idea how they were doing as a company. Finally, Kevin called me to apologize he had to cancel a meeting because they were just about to close a round — and, the light went off in my head.
“Can I invest, too?”
Kevin was busy as a co-founder dealing with the round, but he took my request seriously, checked out my references, and after a few weeks, managed to make a bit of room for me in the latest Series A round that was announced in February. I had a bit of time to really dig into the Getable’s metrics, which now already services more than 50 construction companies across 250+ job sites, process over $3M in construction rentals (saving on average over 20% for companies), and also driving over $20k in sales to suppliers who join the Getable network.
I am grateful to Kevin for taking my call during a stressful time and taking the time to read my posts on the matter. In return, I am now allowed to invest alongside a great syndicate which led Getable’s Series A as the company marches further into a massive industry ripe for new technologies and new business models. Finally, it’s worth noting I wouldn’t have arrived at Getable if I didn’t see the concepts take root among consumers and then, write about them here on my blog. The writing helps reinforce what I see taking place, and then helps me connect with new friends like Kevin, and those connections lead to things that I couldn’t have planned with any grand strategy. That feels good.
Disclaimer: This list is not likely complete nor precise. Please read on: A few weeks ago, I looked at U.S. consumer unicorns and scraped public databases (imperfect sources) to find which institutional investors got into companies that would eventually turn out to be worth over $1 billion. Specifically, I looked back to 2008 and tried to find funds which invested when the company was valued at or under $100m. These are just arbitrary parameters.
Now, I’ve done it for enterprise/B2B companies in tech which have started in 2005 or after in the U.S. Note, there are more of them, but the total enterprise value of these companies added up would still be dwarfed by what has happened in consumer services. Again, please note the data isn’t 100% precise, so if you see an error or omission, please just tell me and I’ll fix it. Also, some of these companies have ballooned above $1b (like WeWork), so while the pre-$100m rule doesn’t apply exactly to that company, I kept it the same here — I don’t know IRR but safe to say some of these firms have outsized returns on just one investment, so congrats to all who made the list.
Mention frequency > 1 are: SV Angel (7); Sequoia (5); Lightspeed (3); Greylock (5); Accel (3); Khosla Ventures (3); Kleiner Perkins (2), Blumberg (2); Benchmark (2); First Round (2); a16z (2); Felicis (2). Note, also, that many YC companies focused on B2B like Zenefits and Optimizely on their way to the billion dollar mark, so if you have suggestions there for a “too watch out for list,” I’ll update this. And, as they say, once is lucky (but still awesome), two is good, and three a pattern.
When I think back in time, to my youth, I have very strong memories of those days, but not many physical reminders or keepsakes from that era. In my parents’ house, I have some boxes stored here and there, and as I’ve moved around from NYC to SF to NYC to SF to Cambridge to Palo Alto over the last 15 years, I’ve been trying to get rid of things — not hang on to them. However, I do have a smaller box with some actual photo prints, my old passports, my old wallets, and my old wristwatches. Each of these items, in turn, carry a lot of personal nostalgia for me. You wear the wristwatch so much, it becomes a part of your body; you shape the wallet with your body over years; the passports remind you of change over the time and the places you’ve been; and the pictures, well, we all know how important those are.
Now, speeding up to 2015, close to the eve of another Apple announcement (presumably about Apple Watch), I am excited because the Watch is awesome and I want one. And, this all got me thinking: There’s time, so we have Apple Watch; there are wallets, so we have Apple Pay; there is the matter of our identity, like passports, so we have TouchID; and we have pictures, often the most critical trigger for us to recall our memories, for me now entirely taken via iPhone. All of the nostalgia I have ever kept for myself now, with Apple Watch on the way, will fit into one ecosystem, across two devices, connected in the cloud, and at my fingertips with iCloud (hopefully).
I dug out my keepsakes (see pictures below of my old wallets, watches, and passport photos). On the wallets, the green one is a freebie from Newport cigarettes, my dad got it as a promo and I wanted it so badly, so he gave it to me; on the watches, the second one from the left is something I found in the woods in my hometown and have had fixed 4-5x over the last 30 years; and on my passport photos, my dad would sign them for me as we traveled back and forth to India. It makes me realize just how transformative this mobile era is. It is not just changing how we live, but maybe also how we remember our pasts.
Being a new, inexperienced, and small investor, I really have to “take what the defense gives me.” Put another way, I am often forced to look in areas and stages where more professional investors wouldn’t go. Sometimes I ride along and go late, but lately, I’ve also been going early, and one of the things I try to do in these cases is see if the company has what it takes to get into Y Combinator in the next 3-6 months. Here, I help them prepare.
People may think of Y Combinator as a startup incubator, and in some cases it can be, but it’s really a startup selector and accelerator. And, over the past two years, it has quietly been moving upmarket, as well as growing in absolute size. This means on Demo Day you can see three companies in a row present, where one has zero revenue, one is making about $4k a month, and one is making $350k/month and growing. This distorts the Demo Day vibe a bit (and potentially puts less mature companies in a tough spot), but ultimately, the YC engine is about a huge, smart, network effect and growing. The best startups coming out of there are doing both, leveraging the network for advice and new customers and growing by any means necessary.
Which brings it back to me and Haystack. I love going to Demo Day but it’s also so big and fun and a firehose, it’s hard for me to make decisions so quickly. So, I meet a bunch of the companies earlier, like many others. So, I also try to meet people early who I think have a great idea and incredible drive and who could benefit from applying and getting into YC. I have a company in the current batch I did this with, and while it was a bumpy road, it worked out and the founders are loving the experience.
A final note: I do not have any special ties with YC to help with applications, and this approach doesn’t work all the time (I’m 2 for 3), but I do think it’s an opportunity to find founders who have already started something that’s beginning to work, and a big idea — if they’re thinking about something big, if they’re leveraging their limited resources, and if they’re focused on how to grow, it’s a fair shot to get into YC. Getting into YC doesn’t mean the company will be successful, of course — but the network, peer & time pressure, and focus on growth gives an early company a great chance to get to the next key milestones.
As someone who worked on consumer mobile products for a good number of years (and who carries the scars of the endless search for mobile distribution), the chatter about new mobile services using text messaging as the interaction layer has been fascinating to watch. Kent Goldman from Upside has some of my favorite tweets about the emergent trend, remarking “Good old SMS is the new UI” and Jonathan Libov of USV had a longer post (click here) about how this trend developed as a UI and where it could go in the future.
With the release of Magic and Luka.ai, why is all of this happening at the same time? When Twitter launched back in 2006, its signature 140-character limit was originally created and imposed in order to ensure tweets fit inside text messages, which were limited to 160 characters. Since then, users could always tweet via text through Cloudhopper by syncing their phone to their Twitter account and texting their tweet to 40404. I still do it often when I’m on the go and don’t want to open TweetDeck but have a question I want to ask or thought I need to share in the moment.
Here’s a brief recap of how we got here:
Dearth Of Mobile Distribution Dampens Developer Libido: If you’ve read this blog over the years, I am a broken record on this topic – mobile distribution is so hard to engineer, yet while the overall market size of mobile users creates the largest technology market we’ve ever seen. For an enterprising mobile developer who has tried his/her hands with a few apps only to never get distribution, these conditions can force mobile app makers to look for other ways to capture consumer attention on phones.
Global Tidal Wave Of Messaging Apps: We all understand this, I trust — the massive footprint of mobile messaging apps which will eventually turn into commerce, interaction layers, and much more.
Avoiding App Store Noise and Taxes:Kent pointed out releasing a service via SMS also allows developers to avoid the morass which are the mobile app stores. This also reduces developer libido, working so hard over an app only to see the store flooded with copycats, black box featuring schedules, and drastic changes in UI which reduce search functionality and browsing. I’d add to Kent’s point that for digital transactions for services rendered through the app, some of these new SMS services could provide a bypass around Apple’s 30% toll in the app store.
Reduced Cognitive Load Requirements: It’s hard to design a transactional mobile app where the user doesn’t have to make lots of decisions. Uber is one of the few. But, if I could just text “I want X delivered a bit after 8pm” it’s just easy, and I don’t have to search for an app, open it, wait for it to load, and then find the input areas, etc.
Easier User Onboarding: Asking to download a mobile native app has many steps. Find the app. Push button to download and/or use TouchID to verify download. Wait for the software to arrive. Open the app, wait for it to load. Then, sign up, register, perhaps go through a tutorial….ah, screw it, I just want my burrito and some organic juice. Another friend, Robert Stephens, pointed out it’s an easier request of the user’s time and attention, and after a few interactions, an easier upsell to download the native app. But, to start, asking a user to just “Send us a text to 70707 to get started with Sandwich Valet” is a pretty easy call to action.
Immediately Cross-platform:Kent also pointed out going text-first on mobile also makes the service omni-platform from Day 1, even for a Windows Phone. That’s a joke. But, not really, think of Xiaomi in China or other OS and app ecosystems emerging. Whereas many startups are thinking about going iPhone-first, some of these new services can service everyone right out of the gate.
Conversational UI: This is sort of an aside, but related….My friend Max shared a screenshot of Luka.ai and called it “Conversational UI,” which is clever — delivering a service (in this case, in a mobile native app) in a format where users feel like they’re texting with their friends.
Gateway To Mine Our Conversational Patterns: Last year, we started to see apps deployed which mined our emails to build up our profiles and preferences for eventually delivering a predictive or AI-based solution. Like email, getting into our native messaging clients like SMS provides developers another fertile ground for mining our conversational habits and preferences. People have been wondering aloud about “How can Magic scale if humans are providing answers?” and the answer is, often, “AI.” Eventually, machines will be communicating with us, and we will likely not have any idea.
Potential Drawbacks To This Strategy: This all sounds great, but what are the drawbacks? It’s hard to build a bond with the user without the mobile app. Not having a mobile app blocks the service from leveraging core phone sensors (mainly GPS and camera). Some commerce functions require a browsing interface or creating a basket of goods, in which case typing out the basket is inefficient. There’s also a business model consideration for services which launch here but are on top of other services — additional tips and fees could conceivably add 3x to COGS of an item’s true cost. And, well, we must only believe it’s a matter of time before Messenger, Whatsapp, Snapchat, Instagram, maybe Twitter, and others do some version of this, too, inside their own “chat” experiences.
Like everyone else blabbering on about unicorns, I catch myself reading the posts, too — and many LPs I talk to often just want to know, “How many unicorns do you have?” I’m partially joking, but it’s directionally true. These are the companies which drive the outsized returns. However, I wanted to ask a slightly modified question and see what public data sources would reveal. I wanted to focus on America, on consumer companies that have grown to a $1Bn of private market value since 2008., and specifically on the institutions which were able to invest relatively early — not later stage investors. Here’s the list I came up with, based on a conversation on Twitter. (Disclaimer: Please let me know if I missed any company or fund, happy to amend this!)
Since 2008, the following consumer-facing companies (U.S. HQ’d only) have been formed and reached a private market valuation of at least $1Bn. I’ve also included the only the institutional funds (even if small) who were in the round before a $100M pre-money valuation, give or take, based on public sources — note, 1) I may have not listed a fund, so please correct me if I need to, and 2) I am not listing individuals:
Uber / Lowercase, Benchmark, Structure, Founder Collective, Kapor, First Round, *AngelList Pinterest / Bessemer, FirstMark, High Line Whatsapp / Sequoia Instagram / Baseline, a16z, Benchmark, Lowercase Waze / BlueRun, Magma, Vertex Oculus / *Kickstarter, Formation8, Spark, Matrix, Founders Fund, Big Ventures Nest / Shasta, Kleiner Perkins Tinder / none (*Benchmark now on BoD) Living Social / Revolution, Grotech, USVP, Lightspeed Groupon / NEA, Accel, SV Angel Houzz /Advent, Sequoia Square /Khosla, First Round, SV Angel Snapchat /SV Angel, Lightspeed, Benchmark Wish /XG Ventures, Caffeinated, Felicis, Digital Garage, CRV, AME Cloud, Formation 8, GGV Instacart /Y Combinator, Khosla, Canaan, Sequoia, *Funders Club Tango / Hambrecht
Assuming this list and rundown is true, what can we glean from it? Well, no surprise, Benchmark and Sequoia are both early and swinging big; First Round and SV Angel caught a few, as did Khosla and Lowercase, then there’s actually plenty to go around for the rest, as many firms have one — and two companies above were actually part of crowdfunding platforms (while one was on Kickstarter, but no equity was sold there). Finally, consumer is what grabs everyone’s attention and what the tech and popular media focus on, but relative to enterprise & B2B startups, there are just fewer consumer companies (16 since 2008, by this case in the U.S.) that reach $1B status — however, the total market cap of the consumer companies is much larger, hence our collective obsession and fascination of tracking such things. Oh, and LPs care, too ;-) By the way, if I only started counting from 2010 onward, the list for consumer would drop from 15 to only 10, and a good portion of them have been acquired already. Of course, there are many more in the pipeline, and if I checked on this list in a year, there will be more.
This is an unprecedented time in technology platforms and deployment. One of the biggest consumer trends (among others) to emerge from the SF Bay Area is the idea of “The On-Demand Economy.” Lately, the space has gotten so hot (and some may label it frothy, even), that the term “on-demand” has been loosely used to describe an even larger phenomenon — order everything from your phone, even if it’s not truly “on-demand.” As a result, while the phrase “on-demand” sticks, I like to point out there are two types of species in this genus: (1) services which are truly on-demand, like Uber, Lyft, and Postmates, where users demand a good/service, which then triggers the system to fulfill that demand; and (2) services which allow the consumer to transact by phone, but the service is delivered at a scheduled time, like Instacart — here, the consumer experience feels close enough to on-demand that it all gets wrapped up into one moniker.
How We Got Here (Briefly)
I’m going to quickly gloss over some big topics, just for context: After the 2008 crash, there was a little shift in the economy. People will argue that in the resulting slow recovery and then tech boom, everyone is doing a little better, but many people haven’t gotten FT jobs back (often stopping to look for new work) and have settled into the life of a 1099-er. This has been furthered by the unintended consequences of reforms in healthcare law, which have motivated many employers to cut back their workforces’ hours to be under 30 hours/week, the threshold where employer-mandated care kicks in. And, finally, you have the still unbelievable ubiquity of little computers proliferating across our homes and pockets, all connected to data or WiFi. Those phones, as I’ve written about many times before, form to collect the greatest consumer technology market we have ever seen — yet, mobile distribution remains choked for many, forcing some daring entrepreneurs to monetize by using the phone to aggregate demand and fulfilling that demand through offline operations.
The On-Demand Stack
When we think of “On-Demand,” we think of apps like Uber, and there are many — and more in beta or seeded that may seep into the mainstream. But, if we peel back the layers of these apps, what we find is a complicated stack of business operations, supply, and technologies. I won’t be able to capture them all here (though, please do reach out and I will add to the list)
Labor: The apps we use need people (for now) to carry out the labor. Here, startups (such as Task Rabbit, Homejoy, Shiftgig, Wonolo, etc.) work to provide labor in specific verticals where the end customer is a network of businesses.
Mobile Phones and Networks (iOS, Android): Sort of obvious, but bears repeating that the proliferation of phones makes this all possible, even despite mobile distribution being hamstrung for many.
Infrastructure & Services: What makes some of these apps run, perform, and adapt to users’ needs? Garry Tan had a great tweet last year, something to the effect of “The best software is invisible.” Well, if we looked underneath the Uber app, we’d find a range of technologies, some lumped into SDKs, some built in-house, and some external services that, combined, help with optimizing routes (Addy, Narvar), passenger & driver matching, pricing, fare-splitting, SMS communications (Sonar), promotion/referral redemption & management, app indexing, deep links (Button, URX) and one day loyalty. As labor comes through their funnel, potential drivers need to go through background checks (Checkr, Trooly, Onfido). Of course, when you get into an Uber, you can now integrate your Spotify experience into your ride. I’d also expect more of these complimentary, ancillary services to help delight users and drive deeper loyalty and engagement.
Deployment Application Layer: These are apps like Uber and everything else we put on our phones. Too many to count here, of course…
As a final note, I’m both biased positively on this trend (though there are risks) and heavily invested up and down this stack, mostly at the application layer. I do not know how far the trend will pervade outside the early-adopter tech centers and beyond transportation and food. I’d be lying if I said I did. What is clear is that for now, real companies can be built as services for the larger app companies, and I do believe even in transportation and food (the best two daily active use cases) we will see more version and plenty of healthy competition, collaboration, and eventually consolidation. Be careful what you demand.
Late last year, in one of my many chats w/ Connie (who created StrictlyVC), we came upon the topic of “Hey, how could StrictlyVC be something more than it is today?” Big question. We batted around a ton of ideas. I was willing to help on whatever made sense, and Connie — juggling a daily newsletter and a bunch of other things — decided on a few live events for 2015. Thus, “The StrictlyVC Insider Series” was born.
Connie had her first event last week in San Francisco, and the turnout was great, all readers of her newsletter getting to meet live, in person, in the beautiful offices of Next World Ventures (which was also hosting an original Banksy — see pics below). We were lucky to book a star lineup — I kicked things off in conversation with Keith Rabois, then Mark Gainey (Strava founder), and the event closed out with Naval from AngelList & Connie in a 1:1 discussion. If you’re interested in the world of venture and you haven’t already signed up for StrictlyVC, take a look at Connie’s excellent post-event reporting which recapped the conversations about Strava, AngelList, and two separate posts (Part I & Part II) on all market insights from Keith Rabois. (Sign-up here for StrictlyVC.)
In particular, I want to highlight the discussion with Rabois (again) and would encourage you all to read through Connie’s synopsis. In the first part, Keith makes a more detailed case about why private companies should be going public in today’s environment, and why it’s unhealthy (and an excuse to avoid scrutiny) for the overall ecosystem. The full argument from Rabois is captured here, by Connie. In the second part, Keith and I discuss how larger VC firms can think about having a multistage strategy of investing at seed, traditional Series As and Bs, and then on to growth. I see more firms wrestling with this issue as company formation becomes quicker, cheaper, and flooded with micro- and crowd-based funds. See more of Part II here.
Finally, congrats again to Connie and her readership at StrictlyVC. What may look like a simple daily newsletter on the venture industry requires a ton of work, focus, and dedication. And, we are already planning the second event and talking to a few speakers. From what I see so far, it will be fantastic, and as soon as we know the date, time, and venue, you’ll want to pen this in your calendar.