Venture Capital Archives

Alpha Summit: On-Demand Economy Discussion

Earlier this week, I drove down with my friend James to Monterrey for this year’s Alpha Summit, which is basically a long afternoon of big group discussions with super smart founders and investors around a range of topics, followed by dinner and a party. It’s great fun and Mike Jung and his co-conspirator Eric Chin have created the type of group I wish I could’ve — every event they put on is so well researched and planned. (Thanks Mike J.)

Lately, I’ve been asked to lead or moderate sessions at events on the topic of the on-demand economy. Before this week, I was frankly surprised so many people were continually interested in this theme. After this week, now, I realize it is a real thing and also fun because it conjures up good, spirited debate. I’ll try to briefly summarize what was debated in the group, and if you’re interested in this topic, make sure to read Liz Gannes‘ terrific Re/code series on this phenomenon and follow The On-Demand Economy on Twitter, which was co-created by Mike Jaconi of Button, who co-led the session with me:

It’s Uber and then a big drop-off to everyone other company: While nearly $5b has been pumped into on-demand services, the lions share of that has gone into one company, after which there is a big drop off. People wondered if there could be two horses in the transport space, and felt food was more about having choices so could support more players, but then fewer barriers to entry.

Catering to the wealthy or the masses? Good split in the crowd (so it seemed) as to whether this is just a Tier 1 “rich city” wave or whether it can spread to many cities (Uber aside). There were attendees who understand the space who do not live in the Bay Area, and there thinking was largely that the unit economics of these businesses wouldn’t work in less dense places.

Frequency of use: This is a critical topic for consumer transactional services like these. We didn’t talk about it too long, but my feeling is that the most-valued services tend to have very strong daily active use cases (oftentimes more than once a day), while some have strong weekly active use cases, and a whole bunch are ones you’d use once a month, maybe even at best.

Unit economics and margin compression: Speaking of unit economics, there was healthy discussion around how and where these companies make their money. Do they skim off the delivery or have a margin on the good they’re delivering? Do they own inventory or will they need to? If margins are good today, will they compress with scale as entrants consolidate or pivot? My own view here is that food and transport/logistics are both multi-trillion dollar markets in the U.S. alone, so it may be the winds of the market which drive scale and weather any compression.

From consumer concept to B2B business model: This is a topic I’m focusing on, the spread of consumer concepts like sharing economy, on-demand services, and personalized software into the mid-tier company and enterprise stage. We didn’t discuss this unfortunately, but I’ll plug again that if you are thinking about this area, please get in touch with me. (My email is on my “About” page.)

After the session, a bunch of people approached me saying they loved the discussion, though they didn’t participate. I haven’t gotten that feedback on this topic, so maybe it’s because the business and delivery model feels very current today, and the market sizes and early indicators don’t lie — though they do cloak some companies which are likely burning venture cash in order to try to find a market. My own belief is that (1) many services called on-demand are in fact scheduled; (2) the category has been overfunded for some questionable use cases, but the cost is so low compared to the potential outcome, it’s worth a try; and (3) that the winners will eventually expand from what they’re doing today in order to capture more share — and using on-demand techniques is the wedge that cuts into the edge.

Consumer Concepts And The Enterprise As The End Customer

Benu

Earlier this week, I helped lead a discussion re: on-demand services with an old friend (Kevin from Shyp) and a new friend (Sara from Postmates) — Basti double-booked himself! Our chat was part of Emergence Capital’s annual fall “Mobile Enterprise” event (see below for the Twitter timeline from the event), which is always great. I learn a ton at these events. My favorite sessions were the 1:1 interviews with David Barrett (Expensify) and @Stewart Butterfield (Slack). Both founders are unapologetic about how they work and provide real-talk in the face of generalized mantras and blogs people read/share re: how to startup, how to get investment, how to hire. These guys are the real deal and I wish I had my hands on the audio feed for these chats.

I seem to get called to help organize every “on-demand” panel, which is nice but also confusing. Is it really a big deal? I go back and forth. Almost two year ago now, when I was lucky to invest in companies like Instacart and DoorDash, I thought — yes, it’s a big deal. Then, I started to get wind of more companies, and they were contacting me, and I got overwhelmed, so I shied away. That turned out to be a mistake and I missed one awesome company because my brain shut off. Then, more recently in LA at the Rutberg Media event, on another panel, someone from the crowd asked a question about on-demand services for business, and Kevin got me thinking about something — what if on-demand is now just table stakes for delivering new customer experiences, even when the customer is a business?

That’s what we discussed on stage, and what I’ve been looking for in my investing. So far, I’ve invested in a small handful of ODS geared at businesses as the end customer, and it turns out they also like this type of service. Maybe there’s something here. And, maybe a bigger trend. The phrase “consumerization of the enterprise” is quite overused and old, but what if consumer concepts like the sharing economy, on-demand services, and personalized software invade the business segment and give new companies a leg up on incumbents and even growing startups? That’s what I’ve been thinking over the last few weeks and would love to meet founders who are thinking along similar lines.


The Color Of [Easy] Money

Earlier this week, Mark Suster wrote an eye-opening post about a recent experience he had with an investment his firm made which related to the behavior of an individual angel investor in that round. Please read it here. The immediate reaction by most was the shock around how an investor could behave as this angel did, but putting this specific, unfortunate story aside, I had a different, more general takeaway: This is the color of easy money.

Today’s times are defined by a few forces. Many would agree there’s an oversupply of seed capital. So, it’s a great time to start something, and it’s pretty easy to raise seed funding (for the most part). Founders prefer rolling closes with convertible notes vs priced rounds (for a variety of reasons), and are getting more savvy at leveraging crowdfunding and other alternative sources of seed capital. For folks who successfully raise at seed, oftentimes it’s a crowded cap table, and the most lines on the cap table mean more potential points of information failure. (This is part of what Mark is blogging about.)

Generally, it probably isn’t a problem for founders because most of these smaller investors don’t get information rights. But, I can say that there are other people hanging around these deals who want to at least look — other LPs and folks who have invested in the seed investors’ funds, people offering debt (versus equity). Mark is right in pointing out that so many smaller investors are also trying to leverage their positions into something bigger. It’s only rational to assume that’s happening, and with that race comes its own behaviors and norms.

In reflecting on Mark’s post, I wonder about a few things. Will professional VC firms (like Upfront, or others) want to help “clear the cap” table when they come in to lead a round? There are economic incentives to do this today given how ownership targets have been lowered for many in VC, but maybe there’s a security angle, too. Will this kind of news ripple across founder networks and make them more critical of who is on their cap table, or is this just a blip for a blog post and it’s back to business as usual?

Quick Thoughts On Slack’s Big Round

Now that the frenzy has passed a bit, I wanted to share a few brief thoughts on Slack, their latest investment round, and all the chatter it all created. Whenever a company breaks out under our noses and simultaneously hit that billion-dollar mark, the peanut gallery (myself included) try to figure out why. Incidentally, a few days before that, I wrote my annual “Breakout Tech Company Of 20__” post and concluded that 2014 didn’t produce any singular breakouts, but instead the new incumbent elite (Uber, Stripe, Snapchat) widened their gap from the pack. While I don’t think I was directionally wrong, my post was premature and I should’ve waited and picked Slack rather than just mentioning them in the comments.

As usual, it’s the founders who make moves and prove the rest of the field wrong. I overheard so many people around town talking about Slack, the really high valuation, how investors are piling money into companies, how this provided 60 years of runway, but no one mentioned that the team may want to grow fast, it’s hard to hire right now, companies need cash in the bank for extra leverage if they enter any kind of bigco M&A discussions, and with all the SaaS seeded companies out there that won’t make A, they may elect to acquihire some of them. We just don’t know.

With that said, here’s what’s interesting re: Slack’s rise and $1B mark, from my point of view:

SaaS Attack & Connective Tissue: We live in a time when there are *so* many SaaS companies. Both private and public investors love the predictability of the SaaS model, and it’s of course a huge evolution from having to sell licenses and require updates in the old school ways. As a result, however, it’s become more difficult to suss out which early stage SaaS companies have breakout potential, and enterprises themselves (the end customers here) experience fatigue in the same way consumers and consumer investors experience app fatigue. Slack addresses this by having done the “schlep work” of integrating with a variety of 3rd party SaaS services and adding a communication layer on top that’s different than email. In a sea of disparate SaaS solutions, Slack becomes critical connective tissue.

Email Overload: Ask anyone at a startup or larger company if their use of Slack at work cuts down on email, and the resounding answer is “yes!” That’s not only a threat to Google Apps, but something employees don’t want to lose. People don’t like to be on threaded, cc’d conversations that are 17 or 80 strings long.

Humanized Conversations: On top of this, a friend remarked to me that the interactions at his work on Slack turned more conversational, and as a result, more humanized. People didn’t feel they were being told what to do and managed over email, but that they were part of a conversation, and people were polite, casual, and focused on helping each other. I’m sure that varies from place to place, but that’s quite a powerful endorsement.

Valuations On Multiples Vs Intangibles: So, much was written about Slack making $12m a year, but we don’t know churn yet, and the price of the round valued the company at $1.2B, about 93x earnings, so that’s crazy, right? But, let’s step back…Dropbox and Box need workflow layers to compete with the big companies, Google has tried and failed at collaboration, Asana and Trello are great but don’t yet have the product that will breakout nor a distribution strategy to get there (I say this with love as I like both products very much). So, who is going to do it? And if Slack does, does a $1B or $1.2B price tag matter? Remember, the folks at KP are close with Google and Google Ventures also was in this round. And, then there’s the founder — first time lucky, second time for real? Who knows, but from what I’ve heard, this guy doesn’t mess around and figured out a widespread problem to solve and did so with cross-platform software. It’s the people that venture investors back. This person led his team to this point. Who is going to bet against him now? And, therein lies all the answers to the valuation the company earned.

On-Demand As Tablestakes For Mainstream Consumer Experiences

The mobile-fueled “on-demand economy” has gone through a few phases. It started with magic, like — “hey, I can order an app from my phone!” Then, as distribution choked on mobile, entrepreneurs starting building “Uber for X” ideas like Postmates and other great apps — then people said, “hey, how many of these services can we have?” It started to sound like a bubble of ideas that wouldn’t be supported by the market, let alone venture capital. The economics of providing an on-demand service in today’s mobile world vary from company to company (and related to the cost of goods sold, where the delivery is often a loss leader or subsidized by the customer through a fee and/or tip).

For now, as 2014 ends, it seems the next phase for on-demand services is going to be seeping into the mainstream. Whether the economics work or not, the reality today is that consumers now expect on-demand service options and offering them can change consumer behavior. This month, Starbucks CEO Shultz announced on a public earnings call that Starbucks will begin testing “coffee delivery” in 2015. Or, consider Costco, which is now open to shoppers (note: they don’t have to be members) through Instacart or Google Shopping Express. Or, consider a startup called Curbside, which offers the ability to order and pick up at store — not quite on-demand, but moving in that direction. Has your spend at Target declined over the last few years? I thought so.

I was paying my credit card bill this morning and noticed the charges were overwhelmingly for two things: transportation or food. With transport, aside from airlines, the charges were for ride-sharing services, and with food, spread out over an array of new services and payment apps, many of which deliver things to me. It is the new expectation for mobile-first consumer experiences. Look at companies like Sprig and Spoonrocket — these are are entirely new brands and could be delivering amazing craft coffees right to your desk, bypassing your need to wait in the Blue Bottle line for 20 minutes. This is a silly example, but illustrates a point — when mobile is combined with a clear brand which offers a suitable or better substitute to something we already do, companies like Starbucks even need to start thinking about new interactions around consumer experience.

Stealth Mode Is En Vogue Again

A startup idiom can go something like “stealth mode is overrated” or “counterproductive” or just plain “dumb.” Lately, however, there are more and more companies I’m seeing which remain stealth, don’t announce funding, or their investors, or much of anything. Here, the conventional reason given is: “Press and coverage no longer drives attention and, therefore, conversions or customers.

But, I think that’s not entirely it. I think a deeper force is at play.

Over the last few years, companies couldn’t wait to announce funding, their backers, and work the PR angle. Investors fueled this further writing on their blogs about new investments alongside press events. Nowadays, not a day goes by when someone tells me about a new stealth company that has been funded by a great investor, for around $3m or so (give or take), and there’s little or no trace of the company, the founders, or investors. All carefully cloaked.

My theory — people are afraid of competitive forces and ruthless copying. Working in the dark now may preserve all sorts of advantages, such as the ability to focus, the protection from recruiters or poaching behavior, and not giving ideas to overfunded teams of talented souls who are clever enough to pivot 180 degrees into your neck of the woods. I should underscore here this has been so common over the past year that when I see tech headlines on Twitter, it just feels like an entirely different universe. I should also underscore that these companies are often on a different level from what is publicly discussed about other companies. A growing but derivative company may get people chattering online, but some of these new companies — if public — would make for great blog posts, discussions, and debates about what our future may hold.

That gives me hope but also puts me in a bind. I have survived here by being open and public, but also working very hard to work with several competing interests while maintaining confidentiality. And, I like to distill what I see happening and then write about it here, as a way to deepen my understanding and learn from others. But as more things go stealth, I will hear about things less, and even if I do, like I did this week, the information can’t go anywhere but patiently wait to launch or seep quietly into the mainstream one day. From what I’ve seen, I hope they do.

Nursing My Stocktoberfest Hangover

Earlier this week, I ventured down to San Diego to hang out at Stocktoberfest 2014. As soon as I touched down, I asked myself: “What took me so long to go down here for this?” It was fun right from the beginning, and Howard puts on a great event. As I ventured over to the bar for the opening happy hour and to watch Game 5 of the World Series, I immediately made new friends, talked shop, and even stress tested my presentation for Monday on someone with way, way more knowledge about the topic than I have. That turned out to be a useful beer. (More about that in a second.)

I’ll start with Tuesday first. @HowardLindzon graciously had me participate in two sessions. On Tuesday, it was a more general panel on mobile trends for the whole audience. The panel consisted of Howard moderating, myself, Jordan Mendell (DraftKings), Alex Bard (Campaign Monitor), and Justin Overdorff (Yelp). We discussed the classic stuff around mobile ecosystem — Apple vs Google/Android, Yelp and Pandora, and apps which truly benefited from the timing of the shift to mobile. As this is mostly a crowd of technical public stock enthusiasts, it was harder to explain how to play mobile in the public markets, partly because mobile is still immature in the big picture yet maturing for entrepreneurs given the distribution constraints. Public investors think about the big companies, the handset makers, the chip layers, infrastructure, carriers, and other parts of the ecosystem. Outside of Facebook or just mobile ads in general (a growing market), it’s hard to pull this off in the public markets.

Now, back to Monday. I wasn’t worried about the Tuesday panel because I’ve done tons of panels on mobile. Easy. But on Monday, Howard wanted me to lead a breakout of how I come about picking technology stocks. I called it: “Can insights from startups drive public market calls?” Given the audience is quite technical about stocks, my method and presentation are the exact opposite, so I was a bit nervous. As a result, I worked to make it more of a question than a session, and then fostered a discussion after explaining my own methodology. (I’ve put up the slides from the talk below.) What was great about the session, after overcoming the fear of presenting it, is that nearly everyone in the breakout raised their hand and offered a comment about their reactions, and it started a great discussion. My biggest takeaway from the session actually applies to investing generally, public or private — so much of it is driven by “entry prices,” as investing is about multiples, and right now, so many of the private entry prices to obtain equity are getting quite high.

Finally, Howard and his team did a phenomenal job to make everyone feel comfortable and I saw some old friends and made new ones. As the tagline goes, for “profit and joy.” It was a joyous occasion, indeed, and speaks to the community Howard has built with Stocktwits. Thanks for hosting, Howard!

The Breakout Tech Company Of 2014

For the past two years, I ended the year with an attempt to name “The Breakout Tech Company” of that year. In 2012, I picked Stripe [see post here]. In 2013, I picked Snapchat [see post here]. Had I done this in 2011, I would’ve picked Uber. Each year, I tried to use the same framework — “the right person, the right idea, the right product, the right time, and the right market.”

As 2014 rolls to a close, I’ve been thinking about which company achieved this feat. And, I’ve been thinking about it for the past few months, and asking other friends in the industry. And, yes, there are great new companies forming every month and many of them are growing quite quickly. But, compared to what we’ve seen over the last three years, it’s hard to find a suitable comparison.

So, therefore, my vote for Breakout Tech Company of 2014 is to simply say that the previous three — Uber, Stripe, Snapchat — are actually continuing to breakout even more. They’ve already left one orbit, and now lurching for the next orbit. Uber is growing rapidly worldwide into the mega-market which makes up transportation and logistics; Stripe is operating on all cylinders and one of the marquee partners for Apple with Apple Pay; and Snapchat “Stories” are creating a new media format that’s poised to be a hit with advertisers given the scale, brand, and interactions native to this unique app.

So, there you have it — this will be a short post. It’s not fair or ideal, and I know many newer tech companies are doing well, but I don’t see anything breaking out on the level of Uber, Stripe, and Snapchat. They’ve raised the bar, and right now, these new “incumbents” are widening their lead with the help of different tailwinds. So to speak, the rich are getting richer, and the bar for newer companies to breakout is getting even harder.

The Thin Edge Of Food Delivery

On any given weekday, I can order Sprig or SpoonRocket for lunch while I’m in San Francisco for the day, just with the tap of an app. When I go home back to the Valley, I can have any one of the following services deliver food and dinner to my place: Fluc, DoorDash, Instacart, Postmates, Munchery, OrderAhead. (I’m guessing eventually Square will offer something similar after acquiring Caviar.)

Food, like transport (Uber, Lyft, etc.), is hot because it’s the ultimate daily active use case. Much has been written about this. And, while most of these services can bring you the same level and type of food, how it’s done is just slightly different, with some being more efficient, or more tech-based, than others. For instance, Postmates and DoorDash charge for food from the vendor and then add deliver fees in their own manners, fixed or variable. Munchery, on the other hand, makes its margins on the food because they prepare it from start to finish — here, delivery is not used to extract value. Instacart can pick up ready made dinners at grocery stores, and they build up a margin through annual subscription, dynamic pricing, and using tipping to subsidize the rates for personal shoppers.

Food itself is a big category, no doubt. Groceries, for example, is a $600Bn+ annual market in America alone. So, in one sense, these companies can focus and build out scale (if they get that far) and provide insulation and a consumer interface to many grocers, restaurants, and more. However, depending on where their margins reside, some of them may feel under pressure to expand the “SKUs” they offer to include things besides food. This is why we’re seeing specific retail on-demand delivery services like Deliv (malls) and Curbside (Target). So, another way to look at it is that these are all logistics businesses using mobile as the consumer interface, bringing in SKUs, and starting with a type of item Amazon or Google could likely never deliver despite being a many times a day habit.

The ultimate concern, then, is “Will Amazon and Google just run over these startups?” And, as @jess pointed out below, probably fair to add Uber to this incumbent list as well. I don’t think that will be the case. If anything, it is startups that will be fiercely competing with each other, and some may undercut prices to gain mind- and market-share. Amazon and Google can take this on as loss-leaders, too, but there could be something about the 1099 Economy which taps into a new cultural mindset to favor on-demand wage opportunities in exchange for having control over their time and labor market participation.

The tricky part for me is that Amazon has most everything a household needs and can bring it to most urban customers within set periods of time. Google could do the same at some point, but would take a while. But, neither of them could deliver fresh food in the manner folks in the Bay Area have grown accustomed to, and because of that, this may create a very, very small opening for a new set of consumer brands to emerge. That’s what’s happening now, and the while its too early to tell who will be left standing, the unit economics and margins of each business may give us a clue, though ultimately, I believe the winners will have more SKUs to manage.

Early-Stage Math And Upstream Expectations

For early-stage startups with the luxury to have this problem, a common topic that comes up in conversation lately is: “Well, how much should we raise?” I have a hard time answering that question with a specific number because everything is so case dependent and I don’t usually have a good sense of what the founders have in mind for long-term planning. And, even though I have my own experience to draw from, I’m not sure it’s applicable or proper to extrapolate from. So, in the absence of that, I end up stitching together three separate posts from investors who have way more experience than me:

What A CEO Does.” In this post, there are three jobs for the CEO, one of which is he/she “makes sure there’s always enough cash in the bank.” Sounds obvious, but worth repeating and adds a solid foundation.

Always Have 18 Months Of Cash In The Bank.” The logic of why is explained in the post, and it seems like a good rule of thumb.

And, finally, there was a @pmarca twitter thread about this. I believe some people drew the wrong conclusion from that online discussion, getting hung up on the name of a round (seed vs A, etc.). All that crap is semantic. I tried to write about what it really means here. Essentially, if an early-stage startup has ended up raising around $3m or more, an investor like Marc Andreessen (and maybe this shifts with each person) will expect that startup to have even more evidence of usage, traction, and/or revenues. Those are the expectation of a big top tier fund, and in discussions with folks at those places, they all agreed.

I have noticed in the past few weeks that founders I’m talking to are now more aware of this. I didn’t connect these dots until a few days ago, so it was helpful to go through these conversations. One founder, for instance, wanted to raise $1.2M. He blew by that, and then decided to go up to $1.75M if high-value or strategics came in. But, he asked me, “What should I stop at?” He could’ve kept going. It can be tempting. But, I didn’t have a good answer for him…so, I wrote this post instead.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

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