Growth vs Retention

Entrepreneurs always ask what the one number they should focus on for raising money. I always say “90 day retention numbers for your acquisition cohorts”. There’s a common view in silicon valley and around the tech sector that growth is the one thing you should focus on. But it’s hard to grow if you are churning your users. And if you are paying for user acquisition, as many startups do in search of growth, then retention/churn becomes even more important.

This issue was highlighted in a Forbes post on Homejoy, which apparently had a retention problem. A former employee said:

Retention was clearly bad, and that’s what killed us

This is a huge conundrum for entrepreneurs who want and need to grow in order to build confidence with investors (both existing and future) and to attract and retain talent.

This all comes back to stepping on the gas before finding product market fit. You might think you have product market fit and so you scale up your hiring, your marketing, your sales, and your capital raising and spending.

But if you can’t retain a healthy percentage of your users past ninety days, you don’t have product market fit yet and all the investment you make in your business is just money down the drain.

So focus first on your 90 day retention numbers and make sure to nail them and prove you have product market fit. Then scale.

Anxious Investors

Anxiety is something all investors feel at one point or another. Investing is a mix of greed and fear. When things aren’t going great, anxiety sets in.

In public equity when you get nervous about a stock, you can usually sell the position and move on.

In private equity, you are stuck with the investment. So anxiety sets in.

Entrepreneurs might mis-diagnose anxiety as something else. If your investors are all of a sudden meddling in the business, you might be seeing anxiety. If your investors are asking for endless amounts of data, you might be seeing anxiety. If your board meetings have become tense and difficult, you might be seeing anxiety.

You can’t just suggest they take a pill and chill out. Though I’ve seen entrepreneurs do that before.

Here are a few suggestions for managing anxious investors

1) Increase the frequency and duration of the communication. There is nothing that amplifies anxiety like a lack of communication. So do the opposite. Overcommunicate.

2) Have a frank and candid conversation with your investors about the source of their anxiety.  Getting them to articulate what they are worried about will help a lot. Then you can address the issues directly.

3) Get more face time with the rest of an investor’s firm. Often the anxiety comes from the investor’s relationship with and place inside of their firm. This is particularly true of junior partners or associates. Offer to come talk at the weekly team meeting. Or suggest that an investor bring one of their colleagues to a meeting. This one can backfire because if things are truly messed up you might amplify and multiply the anxiety inside the firm. But if you believe the anxiety is misplaced, this approach can be helpful.

4) Get some independent directors on your board. If your board is full of investors and you don’t have any independents, you are setting yourself for an anxious board. Get investors on your board who are less susceptible to get anxious when things go wrong and the dynamic of your entire board will improve.

5) Fix the problems in your business. Nothing helps to reduce the anxiety level in an investor than strong performance.

I am an anxious investor myself. I was worse when I was younger and everything was riding on my performance. I’ve eased up over the years. But I still wake up in the middle of the night anxious about a particular company/investment. It’s how I’m wired up. And I think its part of what makes me a good investor. It is also what makes me potentially a problem. I try to be self aware of the anxiety and manage it so it doesn’t impact our portfolio companies. But I know it can and it does.

Entrepreneurs need to learn how to manage anxious investors. It’s an important skill that will come in handy many times.

Video Of The Week: Economic Development In NYC

There were a number of interesting and relevant discussions at the Cities For Tomorrow conference last week. This one, between Michael Barbaro of the New York Times, Dan Doctoroff of Sidewalk Labs, and Alicia Glen, Deputy Mayor of NYC, about economic development in NYC was particularly relevant to entrepreneurs looking to build companies in NYC.

Feature Friday: Brights At Night

The best features are the ones that you discover on your own and say “wow, that’s amazing.”

That happened to me last weekend.

We were coming back from dinner at night and the Gotham Gal was driving our Tesla.

She had the brights on and as another car came into view coming toward us, the Tesla automatically switched the brights to normal.

Then as the car passed, the Tesla switched back to bright.

I don’t know how long Tesla has had this feature on its cars. But I noticed it for the first time last weekend.

It’s such a simple thing. It’s not that hard to swap the brights on and off as you drive at night.

But having your car do it for you is better.

It is a great feature.

Bootstrap Your Network With A High Value Niche Use Case

Last night my son drove me out to the east end of long island where we have a packed day of meetings on some family business today.

As we hit the long island expressway, I got on my phone and started DJing and we got into a zone.

As the traffic thinned out, we started making great time.

At one point I looked over and Josh had his phone in his lap. I was about to go off on him about on not texting and driving (something I constantly harp on with our kids), but before the words left my mouth I realized he had Waze open in his lap.

Let’s just say Josh is not a fan of the speed limits on the LIE. And I know that on his last trip he got pulled over for going 70 mph.

I realized he was looking to avoid getting another speeding ticket. So instead of lacing into him about texting and driving, I asked where the radar detector was.

He said “its coming up in about a quarter mile.”

For the rest of the way out, we watched the traffic speed up and slow down as we passed various speed traps.

It seemed like everyone on the LIE last night was on Waze. Which would not surprise me.

Today Waze is mostly used for getting traffic and driving directions. That’s a use case most everyone who drives needs and wants.

But the original use case for Waze is the one Josh had landed on last night in his effort to avoid another speeding ticket on the LIE.

Which takes me to the point of this post.

If you want to bootstrap a peer to peer network, you can’t start with the mainstream use case. You need to start with the highest value use case, even if it is a much smaller niche.

Not everyone likes to drive 80mph in a 65mph zone. But the ones who do will take extra measures to avoid getting pulled over. They report the speed traps to everyone else in real time. Which is what the first users of Waze did.

That led to more people using Waze to avoid speed traps.

And eventually that led to enough critical mass that the mainstream use case of a peer to peer traffic monitoring/avoidance application was possible.

The same is true of Snapchat. People made fun of Snapchat in its early days for being a “sexting” app. That was the “high value niche use case” that bootstrapped the network. And once critical mass was reached, the broader use case of a network for ephemeral photo/video sharing could emerge.

So if you want to build a peer to peer network, you have to find the use case that is high enough value that some people will do things (like put content into your application) that most people won’t. If you nail that, and win the hearts and minds and activity of that small high value user base, then you will have to opportunity to go mainstream. If you aim for the mainstream users first, you are setting yourself up for failure.

Leaders and Executives

I saw the news that Phil Libin has stepped up to Chairman and the Board of Evernote has hired Chris O’Neill to be CEO. I don’t know much about Evernote, I don’t use their product, but I admire the company and I like the idea of a founder leading a company without being its Chief Executive Officer. There are many examples of this working. The most well known is Larry Ellison’s role at Oracle. Larry doesn’t run the business on a day to day basis but his influence is felt deeply in that company. Another great example of this relationship is Reid Hoffman and Jeff Weiner at LinkedIn.

Leadership is different than management. I have said that many times before on this blog and I will say it again. I believe it to be true. Leading is charisma, strength, communication, vision, listening, calm, connecting, trust, faith, and belief. Management is recruiting, retaining, delegating, deciding, communicating, and above all executing. Many CEOs do both for their companies. But getting leadership from the founder and management from a great executive is a model that can work really well.

The key to making this work is having the founder totally bought into the split roles and totally bought into the person who is going to be the executive and provide day to day management to the Company. In the leadership role the founder must step back and allow the executive to manage the business. They need to step in when leadership is required. That is usually when hard decisions are required and the founder’s instinct can be incredibly valuable.

A really good Board can help the founder and the executive figure out when management is required and when the founder’s leadership is required. But the Board cannot babysit this relationship. It has to work and be functional between the two people. If it is not, then someone has to go and that is usually the executive. That is because a founder’s leadership is hard to replace. A strong manager and executive is not easy to find but that talent exists in many places in the market and is not inexorably tied to the company because of the founding relationship.

If a founder can find their manager/executive inside of their company, that is ideal. Because going with a known relationship vs a brand new relationship produces a higher likelihood of success. But you don’t have to do this. Jeff Weiner was hired from outside of LinkedIn. And, I believe Chris O’Neill was hired from outside of Evernote. Both approaches can and do work. But if you have a strong manager/executive inside of your company, I would strongly suggest trying that. It is lower risk.

I have also seen a fair bit of talent churn out after the founder steps up to Chairman, particularly in the senior team. That’s a reason that many founders are nervous about doing this. My advice is to go ahead and do it. The first year of any new CEO’s tenure is going to be super hard and will require rebuilding the senior team, no matter what. But that can be healthy for a business too.

I admire Phil Libin’s conviction that he is not the right CEO for the next stage of Evernote. And I would encourage him to stay deeply involved in the company, providing the kind of leadership that only a founder can provide. And by supporting his chosen CEO who will need it in spades. I wish them both success in this transition.

Fundraising Tip: Don’t Send The Same Email To Two Partners At The Same VC Firm

Over the weekend I got an email from an entrepreneur wanting to come pitch his startup to USV. He copied my partner Andy on the email.

I immediately thought “I’m going to let Andy reply to this one.” But a couple days later the email still was sitting there in my inbox unreplied to. So then I thought “Andy is probably waiting for me to reply to this.”

Finally I shot Andy an email and we compared notes on it and then I replied to the email.

But it doesn’t always work out like that. I’ve seen a similar situation end with neither partner replying to the email and it goes unresponded to.

I call this situation email hot potato and entrepreneurs should avoid it by sending an email to only one partner at a VC firm, not two or more.

A good alternative is to send an email to one partner and copying an analyst at the firm as well. The analysts are the most diligent people in a VC firm about staying on top of inbound deal flow and they will often step in and reply to an email that a partner has missed or forgotten about.

The important thing here is to avoid confusing who has the responsibility to reply to the email by putting multiple responsible parties on it. While it would seem that it would increase the likelihood of getting a reply, it actually reduces it.

The No Hands Syndrome

Last week I saw this tweet from Dan Primack who covers the VC sector for Fortune:

I replied to it and I also mentioned it in a comment thread here at AVC recently.

Here’s what I can’t reconcile.

Bitcoin/Blockchain is one of the fastest growing sectors in startupland. Here’s a chart from VC Tom Tunguzblog.

fastest_growing_investment_categories

I know that measuring something using y/y growth rates can be misleading because of the small numbers involved. But Bitcoin is the fastest growing area in startup investing over the past three years.

And yet not one VC in a room full of them (90 of them) raised their hands when asked how many would invest in a bitcoin startup.

Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.

But I do know one thing. When not one hand goes up in a room full of VCs, go there. It is going to be profitable.

Video Of The Week: Watching Videogames

I had a conversation with my son yesterday about watching games vs playing games. He told me he doesn’t watch a lot of videogame play on the web, but he has friends who are really into watching others play videogames.

Of course, this is not new. Amazon bought Twitch.tv for almost a billion dollars a year ago. And more and more people are watching others play videogames instead of or in addition to playing them.

Here’s an example of why: