Venture Capital Archives

Shift To Consumer Investing

I intend to shift most (not all) of my focus back over to consumer investing in Haystack 3.

In my first fund, it was dominated by consumer. That wasn’t intentional. I was just starting out, I was a dog chasing cars. In my second fund, most of it was consumer, but I started to go a bit deeper into enterprise SaaS and industrial IoT. That exploration led me to start focusing on enterprise and industrial IoT in my third fund, which I’m currently in the middle of. In this current fund, I have focused my investing in two areas so far — enterprise SaaS, security, and infrastructure, and industrial-focused software and robotics. I’m finally able to write more about these so expect some “The Story Behind My Investment In _____…” posts over the next few weeks.

Along this way, in Haystack 3, I have been looking for consumer-focused companies but have ultimately passed on all the opportunities to date. Those were hard decisions, and I’m sure I made some mistakes. So far, in 8-9 months of investing Fund 3, I have only invested in one (1) consumer-facing seed-stage company, and it’s not yet launched and may shift its model to an indirect B2C2B model.

I would like to do more on direct consumer in this fund, and it’s been nagging at me for a while, so I finally wanted to post on it. I do not have a laundry list of categories to hunt down or chase after, and I have a small handful of ideas of where I think interesting consumer behaviors may emerge, but I’d rather see what’s out there and be surprised. Yes, I have thought about areas of consumer spending (insurance, rent/mortgage, self-improvement, health etc.) and consumer attention (VR, AppleTV, apps etc.) and I’ve written about live video and esports and bots… but I would say the pattern I’m looking for is as follows: Something I can experience/test myself or observe others doing; a company which is obsessed about creating and building a direct relationship with a consumer; a team that is obsessive about acquiring customers and users and their CAC numbers; and a team that has a vision for a future on a global scale — doesn’t need to be today, but eventually. A product vision and desired roadmap goes a long way.

I am going to focus on this now more intently and really dig into it over the summer. It’s OK if you’ve already raised a pre-seed or seed or whatever fund. And, I likely won’t make any investment decisions very quickly on this, so am looking to engage more and get to know more people before selecting a few to work with. I’d appreciate it if you could share this with people you like or find interesting in the consumer space, and thank you for reading.

The Chocolate Chip Cookie Company

Nearly a decade ago, I met an investor while I was in Boston who was trying to explain to me how some very rich people like to invest. This is many years before I become interested in investing myself. He called it “The Chocolate Chip Cookie Company” syndrome. He said that when rich people socialized with their friends, they’d like to name-drop companies they’re an investor in. “Oh yeah, we own a piece of that company.” Cheers!

He’d often refer to this investor psychology when he was trying to sell. “Chocolate Chip Cookie Company” he’d whisper and nod to himself. At the time, I had no idea what he was talking about. I didn’t know this world he spoke of, or the world he operated in.

Now, I think I have a better understanding of this investor psychology. In this world, think of chocolate chip cookies as a hot tech sector. Today. that is likely bots, or chatbots, or bot platforms, or bots with AI, or, really, any type of bot-cookie you can think of — the kitchen sink cookie.

Part of the psychology is to be able to prove ownership in something. Part of it is to make sure part of one’s portfolio is covered or has the right exposure — “gotta have a play in chocolate chip cookies, right?” No portfolio would be complete without it.

Today’s tech startup obsession du jour is… bots.

I gotta have a bot company.” But I am 99% sure no one knows where this is all going, and instead of harnessing an open web or relatively open iOS platform, it’s not yet clear if the big mobile messaging clients like Messenger, WeChat, Whatsapp, etc. will allow or permit a new service to take off on the back of its own property. But the category is interesting enough and barriers to entry are quite low, so investors (who don’t want to miss out) are piling into new startups, creating ad hoc funds, flooding to incubators, temporary funds, and even starting to invest at the institutional Series A level.

What do you think of bots?

Huge. I’ve got a bot play in my portfolio.”

Cool. Me, too.” (sips bourbon)

We all will, and it will take many months, if not years, to figure out who picked the right chocolate chips.

Minimum Wage, Maximum Automation

The State of California recently unveiled a plan to increase minimum wage in the state to $15/hour by 2023. Currently, America’s national minimum wage is $7.25/hour, which hasn’t increased since 2009. The concept of minimum wage is complicated, and I don’t want this post to be focused what is fair or isn’t about such an increase. I certainly don’t condone workers having to see most of their take-home pay go to rent and most of their free time eaten up by commuting. That said, I do sense aggressive increases to minimum wages will come with deeper consequences, ones that our society will now wrestle with on a daily basis and for years to come.

Increases in minimum wages will accelerate a massive shift to automation.

I see it on a weekly basis with startup pitches. Name any manual job currently booked at around $15/hour or so, and I’d bet there’s a 50% chance that task will be automated, either with pure software, enabled hardware (in the form of a robot), or some mix of both. Automation via software has been underway for a few years, but when it’s combined with hardware, the results will be astonishing. The components needed for such robots are now readily available and getting cheaper by the year. The hardware/robots can be differentiated by software and the vertically-specific applications they are designed for. The robots become a vehicle by which new technologies and services can be delivered, and of course done so at a fraction of the cost without the additional overhead (like healthcare, etc) that can saddle a balance sheet.

I know this is coming — and fast — because I myself use products on a daily basis that replace traditional human labor with automation and learning.

The way that I describe this trend in general is to imagine your local Starbucks. Say it is about 2,000 square feet total. At a busy time, you may see 8-10 workers in the store. Why? Shouldn’t I just be able to walk up, have a beacon notice my presence, and a robot makes my drink. The machines to do this already exist. It is coming.

We can expect to see the consequences of minimum wage increases (which I acknowledge are extremely complicated) take root in automation, robots, and corresponding services. Some solutions will appear like vending machines, whereas other solutions will mimic human movements and behaviors, just in different shapes and forms. The technology and builders are already here, working on these solutions — the turbulence in the bifurcation of the economy, the force-changes driven by technology, and the slow response to build enough suitable housing and transit may combine to usher in this robot-led era with greater speed. Minimum wage, maximum automation.

Investors Are Going Botsh*t Crazy

Bots. They are everywhere in startup land. It feels like a gold rush — a bot rush. And, there is a backlash, as well — a botlash. Whether it’s more and more people using Slack and other messaging apps and come across these new bots and features, the trends set by Y Combinator’s Demo Day (where, by my count, four very interesting companies launched in this space), or one of the 101 pitches investors see from founders, bots are everywhere.

In this rush, there is surely opportunity, and also noise. At a high-level, “bots” are attractive because it is a lightweight format by which a startup or messaging app or Amazon Echo can deliver services to users on the simple end of the spectrum, and perhaps one day automate, predict, and conduct work for us as it learns from our interactions and behaviors, as well as learning from other APIs they interact with.

The noise created by today’s frenzy makes it hard to find signal. As a I result, from an investment point of view, I see the bot world in three (3) categories:

1/ Vertical-focused B2B platforms w/ SaaS business model: This is targeting a specific end users (usually businesses) that need to create a bot for news, or commerce, and pay the startup for a suite of tools to do so.
2/ Selling picks & shovels: When you sense a category is going to be big/important, but don’t know what the end-users will use, one can invest in the developer platforms and services that the bot creators will need to make their bots.
3/ Direct to consumer (or prosumer) plays: This can be seductive because messaging apps are huge (easier to get users, distribution), but also dangerous because today’s platform can become tomorrow’s gatekeeper.

How do I think this will all unfold? I have no idea, but I think the three investment strategies above make sense, all for different reasons. I have an investment in 2, looking at 3, and looking for 1. I’ll let you know when I find out.

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Separately, on the consumer side, I’ve been thinking about what I want personally in a bot service. I wanted to write that below in case anyone has built it, is building it, or is looking for an idea. Here’s what I want:

1 – I want to create my own personal bot, Semil-bot.
2 – On web or mobile, I go to your page and authenticate with Facebook. This has to be ID-based.
3 – I connect a range of services and accounts, beyond financial like with Digit etc. Definitely Gmail and Google Calendar, like Paribus.
4 – If I give Semil-bot the keys to my digital kingdom, I want it to not only dive in and learn everything about me beyond Facebook, I want it to crawl a network of specific APIs for financial services, insurance, digital media, social networks, etc. and constantly be on the lookout for my best interests, to save me time and money without me having to think about it or execute any actions.
5 – Semil-bot would send me a daily update email with actions that it’s taken an easy way to reverse, pause, or suspend commitments. It would work for me, on my behalf, 24 hours a day. I would pay $10 or even more for this service.
6 – But, this isn’t just a weekend hack project. As the system gathers more information about me and other APIs, it needs to learn and form a real brain. It needs to learn over time and make inferences. It needs to anticipate things. It needs to deliver a service that saves me both time and money, reducing cognitive load and becoming a trusted digital agent to act on my behalf.

Picking, Riding, And Investing In The Next Great Technology Wave

The last big wave which helped generate huge returns for technology investors was largely driven by phones. Building apps and services on top of phone sensors, connected to the network, gave us new media apps like Instagram and Snapchat, new communication tools like Whatsapp and Messenger, and new ways to travel like Airbnb and Uber (thank you GPS sensor and Google Maps API!). The mobile wave was/is big enough to create opportunities for others, as well, though these are the biggest outcomes.

In early-stage investing today, a bunch of friends and peers who invest at seed always wonder — what’s next?

Lately, when I’ve been asked this question, here’s the analogy I use to the answer the question:

Imagine we are all surfers in a surf competition. During the day, we each are allowed to pick a set number of waves to ride and are scored on them. There are lots of surfers doggy-paddling in the open ocean, and the goal is to identify, pick, and line up to catch the biggest wave of the day. The problem, of course, is that in the moment, from your vantage point with your head bobbing on the surface of the water, it’s hard to identify and commit to the wave at the right time. If you move to soon, you may pick the wrong wave; ff you wait too long for the wave to take shape, you may not have enough time to catch it properly.

The goal, of course, is to pick the right wave and time it perfectly. Picking the right wave will be scored well and rewarded by the judges, will give the surfer an unforgettable ride, and will pack enough kinetic, nautical energy that will propel the surfer to reach new speeds. That is the goal.

In reality, right now in the early stage, everyone’s wading in the open ocean, surveying the horizon for promising waves to form. There are waves we anticipate in tech but we don’t know when those waves will reach a point where we can ride them — waves around Artificial Intelligence and Machine Learning; or vertical marketplaces; or SaaS network; or Virtual and/or Augmented Reality; or bots and agents; or autonomous robotics; or…name any other big category. We all just don’t know what that wave will be, where it will come from, and what it will look like.

In the face of this uncertainty, some elect to follow their peers who are known to have a good nose for spotting big waves. Some have studied up on how to pick out a big wave looking at data or other physical properties. Some are happy to pick out a portfolio of a few waves and hedge their bets (that’s what I’m trying to do). Every strategy comes with its benefits and risks. Entrepreneurs, of course, see these waves before most investors do, but both founder and investor can pick the wrong wave or move too late when the big wave is forming. It will be just a matter of time before this next wave emerges — because no one knows when it’s coming — and it will be exciting to see what it looks like and where it comes from.

Early-Stage Investing: Notes From The Field, Mid-March 2016

Where is the early-stage financing market for startups today, mid-March 2016? In my opinion, and depending on where specifically you sit, right back where it left off.

After a few bumps over the last 9 months, with little shocks in July 2015, a bigger shock in August 2015, and a ruthless slashing of very visible and great public technology companies in January and February 2016, many people (and yours truly) commented that the entire environment has “chilled.” Now, as March is unfolding, that is changing a bit. Working backwards, here’s a brief snapshot of what I’m seeing in the SF / Bay Area market — just one guy’s opinion:

  1. Series B (“the second board member”): These are known as the Rounds of Death. As the private late-stage dries up, Series B and C investors, who structurally need billion dollar plus exits to make their models work, know that IPO windows are jagged, brittle, and chilly, and since M&A over a billion is quite rare, many have either held off or suggested flat/down rounds to make new investments. (Yes, I know, some companies still get funded.)
  2. The Series A Rounds (“the first board member”): These are happening, albeit slower, but the caveat is that there are now new kinds of Series A rounds which can distort where a company is. It used to be that a classic Series A is when an institutional VC joins as the first real board member of a company and makes a life-cycle commitment to the company and founders. Now, there are more funds and more people doing rounds the sizes of the old-school A, say $5m give or take, plus or minus. This could be insiders protecting an investment, or LPs coming in to buy more direct ownership — or, it could be one of the many new funds being formed almost weekly to put dollars to work in tech and get ownership.
  3. All The Seed Notes Before The A: This includes pre-seed, seed, second seeds, seed prime, seed extensions….the never-ending parade of convertible notes that we’ve all come to love. It is here, early before the A, that I see little to no change in the market relative to how Series B investors are extremely cautious or Series A investors that are taking their time (yes, I know, and still doing deals). There is not only so much money to be deployed across the seed market, I have learned from being on the fundraising circuit myself that there is more money just sitting on the sidelines, and we will see this in the form of new funds (new ones every week), and they have to deploy those funds, and seed is where most of us play because there is no barrier to entry — there are some barriers to entry to doing Series As because founders want those to be branded and institutional, but at seed, it’s loose, fast, convertible debt that matures in two years or, if you’re lucky, less. Given these factors, founders in the right spaces with good teams raising seeds now can get higher prices, and that’s especially true in/around some of the most successful accelerators and incubators.

This is where I see the market today, mid-March 2016. Seeds are a plenty, and growing well; Series As are happening, but a bit slower; and Series Bs are when founders feel the most friction. All in all, it is still a great time to start a company, but we may find out over the next few years that we’ll have startups turning over quicker and perhaps more replenishment at seed as the larger institutions wait for conditions to become “just right” before making a life-cycle commitment to a new company.

Twitter: While You Were Away, Episode 3

Third installment of our new podcast, “While You Were Away,” a sort of Rap Genius for tech Twitter conversations. Joel Andren (who hosts this podcast) does a terrific job stalking Twitter to see conversations unfold and learning from them.

1/ Startup in SF – Worth It?, relating early adopters in the Bay Area and challenges in finding and retaining gig labor. Conversation includes Adora Chung, Keith Rabois, Adam Besvinick. (Twitter thread)

2/ Complaining About Twitter, relating to how startups should prepare for the 2016 fundraising environment. Kicked off by Danielle Morrill, joined by many others. (Twitter thread)

3/ How To Become A Pro VC, where we break down the great conversation started by Kanyi Maquela, including tweets from Keith Rabois, Josh Elman, and many others. (Twitter thread)

Twitter: While You Were Away, Episode 2

Second installment of the new podcast, “While You Were Away,” a sort of Rap Genius for tech Twitter conversations. Joel Andren (who hosts this podcast) does a terrific job stalking Twitter to see conversations unfold and learning from them.

1/ Startups vs Regulation, relating to changes at Zenefits. Conversation includes Modest Proposal, Keith Rabois, and Ben Thompson. (Twitter thread)

2/ Complaining About Twitter, relating to changes to Twitter product. Kicked off by Paul Kedrosky, joined by Sean Garrett and many others. (Twitter thread)

3/ How To Be Taken Seriously By Professional VCs, where I give guidance on how to get a real VC to pay attention. Includes Bubba Murarka, Josh Felser, Keith Rabois, Josh Elman, and many more. (Twitter thread)

The Story Behind My Investments In Booster Fuels and AquaCloud

Oil and water do not mix. When one attempts to mix them, they separate. Despite the laws of basic chemistry, it turns out oil and water do, in fact, mix in the Haystack portfolio.

Oil and water have been in the news lately. Regarding oil, where the price of a barrel has dropped about 75% in less than two years. This caught most of the world by surprise. It will also likely create a big surplus (some estimate $3 trillion), though some believe it can swing back just as quickly — personally, I think U.S. fracking has been the main driver here and this is the new normal.. And, with water, we have a long-term narrative about the dangers of rising, warming oceans, and more recently, of contaminated drinking water in the world’s richest, most advanced country: In Flint, Michigan, tens of thousands of residents have been exposed to water poisoned with lead.

Even in crisis, opportunities arise to find solutions so that we do not repeat history.

Let’s start with water.

Back in 2015, as I began investing more in SaaS and what I refer to as “Industrial Software and Industrial IoT,” I began looking for two types of companies: Those which could build and sell products to either large conglomerates (think: Boeing) or non-corporate entities such as governments and municipalities (such as OneConcern, which you can read about here); and those which used cheap, low-power sensor networks to collect and monitor new data sets. As I was tweeting about it, my friend Matt reached out and introduced me to AquaCloud.

And, after months of getting to know the team, I’m excited to share that I’ve invested in AquaCloud. Check them out here. With AquaCloud sensors, municipalities, water companies, and private companies with reservoirs can use custom sensor networks to measure depth, temperature, pH, dissolved oxygen, and conductivity, along with a host of other ailments, such as ammonia and other nasty elements. With a modern sensor network connected to cloud services, a city like Flint would not only receive real-time alerts about issues, it would also receive predictive monitoring to head off calamity. Specifically, AquaCloud could have protected Flint’s water system by notifying water managers of contamination.

And, what about oil?

Almost a year ago, my friend Boris sent me a note about a company he just committed to in the on-demand space. Having invested all over that category, I was initially disinterested in doing more in the space. Boris still suggested I meet the founder. So, I did, and in the first five minutes of meeting the CEO of Booster Fuels, I knew I wanted to invest.

Booster’s vision is that the manner in which we get our gasoline is potentially outdated. I immediately started the conversation by asking about (1) the shift to fully electric vehicles and/or self-driving and (2) the narrative around declining car ownership. Frank, the CEO, had a great answer on the tip of his tongue — the size of the market. It turns out the average U.S. household spends thousands of dollars on gasoline; that while electric, self-driving cars represent the future, it will still take a long time to make them mainstream; and that car ownership is actually on the rise, despite what one may glance at on Twitter. Even in the age of ride-sharing, falling gasoline prices and auto competition pushed the cost of ownership down that it stimulated demand.

Booster started smartly by targeting large office parks and campuses in the midwest, avoiding the early-adopter crowd in the Valley. By doing so, Booster ensured they would have a viable business model to start with and could operate away from the shine of the tech world’s klieg lights. The franchise model of gas stations which have swept across the U.S. made sense in a world of sprawl, but also added retail, real estate, and infrastructure costs to consumers. Though more complex initially, a network of Booster Fuels trucks can theoretically help consumers save even more on gasoline as the price continues to fall and present larger oil and gas companies with a new retail model for delivering goods and services to consumers.

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As I’ve been writing about here, I’m becoming even more thematic in my investing as my fund experience slowly matures. In my current fund (Fund III), I am looking specifically for startups in any of these categories, and sometimes there’s overlap:

  1. Industrial Software & Industrial IoT: I’ve done the most here so far. 3D printing software, drone applications, sensor networks. I’m looking for people who are determined to bring solutions to heavy industry.
  2. Enterprise SaaS & Security: Pretty straight-forward startup stuff here. Particularly, I want folks who are creating new categories and/or who are creating or leveraging a proprietary data set which can hold long-term value.
  3. Consumer Technology and Markets: I’m more open here because it’s harder to predict. I’ve only invested in one consumer play in the last 10 months. In particular, I’m looking for founders who are trying to find ways to help consumers save money on home rental or purchase costs, as well as costs associated with healthcare, such as reducing visits to see doctors and specialists, and so forth.

If you’ve read this far, what would be helpful to me is to see more consumer-focused startups at the angel or pre-seed stage. Thank you for reading.

 

New Podcast: “Twitter: While You Were Away”

For years, I’ve been wanting to do a simple podcast. However, while I always used to organize them, I didn’t want to do that this time around. I planted a few seeds with friends but nothing clicked. Then, my friend Joel Andren tweeted he wanted to start one, so I DM’d him, we got on the phone, and I loved Joel’s idea: A weekly podcast to dissect the rich conversations which take place in “tech Twitter.”

The podcast is called “While You Were Away.” Think of it as a “Rap Genius” to what people are blabbering about on Twitter. In our first try at this, I found Joel to be a great, natural host and I was right about the fact that I wanted to play second fiddle. This is really just for fun and we hope a small few of you will fire this up in your car or Uber or while you’re doing something else. Feedback welcomed!

The first episode is below. And, there are four (4) threads on Twitter that we unpack, unravel, and dissect

1/ Startup Acquisitions by Microsoft and Yahoo, includes tweets by Jason Lemkin, Hunter Walk (open thread)

2/ VC Funding Slowing Down?, includes tweets from Mike Dudas, Keith Rabois, Hunter Walk (open thread)

3/ No Mobile App Breakouts?, includes tweets from Peter Pham, Michelle Tandler, Ryan Lawler, Josh Elman (open thread)

4/ Being Banned By Tesla, includes tweets from Paul Graham, Stewart Alsop, Elon Musk (open thread)

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2016 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus