I am very proud the announce the first investment of Haystack III: OneConcern.
I met the founders through another friend at a fund, he was looking at the company and knew that I liked software plays that sold to national, state, and municipal governments. Most investors don’t like those sales channels, but I do. Why? Because I believe over time the budgets for certain things (health, emergency, climate) will balloon to meet societal needs while many others will fade and erode because we simply won’t have the money in the tax base to get it done. Those essential tasks then will have to be left to technology and software, and in my investing, I’ve found that once an entrepreneur figures out how to sell into governments and builds the right stuff, it is one of the best channels out there because words spread through different networks and it’s harder for a new entrant to cut in.
Anyway, I met the CEO at the request of my other investor friend, and I was immediately captivated by his personal story and academic background. The CEO, a structural engineer from Asia who came to Stanford to study the science behind earthquakes and other natural disasters. This is a tangent, but I enjoy studying the history of earthquakes and learning about how societies have dealt with them. I troll Wikipedia to give my brain a break and read up on these things, so when I met the CEO, I was actually excited to talk about big earthquakes and data, etc. What I came to understand from that meeting, however, was even deeper.
A few years ago, during the major floods in Pakistan, Ahmad (the CEO) was home visiting his family and was caught in the floods. He escaped to the attic of his family’s house and lived on or near the roof for over a week until he was rescued by authorities. I always ask a founder about how past experiences may shape future activities, but I never expected a machine learning engineer focused on building software to help states mitigate disaster response systems say that he himself was caught in a major natural disaster.
While I always try to spend time “in diligence” and vetting a company, I realize now in retrospect I probably spent too much time doing that with OneConcern. The beauty of investing at the seed stage is that I can work with tons of other investors to support companies who start out and have ambitions to grow bigger. Yet, much of the early stages — myself included — have become professionalized, often to the point of placing unrealistic expectations on new companies, new technologies, and new founders, when in fact it should just be about the identification of earnest talent and the relentless support of that talent. I may have conducted my proper diligence, but some things don’t need diligence; a product like OneConcern and an entrepreneurial story like Ahmad’s must be supported — it must be willed into the world, and just like I am trying to do with the creation of Haystack and my own family funds, it will be willed into world no matter what. The solution must exist, and the network of other investors will support it to see it through with their own sweat and passion. That is inspiring to watch unfold and be a part of, indeed.
By now we all know that mobile communications and “chat-style” apps have effectively become the browser within which billions of people (many of whom have never before owned a computer) will access the web. Asian chat apps like WeChat and LINE, among have pioneered innovation in this sector, becoming much more than just an “app,” but transforming into a platform to handle payments, connect with brands, transact with businesses, and much more. The moves we see inside Facebook Messenger angling toward payments, a conversational assistant (Moneypenny), and talking to local businesses are just an inkling of what we can expect in the future. It’s hard to distribute mobile apps, and there’s a power law among the apps we actually use (mostly communications-based), we have the text message entry bar as the new command line interface.
Most people think of “chat apps” when they think of this, and that makes sense. We are using iMessage with our friends, texting on Messenger, and talking to friends overseas with WeChat, etc. It’s easy to imagine each of these services offering conversational assistants, powered either by humans or machines, to help us transact or get things done. Why should we leave Messenger when we’re coordinating with a friend about getting dinner, when the system can just know what we want and respond to our requests implicitly and book a table for us via the OpenTable API?
Now, I think another popular mobile app will also transform into having these characteristics — Uber.
When it started, the Uber app was about calling a black car. Then, it evolved into offering us UberX, and most recently, UberEATS. And, they’re not done, with reports dripping out they’re experimenting with commuters, commerce, group rides, and more, I believe we will see the Uber app transform in ways that will be hard to imagine today. For example, there may be a search box or text box to enter information and/or chat with drivers and friends, and in those conversations, the text box becomes another command line interface ripe for bots to interact with. An example: You call an Uber to meet a friend at a restaurant, you can deep-link out to OpenTable to reserve a table, or maybe just text within Uber you need a table at Restaurant X and it takes care of it in the background. even to the point where your credit card is used for checkout (like inside OpenTable right now).
There are many examples herein. The larger point is that just like our chat apps are transforming into colossal platforms hooked into myriad services, Uber’s mobile app won’t just be a place to order your car or lunch…they will want to capture more of your attention and more of your intent, and now that more AI-based, NLP-based, and ML-based technologies are accessible to third parties, we should expect Uber — like Messenger — to want to hook us into a platform where we can search for, discover, communicate with, and transact with a host of local stores and service providers. These apps will pick up on the natural language we use, they’ll leverage artificial intelligent bots which can parse implicit signals and machine learning algorithms which can learn our preferences over time and either compress transaction time or help us discover new things. For many people who live in cities, Uber is a homescreen app, and it will be fascinating to see how it evolves from EATS to commerce to other areas.
It is not on the level of RIP Good Times. There are good times to be had, but only for a portion of the ecosystem’s participants. The news is as follows: Traditional venture capitalists have become significantly more cautious since Labor Day this year. I can’t prove it with data or a fancy graph. And VCs likely won’t confirm it because everyone wants to be in the market. The truth is, they are in the market, but they’re being much, much more selective. The premium companies with real teams and real metrics will get even more intense investment interest, but the rest will look like Lake Wobegon.
I can’t prove why this has happened, but I can take a few guesses: We’ve seen a string of public flameouts of well-funded VC-backed startups hit the press now, even though those carcasses were on the highway this summer; we’ve seen some VC firms quite rationally not bridge some of their portfolio companies to the next round; we’ve seen international economics to be more interconnected than we’d imagined them to be; we’ve seen a number of companies struggle to even get their houses in order to go public; and we’ve seen many investors with a newfound swagger on Twitter, as if the pendulum has swung back a bit after years of being portrayed negatively in the overall narrative of how startups form and grow.
But, most critically, VCs hear from their LPs who have been coaching them now (1) to watch their investment pace; (2) to extend the term of their current fund; (3) to focus on previous funds’ liquidity before asking for fresh capital; and (4) to more aggressively consider partial secondary sales, even if it puts relationships with founders in jeopardy for a bit, as there’s very little M&A to be had for highly-valued startups that need to grow into their valuations. There’s no way out.
It’s the flow of money in and out that is now in question. It’s not about a bubble, per se. LPs largely believe in the asset class and in the long-term arc of technology and computing power transforming industries for decades to come — however, they have their bosses to answer to, as well, and a lot of money has gone out of their wires and not a lot has come back. That engine needs to be lubricated with cash, and with a dry IPO market and very little M&A to write home about, many funds are taking a more cautious approach, examining their own runways, the fuel left in the tank, and are circling the landing strips before being cleared to descend for touchdown.
If I’m right (and hey, I might be wrong!), what this means for founders is that raising subsequent rounds won’t be impossible — it will just be significantly harder. It is not unreasonable to prepare oneself for a prolonged process, to be subject to reams of diligence, to have investors push prices down to cut a deal. This maybe how it should be (in the LPs eyes), but it will be a different look than founders have seen in a few years, and that will make things feel different and likely change behavior overall in the ecosystem. There’s a long way to go until the end of the year, so let’s see if I’m right.
It’s “New iPhone Eve,” the night before the next generation of Apple’s iPhones hit stores. There’s been so much written about Apple in general and this particular generation of phones, so I just want to highlight three elements that interest me greatly. Previous “S” upgrade cycles have seen the introduction of voice command technology (Siri), biometric sensing (TouchID), and this year, an entirely new intra-app interaction design (3D-Force Touch). I want to focus this short post on the latter. I know there’s tons of news about Apple in general, but I only care about the phone.
But, before that, I need to quickly point out two other things about changes to the iPhone line:
One, Apple sticks it to the carriers!
Everyone hates their carriers. We can’t read their bills. They bilk us for roaming. Going into their stores is a nightmare. It’s sad because they employ good people, but let’s be frank, it’s not optimal, and one of the handcuffs forced upon us is we have to wait for upgrades and are tethered to them for service and their complicated pricing structures. It’s all just confusing and time consuming. Apple is now takes a first step in sticking it to the carriers with their upgrade plans. Apple certainly has its own motives for driving revenue, but they also know consumers will love this move; Apple has a power that can harness consumer sentiment and in this case, they score points and help everyone take an important first step away from locked-in service contracts.
Two, Apple sticks it to the publishers!
Yes, I know that Apple wants everything to happen inside native apps, and that Apple wants to cut off Google’s ad inventory on the mobile web, and that the company just plain hates flash (which drags down pages in the mobile browsers or applications that render web pages inside a native app), and so forth. But let’s face it, crappy content is taking over the open web, it’s being propped up by shitty ads (often coded in flash), and it’s just a pain to read. It got to the point for me where I would just not open a link for fear of how long it would take to load. Now publishers, starved for attention (which then may translate to ad impressions) now have to do the hard work of facing the same music newspapers faced in the last decade. And, no one will feel sorry for them, especially when properties like Buzzfeed anticipated such a world, invested in their own tech and mobile distribution, and imagined news in a social world. As a side note, this will also affect retailers who rely on mobile web touchpoints and who haven’t yet invested the resources to get their audiences onto mobile apps. (For all the publishing whiners out there, the best piece IMO on tactical things to do was written by Dave Winer — read it here.)
And, now back to 3D-Force Touch — Shortcuts for Apps!
For years, I’ve bitched on this blog about how hard mobile app distribution is. Brutal. Given that, I believe companies which emerged around 2007-2012 have better chances at growing their distribution and have essentially built up a moat around competitors. Then, in turn, those companies will benefit to even greater levels as new IoT devices that are tethered to our phones will make it easier to call services, largely because many physical interactions are “easier than opening up a mobile app.” It’s not obvious unless you think about it, but taking out your phone, finding the app in question, and then opening it up and finding the right interaction takes time — new devices like Dash Buttons, voice commands, and other triggers will transform the way we call on services that reside on our phones.
One such transformation could also be 3D Force Touch. Click here for a little video example. Because native apps are silos, when we want to view information that rests in another app while in the current app, we have to entirely switch our context, and go through a clunky maze to get to the new destination. Now we can get back with a back button, but we often lose context. Force Touch will enable users to stay in the current app and see a preview or snapshot of the key information that would’ve, in the old days, only resided in a different app. This could have profound changes for how app makers design and measure activity on their properties.
There are countless examples of why this will be a big change for app makers, the most common being that instead of opening an app to do a simple action, we could just tap on the icon and pick from a drop down menu of simple interactions. When I want an Uber, I won’t have to open Uber’s app, and then hit the button, etc.; with Force Touch, I can just hard touch the icon, and likely pick from a drop down menu to say “call a car” and be done with it.
The main example I like to use involves maps. Google Maps is the best maps product for iOS. Everyone has it. In many texts or emails or from calendar, people often leave those apps in order to visit maps. Google gets paid for those API calls, but they then also have our attention and present us with a valuable search bar where we can create new context at the expense of the previous app we were inside. If we were now stuck in Google Maps, Google could encourage us to search, or could layer information right on top of the map and grab our intent. However, with Force Touch, we could stay inside FB Messenger and continue having our conversation in the chat app. Now, this new feature will not be open to all third-party apps like Google Maps right out the gate, but when it does roll out, it will change how we as consumers think of “opening” and “switching between” mobile apps, and it will alter the metrics measurement and strategies of how mobile developers present information to users in a world where their creations may not be displayed to users in traditional apps, but rather as part of a contextual workflow or conversation, conferring more power to the utilities (like calendar) and communication apps (like SMS) we rely on.
@Semil Fireside Chat w/ @Chamath StrictlyVC Insider Series
September 16, 2015
AutoDesk Gallery SF
(This is the transcript from last night’s chat at Connie’sStrictlyVC Insider Series with Chamath from Social+Capital. I wasn’t on Twitter today but checked in the afternoon and saw that tons of people were talking about it. It must have struck a chord, so I talked to Connie and got someone to transcribe the Periscope. It is definitely worth a read. Chamath not only candidly says what most others would be too nervous to say publicly, he does so in a way that demonstrates he is a truly big thinker and pushing forward the model and conception of what a technology investor can and should be.)
@SEMIL Intro: Thanks everyone for coming. Connie organizes these events, they’re something I really look forward to, and in particular this one. A lot of you here mentioned me on email that you were looking forward to this event with Chamath, you probably follow him on Twitter, listen to what he says, maybe you don’t agree with everything, but what I find really unique about Chamath, is that when he says something you know he’s thought about it and you know he means what he says. To be fair to Chamath I emailed him twice before the event and I said, “what do you want to talk, plug, you tell me.. and he says just adlib, make it interesting. So, we’re going to rely on Chamath to make it interesting.
Which Becomes A Trillion-Dollar Company First: Facebook or Uber?
@CHAMATH: Facebook. And it really comes down to a very simple thing, which is, the principle of N of 1 vs. 1 of N. This is something I think about a lot, which is, when you look at a company, they become these foundational layers in society, to me what’s interesting is they always start where they’re a set of many, they’re 1 of N companies, and somewhere along the way what happens is a bunch of them fall off. There’s these periods of real, either misunderstanding, or discontent, or frustration, and then they develop something discontinuous. When you put those things together, that allows a company to separate themselves from the pack, and eventually, everything falls away, and they’re an N of 1 company. Then they scale and are effectively a monopoly.
If you think of companies that multi-generationally have done that well, Microsoft did that, I think Google did that, Apple will become a trillion dollar company, even though they didn’t start off as an N of 1 path, and Facebook has done that.
But when you compare that to Uber, it’s interesting, people want to value the company as if it’s an N of 1, but it’s fundamentally a 1 of N. And I think that doesn’t.. it basically limits the rate at which it can grow, and the violent market effects it can have, and I think what you see is probably business features sprawl in order to generate revenue to justify valuation.
So you know, at Facebook, for five years, all we talked about was user growth. Like there’s only one thing that matters: user growth, user growth, user growth. Why? Because at a certain point, it basically becomes this canonical definitional service in the world, by language which they will not use, but is like, you are the de facto standard, and that’s how you become worth a trillion dollars, because you have market effects, pricing effects, the ability to attract talent, that is just completely unique and differentiated.
But if you’re an N of 1 company, you’re competing with different folks, and that’s the problem with Uber is that it has to compete with a bunch of folks here, both private and public, capitalized and not. In china it has a completely different set of competitors, in India, it has a completely different set of competitors, each of them are funded to billions and billions of dollars, so what happens with market dynamics, is basically driving things to commodification, driving things to basically price discovery where you don’t have pricing power, you don’t have the effects that make you monopolistic, and the problem is markets will not deny you that at massive multiples.
The way that they value things that are fundamentally unique and not easily recreatable.. So, that turn of capital, those 3 or 4 multiples of P/E that makes something a 40 X vs. a 12 X is a difference between grossing $150B and a trillion dollars, and it’s beyond a shadow of a doubt that Facebook will be a trillion dollar company, it’s just you’re talking about the delta: T which is probably sub-15 years. In my opinion. Uber’s not there. Great company. But not anywhere near the path of being an N of 1 company.
Semil: One follow up on that, do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform.
Chamath: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after.. like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened around literally a few months after Facebook platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”
If you apply that simple methodology to any company that says they’re a platform, there are only 3 platforms in the world! You know? Windows is a quasi-platform, decaying, but still, iOS is platform, and Android is platform, but that’s easy because the denominator is 0. So, I think, that these aren’t “platforms”, these are APIs, these are developer tools, which is good, and it’s a bridge to something, but it’s not a platform, so let’s stop calling it a platform, let’s call it what it is, which is a bunch of endpoints.
Discuss The State Of Professional Sports In The Bay Area
Chamath: I think the Warriors are an example of basically applying traditional management to sports, which is like a really unique kind of thing, which hasn’t been done before. Take a step back.. we teach our kids basically, don’t listen to anybody. We just don’t want them to be programmed.. (this is when Chamath’s son, who was sitting in the front row, just left the talk and walked out), so if he he can take an Uber home I guess.
I think the Giants are pretty well run, I think there’s a really interesting opportunity to do something around the Raiders. I’ll leave it at that.
Assessing The Health Of The SF Bay Area Tech Startup Ecosystem
Chamath: These are all really interconnected, but if you think about it, there’s way too much money, in the system, ultimately still chasing few really great companies. The problem with that is that you have a bunch of imposter companies that get funded for a lot longer than traditional cycles.
So if you had 1/10 the capital, the mortality rates would be higher, faster, the curves are sharp, and instead of what happens is the decay is longer, and in the long decay, what essentially happens is that you are feeding capital to companies that should really not exist anymore, and those companies then use that capital to take up space. They use that capital to hire other employees, and all these other people spend a lot more time wasting their time. And that’s problematic, and if you don’t get that churn, then the few that have the ability to really get to escape velocity, are forced to figure out for themselves, how to get that sooner?
So what do they do? They start to pay people more, they start to spend more on these things that think will attract all these people, and that has this negative byproduct, which is everything goes up, the cost of everything starts to rise, and you have this really vicious cycle where at some point then that N + first young engineer, can’t afford to come here in the first place, because he can’t even afford a 1 bedroom out of 5 bedrooms because it’s $2000, and all of a sudden a first year engineer is making $170K, and it’s like this violent vicious cycle that helps nobody.
Semil: So a lot of people think the solution to that is just more housing, more affordable housing, sounds like what you’re saying, even if they do that, it still wouldn’t stop the core problem.
Chamath: I mean you need to do a couple of things. If we’re really going to bet on SF, and if we’re really going to bet on startups. In Silicon Valley, you have to do a bunch of stuff privately and you have to do a bunch of stuff publically.
So at the public level, you have to invest in what the city is doing, and I think you could debate on some level, how much work the city should be doing around transportation, around housing, you have to basically get rid of the nimbyism and you have to decide to build up. You need to quadruple the amount of housing, quintuple amount of housing. You need to tell every young engineer from University of Michigan that they can afford to live here on $80K a year. All the other ancillary surfaces you need to be able to do that, as an example, we look at our startups and we’re like, the minute that they start to spend 15% of their burn, money that we give them, good money, on rent?? Huge red flag goes up. It’s like, there’s all of these other simple signals, when you, on a per headcount basis, are spending so much, and we start to look at like, the productivity of the technical team, and it’s like good but not great and they’re spending the same amount of money as a team in Redwood city, we start to ask ourselves, are you so convinced that success is going to happen in this city at 1.5X of cost.
For every dollar that someone in Redwood City or Mountain View is raising, you have to raise 1.5 times or 2 times that. Just to get to the same point in time. So you’re cutting you half-life in half. To prove what?? That you can take an Uber from some shitty bar to another shitty bar? I don’t understand. These are like the things that I start to think about, these constraints that need to get fixed.
So, at the public level, you need to have an approach that kind of creates the attractive incentives, for people to come and be able to survive on a living wage. Then at a private level we need to hold our companies to a higher standards where they’re not just burning money on useless stuff that is window dressing. That’s fundamentally getting in the way of building something useful.
Semil: When you mentioned the rate of churn, is slower, as that churn slows, what’s the effect of that? Is it clogging up resources? Are people sticking in at roles where companies are going nowhere..
Chamath: I actually think it’s more insidious than that, it’s like telling somebody.. startups are this really delicate compact that an employer has with a bunch of employees, these employees are a highly productive, extremely well intentioned, people who want to do something really productive, they’re willing to make huge sacrifices, in order to do something that changes the world, that to use a slightly overused phrase.
But when you suck them in, and now you don’t pay off that contract, yet they’ve been working 20 hrs/day for months and months, what are you doing to that person’s psyche/ what you’re really doing is you betray that compact that they made with you. Now it’s fine to fail, and in fact it’s great to fail, but if you fail because you didn’t have the courage to move to Oakland, and instead you burn 30% of your cash on Kind bars in the office and exposed brick walls? You’re a fucking moron. Do you know what I’m saying?
On Companies Staying Private Versus Going Public
Chamath: I don’t understand why public is a bad thing. I think it’s the most rationalizing thing in the word. Because you cannot hide behind bravado and nonsense. You are forced to show that you have articulated a strategy, and a gameplan, and a set of metrics, and narrative, and you have to explain that to people who may not necessarily care emotionally. That’s not a bad thing. That is like an act of discipline. So as an example, you look at a company like Amazon, they barely generated a dollar of profit, but Bezos has created a envelop of trust in the public markets, which are extremely fickle, which are extremely judgmental, we claim them to be extremely short-sighted. Yet they’ve taken a 20-year multi-decade bet on this guy.
So I think that line of reasoning is just wad. It’s an excuse that prevents you from being held accountable in ways that make you fundamentally uncomfortable, cause you’re afraid of what it means to build a real business. Build a real business. Be around for decades. You have a compact with employees, financial source of capital, and you have an opportunity to have market leverage, if you’re good, give you a currency that you can use, so that you can get to N of 1. So why wouldn’t you do it?!
The people that don’t do it, is the people that can’t do it. And the people that can’t do it, will, say all this stuff about waiting, waiting, cause the markets don’t understand.. is just a false trade off, it’s just an immature understanding of your own business. And what it tells me, is that you don’t know your business. Jeff Bezos knows his business. Indisputable. He never grew it 100%. But he grew it 20% per year for 15 straight years. Bang, bang, bang, etc… That guy knows his business.
Trump As A Media Sensation
Chamath: I think he’s, whether you agree with him or not, he is his authentic self. I think that people are starved for average, approachable people, that are themselves. And some of us like it because it’s like watching a train wreck, other people like it because it represents their beliefs and values, it doesn’t matter if there’s authenticity there, and I think the problem is, if you’re part of a system and your entire life has been created by getting these small signals that system matters, you’ll always live by the rules of the system and eventually you become part of the system, you become co-opted, you know you’re not yourself anymore. That’s basically all politicians.
Then every now and then you have this window into the humanity of a person, and it’s really intoxicating. All the people that for once in their life were like, Biden’s the best were simply because of a handful of questions that he answered on Colbert, where he was actually honest and authentic, so I just think authenticity is just the thing that’s truly missing, and I think that’s what people are attracted to.
Audience Q1: Getting Sucked Into A Bigger Money Round Frenzy
Chamath: We were doing some work, and I think the data point that saw was that the largest series A of a very successful public company, if you go back and look at every company that’s ever gone public, and you look at the largest market caps all the way to the smallest, and you look at your series A, and how much they raised, the largest was Google. $25M raise. So this idea that you need all this money is a false trade off. Ben just talked about Fitbit. It’s an amazing example of what a company can do on what people thought was probably, “Oh my god, they must of raised billions of dollars” and it turns out that they didn’t, they were just really good at what they did. So, again, I think that if you looked at a company and how they’re spending money today, we probably would be shocked, relative to historic levels, how much of it’s going into Kind bars and exposed brick and how much is going to the per individual basis, which is great for that person, but again it’s emblematic if that person then takes all that money that they’re making..
Like when I came here, my first job, I made $55K. In 2000. I was a product manager. How do you go from $55K to $175K in fifteen years? So it’s great, but if I were taking that $175K and still having less than that $55K of net effective income, because 2/3 of that goes to rent, and another 1/3 goes to transportation, am I really that better off? I have a higher W2, but I don’t feel richer.
So who’s making the money? Cushman & Wakefield, who owns this building makes the money? That makes no sense to me. So the way we react to this is, we’re like, we try to see who’s willing to do the hard work of business building, and who’s acting. And there are very simple ways. We just ask, let me see how you’re spending your cash. The actors just jump off the page. The company builders are just cheap, they’re just grimy, and just, shitty office space, and they’ve got to keep it under 8 or 9% of their total burn, and they find people who really really believe in the thing they’re making, and they decide to just live in Oakland and pay for Lyft, and it’s still cheaper.. They do all kinds of creative things that deserve capital so they can build. So it forces us to ask those questions, “How are you really company building?” And that’s how we get the truth on who’s going to stand the test of time.
Audience Q2: Cite Examples Of Public And Private Initiatives The Region Needs
Chamath: I can answer this question in the context of Social Capital. So we made a really big transition in the last month, where we decided we’re going to build an organization that looks different than a venture firm. That organization is going to be this hybrid, bastard-stepchild of Berkshire Hathaway and Blackstone and Blackrock.
What I mean by this is, we want to have a large permanent capital base and we want to basically take really long discontinuous bets on companies and sectors and trends. One of the things we said we needed to do as part of that is we need to start really thinking through, having almost like a real estate fund. The reason we said that to ourselves was we owe it to our companies to alleviate some of these problems where nobody else is going to.. If we went and built one million square feet somewhere of mixed-use work and live, and we completely conceptualized what it means to have a modular living environment for a millennial cohort of like, folks who want to work at companies who don’t necessarily have kids, etc. We can do that in a way, and give that back to our CEOs, as a benefit of working with us.
You can probably make all the economics work, because frankly we only really care about the employee of the company anyways, and the equity in the long-term appreciation of real estate will take care of itself, if you take the 30-year view. So, we’re at that point now where we’re like, “Wow! We should probably just go raise a couple billion dollars and actually go get into the real estate business and solve this problem systematically for our companies.”
Maybe in that, it becomes a blueprint for how others should do it. So that’s an example of a private solution to what would otherwise be a public solution that’s probably not going to happen. So, we’re just basically going to act as our own little city-state, and decide how to do it ourselves. In order to do that, companies will have to have the courage to be in San Mateo or San Carlos, and oh, by the way, every major $100M company has never been created north of Palo Alto, in case you’re curious.
Quick Thoughts On Today’s Seed Environment
Chamath: I think it’s really amazing that there’s so many people that.. I feel I have the same version of what all these other people feel, which is we all feel somewhere along the way we were a bit of an accidental tourist, we got lucky, there’s degrees of how lucky we all got, but we’re all then willing to pay it forward, and I see a lot of people, e.g. there’s a bunch of Facebook groups of ex-Facebook employees and the number of these people who are writing these really big checks into companies, and it’s not the amount of money that matters, it’s just that they’re willing to pay it forward.
So, whether they’re doing it with the profit motive or not, I think seed stage right now is very healthy. It’s robust. I think the institutionalized efforts around it, people are a little frustrated because they used to have so much proprietary deal flow and now all of a sudden, you can raise $2 million dollars from 10-15 folks who worked at WhatsApp or Facebook, or whatever.
I think that’s fantastic. I hope there’s more of it. Frankly, as some number of us continue to feel out and be in this ecosystem, and be fortunate enough, you have a responsibility to plow back. Somewhere along the way, it’s our responsibilities as institutions, to actually do a better job at enforcing discipline so that these guys can actually get a chance to get to this stage, and I think that that’s probably another thing where we’re not doing a great job. There’s a lot of sheepish, “follow me” mentality.
Series A & B Investors Need To Enforce Discipline
Chamath: The problem right now, is that venture is completely undifferentiated. Everybody’s the same. Everybody’s the same. Everybody has a set of services that every other person has. So, when everybody’s theoretically different but the same, nobody has a backbone. There’s fundamentally no authenticity in the marketplace. So as a result, nobody will ask these kinds of questions. Nobody will be disciplined. In a company that’s not working, what they’re not thinking to themselves, is “Wow, maybe if we actually return $2M back, and actually capitalize these three other people with a different idea, or fund that young woman who I kicked out the door because I didn’t understand what she was saying.”
So the discipline is important. Why? Because we have a responsibility to get the best ideas to market. We have the responsibility where we should be taking good capital risk. If at the end of this cycle, whenever this ends, we look at who made all the money, and it’s not Benchmark or Sequoia, or Social Capital or Andreesen, but it’s Pushman & Wakefield, WeWork, and ZeroCater, something’s wrong! Honestly guys, something’s wrong.
So, that’s what I think about.. we have to start.. you don’t have to prognosticate doom and gloom and RIP good times, you don’t need to do that, but you do need to go in and say, let’s just dissect how we’re spending money, and none of this idiotic window-dressing nonsense. And see how they react, because if the people don’t have the courage to make hard decisions, you’re probably wasting your money.
Now, not only are you doing a disservice to yourself and your and your own case, you’re really doing a disservice to all the employees who believe that CEO has the courage and the balls to make it happen, when really what they’re fucking doing is acting. They’re really just a walking failure just waiting for the last shoe to drop. And that’s a disservice to them. So you confront that person, give them a chance to change, and if they can’t change, then you better do something. That’s the hard work of building great companies. Not enough people are willing to do that.
I am not an enterprise IT person, but I have made a few investments in the space and will definitely do more. As a small investor, the formation of these types of companies is quite different than what the broader startup/tech population is exposed to for SaaS and consumer-facing businesses. Often in enterprise IT and infrastructure startups, there are real barriers to starting up — the founders need to be of a certain caliber, there likely needs to be some tech breakthrough or promise of one. the dollar requirements out of the gate are much steeper, and the question of sales (distribution) can make or break the deal.
As a result, these investments form with very different characteristics. It is not uncommon for an elite team of new founders to raise $5m+ just on a slide deck, pre-product. The likelihood of returns generally in this space are much higher than consumer, but the breakouts aren’t as common or high-flying, though we are on the verge of seeing a company like Nutanix go public soon and hit valuation numbers that very few companies see.
As I started Fund II about 18 months ago, I was introduced to the founders of Datos IO by one of my LPs. In fact, this LP has sent me tons of deal flow that I wouldn’t have ever seen. That’s only half of what’s cool about this; of course, I am not qualified to evaluate these businesses on a technical level, so how do I go about getting conviction to invest in companies like Datos.io?
One of my biggest lessons — one of many, so far — is that everyone assumes “investor diligence” is done (if at all) in a somewhat similar manner. In reality, investors perform diligence and arrive at their own point of conviction through a variety of methods. Some make market maps; some call all references and customers; some hire technical savants to help them birddog the technology’s worth; some just wing it. In this case, I conducted “network diligence” by talking to three of my close friends who are all deeply thoughtful about enterprise IT and infrastructure, and I walked through this opportunity with them.
After testing my network and spending lots of time with the two founders, I was able to gain conviction in the caliber of the team and technology. And, so far, that process worked just fine as Datos IO went on to earn many term sheets from some of the world’s best technology investors, ultimately selecting Lightspeed as its Series A lead, a firm with a string of hits in infrastructure. A better understanding of the company’s offerings verifies what Datos’ investors already know: That the company, which solves recovery issues for distributed databases, is graduating pilot customers to real customers quickly, by providing a consistent view of the data across their infrastructure for recovery needs.
This example provides another reason why I feel investing is such a great fit for me personally. Being a small investor and with a network to help around the edge, I can learn much more about the enterprise IT sector in a shorter period of time. Though my knowledge in this domain will never be on par with those who focus in this area, for now I enjoy having the flexibility to explore new sectors and make investments broadly. In part, it helps me write pieces like this called “The Enterprise, In Lay Terms,” which has turned into one of the most-visited posts on my site. For 30 years, scale-up relational databases ruled the client-server world, where companies like Veritas provided data management tools. Today, distributed applications (IoT, Mobile, Social, Cloud) call for a new data-centric world where five of Top 10 databases are open-source. The stellar team of researchers and operators at Datos IO have not only built and developed this new technology and architecture, but they’ve put in the hands of large corporations who are lining up to harness their technologies. That is no small feat, and I am proud to be a very, very small part of the team’s journey.
Tomorrow is the second installment of The On Demand Conference, this one taking place in Manhattan. My co-conspirators Pascal from Checkr, Misha from Tradecraft, and the entire Tradecraft team have put together an incredible agenda, event, speaker lineup, and topic list. Sadly, I am not able to make this trip, but I can’t wait to hear about it from friends and colleagues who will be attending. If you haven’t already, check out the Line Up and all the great Agenda Topics that will be discussed.
The on-demand startup world has gone through some downs since the last conference. I’ve written about those here. In my conversations with Pascal and other investors about this, there’s no doubt that the bar goes higher and higher now for companies to earn venture investment. While the consumer demand for these services still remains, how that demand is fulfilled is now under question — and that’s a good thing.
In particular for New York City, with its own great startup scene, this is a good venue for this discussion given the competition and density. It will be interesting to see if one coast has figured out tricks the other coast can learn from, and vice versa. On a personal note, I will be sad to miss tonight’s smaller drinks event for the speakers and moderators, will miss hanging out with Shai, Steve, Matt, the Button folks, and many other friends I’d love to have seen, and I was really looking forward to opening tomorrow’s session in a fireside chat with Albert from USV, but Misha is stepping in and is also interested in many of the same issues touching the on-demand space. (In particular, make sure to read Albert’s post today about the connection between on-demand services, automation, and guaranteed basic income.)
Wishing everyone the best of luck with tonight and tomorrow’s big show, and a huge thanks to Pascal, Misha, for their support. They make this stuff happen with the greatest care and attention to detail.
Tonight, in a few hours, the NFL will open for the 2015 season. It has become the nation’s religion and opiate. In terms of media, and especially TV, it remains the ratings buster, becoming the backbone for ISPs to sell bundled media packages. All of this is well known and documented.
What’s slightly different about about this forthcoming season, this year, is a convergence of trends that involves the world of startups, mobile apps, fantasy sports, and real-money gaming:
(1) Fantasy Sports On Mainstream Precipice: If you listen to sports radio (like me) and/or visit the typical sports media sites, no doubt you’ve been inundated with all varieties of promotions for fantasy sports. This is peak season for these networks and the league to scoop up new users around the draft and start of the season. It is very social behavior and how many groups elect to stay in touch beyond group messenger chat apps.
(2) Real-Money Gaming Baked Into Fantasy: Many of these leagues would pay season dues to CBS or other providers to host their leagues and keep stats, and on the side, many would chip in a pool to award the season’s winner a cash bounty, to keep things interesting. Over the past few years, huge, fast-growing startups like FanDuel and Draft Kings would bring these two forces together, allowing people to play via mobile, enter leagues quicker, enter multiple leagues, and to create depositor accounts and issue huge payouts. (It’s very similar to the Texas Hold ‘Em craze which swept through ESPN and 20-something houses almost a decade ago before it hit a regulatory snag.)
(3) Real-Time Audience Aggregation Power Of Television: For live events, TV is still excellent at aggregating live audiences, and nothing is better than live sports — in particular, live NFL football. People around the world, right now, even if they hate the Patriots and couldn’t care about the Steelers, they are going to watch and follow this game. When audiences form around the game, the pre-game, the post-game, they’ll be hearing ads for fantasy sports apps and those which have the ability to play with real money and take these social leagues to the next level. It is happening fast, the economics work, and most importantly, the sports leagues and the owners and network providers want and need this to happen.
The NFL owns Sunday culture, and with Monday Night Football and the newest addition of Thursday Night Football, is creeping into more of the nation’s free time and prime time. Daily fantasy sports with the allure of prize money attached to it turns what is a once-a-week product into a daily active use case product. When you combine the addiction toward the NFL product, the power of network TV, the social draw of fantasy leagues, the permeance of mobile apps, and the specter of winning real money, the result is a perfect storm of fans to “get into the game” in a whole new way.
Why are technology companies and high-profile startups so hot for grocery delivery, still, in 2015?
Let’s keep things simple: Americans spend nearly $700B each year at grocery stores. Each year, every year. It’s not a fad, it’s what they do. They often visit them at least once a week, if not more. And, the person going there is usually the head of the household and therefore commanding the household’s purchasing decisions.
By being a lucky early user, I was invited to invest a small amount in Instacart. Little did I know at that time how excellent the team was at this service, which appears mundane from the outside. That was in 2013. Back in 2007, Amazon launched “Fresh” and only 6 years later, again in 2013, started rolling out to a few other cities. Along the way, Peapod was there, and the ashes of Webvan still linger in the air.
Then, yesterday, Google announced it would start offering grocery delivery via Google Shopping Express in San Francisco. Over the past decade, big box retail has added grocery to their arsenals, with Costco, Target, and Walmart all offering you the chance to buy a large TV and organic bananas all in one stop. When I shared this news on Twitter yesterday, one responder shared this link about Amazon testing drive-through grocery stores in Sunnyvale and another shared this link about how 3PL (third-party logistics) providers are hopping up to help protect these grocery chains and independents from the predation of the larger companies.
Instacart, by contrast, has leveraged its founding team’s knowledge of the industry, leveraged structural changes in the labor markets, leveraged timing with widespread mobile penetration, and leveraged the Uber regional rollout playbook to attack more markets and grow. People often wonder about how markets value certain companies, but if grocery shopping is a core habit nationwide, and if the other big companies want to get into it but operationally can’t get it done, it validates even further how difficult Instacart’s role is, especially in a culture where most consumers expect free delivery without markups.
On top of this, consider that the next time you go to Whole Foods or Safeway, what you see in the store today may be very different in 10 years. Grocery, it turns out, is the thing that keeps customers physically coming back, and once they’re there, they may also want to buy other things, such that a retailer like Whole Foods could do a number of creative things, such as building out their Life365 brand (like Costco does for Kirkland). I think of Instacart as a layer that sits in between the customer and all of these retailers — it handles inventory and delivery management for the companies, and it offers variety and choice for the customer, as well as allowing them to save time.
From 35,000 feet, it may all seem mundane, but it is not so. It is something the big companies want to provide badly, but they can’t. Holding inventory is expensive and limits customer choice. Training people to pick and prepare grocery items takes a long time and a lot of care, attention to detail. For ordering and browsing on a mobile device or the web, design matters, and people browse in different ways. And, let’s not forget the simple, staying rule: the category is enormous. Instacart competes and wins by innovating behind the scenes and keeping things simple on the outside in this simple, huge category.
If you’re from Minnesota and you’ve met me, you’ve likely heard me share this refrain: “I love people from Minnesota; they are among the nicest people I’ve met.”
@courtstarr is in that class. Many of you know him, of course. I am lucky to have made friends with him as I first moved to the Valley, and what stuck out about those early hangouts and conversations is that Courtney actually listened to what everyone else was saying. He’d remember. And, he looked for hidden talents in everyone rather than trying to judge people and concepts too quickly. Along the way, we’ve both introduced good people we know to each other, though I am in further debt to Courtney for making me meet Mitchell of Hashicorp early, a company that became one of my earliest investments.
As he was winding down his tenure at Kiip, a company he co-founded, he brought up a topic that we touched on in our TechCrunchTV episode years ago: An incarnation of a previous company he founded in the insurance space was relevant again given changes to healthcare laws. We had a few conversations about this and as Courtney zeroed in on his own conviction to lunge forward with this as his next entrepreneurial adventure, I of course told him, like Anand with Trusted, to count me as the first check.
Over the next month or so, Courtney dusted off his fundraising skills, reactivated his networks, and had longer discussions (not pitches) with a set of familiar investors. I knew early on that his model would evolve with the feedback, but I didn’t worry myself about these details too much because I know Courtney to be a stickler for doing things the right way and that as a repeat founder he wouldn’t sign up for such an endeavor without attaining conviction for himself.
Making a small investment decision in EaseCentral, the new company, was also a learning process. I got to see how a friend turns into an operator, rallies support, calls on his network, and negotiates. Turns out, he’s not only a good Minnesotan, but a good dealmaker, too. I also learned more about the insurance broker market, the changes in the laws coming up, and how the public markets view brokerages versus software service models. There will be some very interesting TBDs here, for sure.
All in all, this particular investing episode reminded me of a line by Mike Maples in my TechCrunchTV discussion with him. Of the venture business, Maples remarked: “…this is a people-flow business and not a deal-flow business. I’ve always had this leap of faith that if you just spend all your time with smart awesome people, that the dots will forward connect. The deals will reveal themselves, and somehow you’ll get into some good ones.“