Posts from entrepreneurship

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.

Loyalists vs Mercenaries

One of the things that entrepreneurs, founders, and CEOs obsess over is holding onto their team. When I propose some sort of difficult decision to a CEO, I am often met with the response “the team will freak out and we will lose them.” And I understand where this emotion comes from. You spend so much of your time recruiting, training, and managing a team and getting them into a place where they can execute for you and you can’t imagine having some of all of them walk out the door. Neither can I to be honest.

But teams come in all flavors. There are highly loyal teams that can withstand almost anything and remain steadfastly behind their leader. And there are teams that are entirely mercenary and will walk out without thinking twice about it. I once saw an entire team walk out on a founder. That company survived it, remarkably.

I’ve been thinking a lot about the factors that go into determining whether your team skews loyalist vs mercenary and what you might be able to do about it. Here are some of the most important factors:

1) Leadership. At the end of the day, people are loyal to a leader they believe in. Leading is not managing. Although it is impossible to lead if there is no management. But leading is that special thing. It is charisma, it is strength, it is communication, it is vision, it is listening, it is being there, it is calm, it is connecting, it is trust, faith, and belief. The best founders are great leaders. They may be shitty managers which means they need to find managers to help them. But they are great leaders. One of the things we look for in founders is leadership. If we want to follow them, we believe that others will too.

2) Mission. People are loyal to a mission. I’ve seen super talented people walk away from compensation packages 2-3x what they currently make because they believe in what they are working on and think it will make a difference in their lives and the lives of others. This is why investing in mission driven companies can produce great financial returns. Mission driven companies have something most companies don’t have. They have “why” that keeps the team together through difficult times and when the compensation isn’t close to “market”.

3) Values and Culture. My friend Matt wrote a post about Values and Culture the other day. I read it and responded “values are the house and culture is the furniture”. He thought that was about right. People want to work in a place that feels right to them. They need to feel comfortable at work. In the way that a welcoming home with comfortable furniture is pleasant to be in, a company with good values and culture is pleasant to work in.

4) Location. I spent the past week in europe. In Berlin, Paris, Istanbul, Vienna, and Ljubljana. These are very different talent markets that the bay area or NYC. In the Bay Area and NYC, your employees are constantly getting hammered to leave for more cash, more equity, more upside, more responsibility, and eventually it leads to them becoming mercenaries. It is incredibly hard to hold onto a team in the Bay Area and NYC. If you are building your company in Ljubljana, Waterloo, Des Moines, Pittsburgh, Detroit, or Indianapolis, you have a way better chance of building a company full of loyalists than if you are building it in the Bay Area or NYC.

If you mess up any of these dynamics, you can easily turn your team from loyalists to mercenaries. Changing leadership is the most common one. Almost every time I have seen a founder leave and be replaced by a new CEO, I have witnessed a significant exodus of talent from the company. It is better if the new CEO comes from within, but even then I have witnessed a significant exodus of talent. When the CEO comes in from the outside, it is almost always much worse.

If you move your team from Philadelphia to NYC or from Des Moines to the Bay Area, expect more turnover. Expect to turn loyalists into mercenaries. These talent starved locations create mercenaries. It’s the nature of the beast.

So what can you do to build a company full of loyalists instead of a company full of mercenaries? First you must lead. If you think you are a good leader, get better. If you think you are a great leader, you can get better. Get coaching and focus on becoming the best leader you can be.

Second, build a mission driven company. Make sure you are doing something that matters. If all you are doing is trying to make money for yourself, then all your employees will try to do is make money for themselves.

Third, invest in values and culture. Matt’s post is a good starting place for some tips on how to do that.  Build a welcoming home and put comfortable furniture in it. I mean that metaphorically of course. But the office does matter too.

Finally, think about being somewhere other than the Bay Area or NYC. Yes, they are great places to start companies, find talent, and get investment. But they are also places where others start companies, get investment, and find your talent. It’s a ratrace, a treadmill, and it’s grueling. If you can avoid it, you owe it to yourself to try.

There are many reasons why the startup sector feels stretched to me. But possibly the most significant one of all is the increasing amount of mercenary behavior I am witnessing in it these days. Hopefully this post will help you avoid that as much as possible. It’s hard these days.

Profits vs Growth

One of the things I’ve always struggled with as an investor in high growth tech companies is the tension between getting profitable vs growing more quickly. It has become a central tenet of tech growth investing (in both the public and private markets) that growth is more valuable than profitability and you can always focus on profits once you have “captured the market.” This leads to behaviors like investing heavily in sales and marketing to increase the growth rates of a business beyond what it can grow at “organically.”

A few months ago, I blogged about a formula I came across at a board meeting a while back that says your year over year growth rate plus your pre-tax operating margins need to be at least forty percent. Meaning you can grow at 100% per year and have operating margins of -60%. Or you can have flat growth and have 40% operating margins. Or you can grow at 20% per year and have 20% operating margins. There is no magic to the forty percent target, but I do like establishing some relationship between acceptable levels of profitability (or losses) and growth. Too many times I have seen companies invest in growth for growth sake without having any constraints or sanity checks on that investment and the losses that result from that investment.

We have worked with/invested in a few super high quality companies over the past decade that did not make this tradeoff. They got profitable early on in the life of their company and then were able to use their profits to reinvest in the business and continue to grow at very high year over year growth rates without having to burn money and raise capital. is probably the best example of this group but we have had a number of them and they are all special companies that I have enormous respect for.

These experiences lead me to question the orthodoxy in the world of technology that says if you are not investing heavily in growth (and losing money), then you are not maximizing the potential value of your business over the long haul. It doesn’t have to be that way. Now maybe you need to have a very special company that has real structural competitive advantages in the marketplace to avoid this tradeoff. Or maybe you just need to be a really sharp and experienced business person to be able to do this (that’s how I would describe Paul and Rony, the founders of, for example).

I also think the profit motive, generating more revenues each year than the expenses you are spending to do that, is a really valuable constraint on a management team. It forces them to think creatively and logically about the investments they want to make. It roots out bad investments in people, product, sales, marketing, and elsewhere in the business and helps to maintain a lean and mean highly functioning organization. If you don’t need to make money because there is plenty of capital available to fund your losses and you are “investing in growth”, then you can also avoid making the hard decisions that focus an organization and insure a high quality team where everyone is pulling their weight.

I don’t want to come off as a positive cash flow freak. It is our business to invest in companies to allow them to run operating losses in order to get a product in market, grow the business and team, and create value for the founders, management, and shareholders. Most of our portfolio companies lose money and we are used to reading income statements with lots of red on them and staring at runway calculations showing when the money runs out.

But I’m a bit sick and tired of the objective of every operating plan I see is to get the business to a point where it can raise money at a much higher price. That’s nice and it’s how the VC/startup game is played. But at some point I’d prefer to see an operating plan that has the objective of getting to sustainable profitability. And I do mean sustainable.

Because, as I said earlier, some of the very best companies we have worked with at USV got profitable early on in their life and maintained profitability while revenues grew100% year over year for a number of years. It can be done. Maybe the reason that many entrepreneurs don’t think it can be done is nobody is telling them it can. So I’m doing that.

Does It Tell A Story?

The Gotham Gal and I were having breakfast today and talking about a pitch deck one of her portfolio companies had sent her for a critical review before going out on the road to raise money. She told me that she made a bunch of suggested changes because it “needed to tell a story.”

Her point was, and is, that a pitch deck is like any other marketing document, it has to have a narrative and a storyline. The receiver needs to be drawn into the story and enjoy it and be moved by the ending.

Too many decks (and pitches) are full of facts and figures but lack a cohesive narrative that makes them compelling. Dressing the deck up with beautiful visuals can help, but even if you do that and you don’t “tell a story” you are not putting your best foot forward.

So when constructing your pitch and deck think about the story you want to tell. It’s probably not your personal history although that can be part of the story. It’s more likely the story of a problem and a market that you have an idea of how to change. Walk the reader up that mountain and show them the promised land on the other side. That story, when told well, generally does the trick most times.