Posts from entrepreneurship

Go East Young Man (or Woman)

Here’s a fun post by Henry Ward, founder and CEO of our portfolio company eShares, about raising money last year.

From Henry’s post:

We were 0 for 21 with Silicon Valley VCs. I never got close. Most of the big firms wouldn’t even meet. A few had an associate do a Skype call even though we were 20 minutes away.

After 21 meetings in SV, I took a Hail Mary trip to the east coast and met with 3 funds. All 3 invested.

Thank god Henry came east. We are hugely excited about the company he’s building.

Henry also makes some great observations about the fundraising process. I like this one a lot:

1. Fundraising is a filtering exercise, not a popularity contest.

I could tell within 5 minutes of meeting an investor whether they would invest. Investors who invested were excited about eShares before we met. They either saw the vision and liked it. Or they didn’t.

Most didn’t but met me anyway. They spent the entire meeting hoping I would convince them eShares was a good idea. I never did.

Excited investors (and the ones who invested) were different. They didn’t let me pitch. Instead, they asked questions to assess risk. They tried to find reasons not to invest. That is the pitch-paradox. The investors who won’tinvest will ask you why they should . The investors who will invest ask you why they shouldn’t. Your job is to make sure you don’t have reasons that they shouldn’t.

Fundraising is simple: find investors that get excited about your company. It is a filtering exercise. Too many founders believe they have the wrong pitch instead of realizing they have the wrong audience. On that note…

You’ve now read half the post here at AVC. To read the rest, go here.

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.

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.

Getting Knocked Down

I recently had breakfast with a friend who is an entrepreneur. He had a really rough start to 2015. His business had a tough year in 2014 and he realized at the start of 2015 that if he didn’t make some big changes to the team and operating structure and costs he was going to hit the wall. He sort of did hit the wall to be honest.

He cut out a layer of management, he cut costs across his entire operation, he got back involved in his product and operations, he worked harder and longer than he has ever worked, including when he started the company.

And the result of all of those changes and work is that his business is now on much better footing and he has learned a lot about what the business needs to go forward and grow from here.

After he told me all of this, I told him that I’ve never met a successful entrepreneur who didn’t get knocked down in the ring at least once or twice. I told him that you can read all you want and get all the advice and coaching that is available and you still will not learn the hard lessons that one has to learn to become best in class at what you do. I’ve come to the conclusion that you have to learn some things the hard way to really learn them well.

At the end of the breakfast, I congratulated him. Not so much on getting through a rough spot in his business, but for getting knocked down and getting back up and winning the round. Because that is what you have to do to get better in life and in business.

Founder Led Businesses

I’ve written about this issue a number of times on AVC. There are some advantages to having a non-founder run the business, but over the long run it seems that founder led businesses are the best businesses.

This rant about Apple by Bob Lefsetz is a fun read and regular readers will know that I am mostly in Bob’s camp on this issue.

The ending is great.

There’s a fiction that corporations rule in America.

The truth is it’s all about individuals. Sure, a group can effectuate the vision, but it always comes from one person, maybe a team of two, certainly not a committee.

Jeff Bezos is Amazon.

Mark Zuckerberg is Facebook.

Larry and Sergey are Google.

Daniel Ek is Spotify

Evan Spiegel is Snapchat.

Who is Apple?

The Decentral Authority

We’ve been big fans of Reddit since it was part of the first Y Combinator class ten years ago this summer. We’ve watched closely as it emerged as a community powered mostly by its users. There was a period when the entire company was one or two developers. And yet not only did Reddit survive that period, it actually thrived during it. It is a quintessential example of the lightweight people powered app that we look for and love at USV.

The growing pains that Reddit is going through as it evolves into something more are particularly interesting to us. We’ve always wondered if a people powered community that is owned as much by its users as anyone can work as a traditional corporate entity. We’ve been through similar situations in our career (Geocities and Twitter among them) and we know how hard it is to reconcile the needs of the users, the management, and the shareholders.

I am not going to come down on the side of any of these stakeholders in this current situation. They all have very valid needs and desires and there are no easy answers to the struggle that Reddit faces. I am particularly sympathetic to the need to manage the trolling activity. Twitter also struggles with this issue. Free speech has an ugly underbelly and when you stare at it up close and personally, it makes you want to puke. And yet where do you stop on the slippery slope of deciding what is acceptable and what is not?

We have also wondered what the first killer app of the blockchain is going to be. Is it going to be personal finance (bitcoin), is it going to be peer to peer connectivity (mesh networking), or is it going to be something else?

There’s a chance that the answer to the struggle that Reddit is going through will also answer this question. It may be that there is no viable middle ground between a centrally controlled media platform and an entirely decentralized media platform. You are either going to police the site or you are going to build something that cannot be policed even if you want to.

The interesting thing about an entirely decentralized media platform is that you can have clients that choose to curate, police, and censor and clients that choose not to. Twitter, as originally architected, could have headed down this path. But for many reasons, reasons I supported to be clear, it chose not to.

But someone is going to go there. And I think it will happen soon. And I think it most likely will be built on the blockchain. There have been plenty of attempts to do this before. And none have succeeded. So why now?

Well for one, the blockchain is here and waiting for its killer app. And there are no shortage of entrepreneurs who want to build it. And platforms like Twitter, Reddit, 4Chan, and others have fed the desire to have something more but for reasons that are entirely valid are coming up empty for some.

The demand is there. The supply (technology) is there. And we’ve seen a bunch of teams working on this. I think one or more will get it right. And I think that will happen soon.

To be clear, this does not mean the end of Reddit or Twitter or any other of the current media platforms that are out there. They will likely move more and more into a centrally controlled media platform. I think that is the natural evolution of platforms that need to cater to the needs of management and shareholders. There is a good business to be had in a centrally controlled platform.

But there is also a very interesting opportunity to build a truly decentralized media platform. I am not sure it will be a good business. I am not sure it will even be a business. But it can be a very powerful community and platform. And there is a market for that. A big one I think.