Posts from entrepreneurship

What Didn’t Happen

Last year, I ended 2014 with What Just Happened and started 2015 with What Is Going To Happen.

I’ll do the same tomorrow and friday, but today I’d like to talk about What Didn’t Happen, specifically which of my predictions in What Is Going To Happen did not come to be.

  1. I said that the big companies that were started in the second half of the last decade (Uber, Airbnb, Dropbox, etc) would start going public in 2015. That did not happen. Not one of them has even filed confidentially (to my knowledge). This is personally disappointing to me. I realize that every company should decide how and when and if they want to go public. But I believe the entire startup sector would benefit a lot from seeing where these big companies will trade as public companies. The VC backed companies that were started in the latter half of that last decade that did go public in 2015, like Square, Box, and Etsy (where I am on the board) trade at 2.5x to 5x revenues, a far cry from what companies get financed at in the late stage private markets. As long as the biggest venture backed companies stay private, this dichotomy in valuations may well persist and that’s unfortunate in my view.
  2. I said that we would see the big Chinese consumer electronics company Xiaomi come to the US. That also did not happen, although Xiaomi has expanded its business outside of China and I think they will enter the US at some point. I have a Xiaomi TV in my home office and it is a really good product.
  3. I predicted that asian messengers like WeChat and Line would make strong gains in the US messenger market. That most certainly did not happen. The only third party messengers (not texting apps) that seem to have taken off in the US are Facebook Messenger, WhatsApp and our portfolio company Kik. top social apps year end 2015Here’s a shot of the app store a couple days after the kids got new phones for Christmas.
  4. I said that the Republicans and Democrats would find common ground on challenging issues that impact the tech/startup sector like immigration and net neutrality. That most certainly did not happen and the two parties are as far apart as ever and now we are in an election year where nothing will get done.

So I got four out of eleven dead wrong.

Here’s what I got right:

  1. VR has hit headwinds. Oculus still has not shipped the Rift (which I predicted) and I think we will see less consumer adoption than many think when it does ship. I’m not long term bearish on VR but I think the early implementations will disappoint.
  2. The Apple Watch was a flop. This is the one I took the most heat on. So I feel a bit vindicated on this point. Interestingly another device you wear on your wrist, the Fitbit, was the real story in wearables in 2015. In full disclosure own a lot of Fitbit stock via my friends at Foundry.
  3. Enterprise and Security were hot in 2015. They will continue to be hot in 2016 and as far as this eye can see.
  4. There was a flight to safety in 2015 and big tech (Google, Apple, Facebook, Amazon) are the new blue chips. Amazon was up ~125% in 2015. Google (which I own a lot of) was up ~50% in 2015. Facebook was up ~30% in 2015.  Only Apple among the big four was down in 2015 and barely so. Oil on the other hand, was down something like 30% in 2015 and gold was down something like 15-20% in 2015.

Here’s what is less clear:

  1. Bitcoin had a big comeback in 2015. If you look at the price of Bitcoin as one measure, it was up almost 40% in 2015. However, we still have not see the “real decentralized applications” of Bitcoin and its blockchain emerge, as I predicted a year ago, so I’m not entirely sure what to make of this one. And to make matters worse, we now seem to be in a phase where investors believe you can have blockchain without Bitcoin, which to my mind is nonsense.
  2. Healthcare is, slowly, emerging as the next big sector to be disrupted by tech. The “trifecta” I predict will usher in an entirely new healthcare system (smartphone becomes the EMR, p2p medicine, and a market economy in healthcare) has not yet arrived in full force. But it will. It’s only a matter and question of when.

So, I feel like I hit .500 for the year. Not bad, but not particularly impressive either. But when you are investing, batting .500 is great because you can double down on your winners and stop out your losers. That’s why it is important to have a point of view, ideally one that is not shared by others, and to put money where your mouth is.

Measuring Price Elasticity And More

Price elasticity is a concept every business person should understand but I have found that many don’t.

Wikipedia defines price elasticity as:

a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price

Here is a chart that, I think, makes the concept easier to understand:

In it’s simplest terms, the lower the price of something the more demand there usually is for it. But every product and service has its own elasticity curve and it is important to understand what the price elasticity is of your product or service.

The good news is that it has never been easier to determine the price elasticity curve of a product or service.

Here is how you do it.

  1. offer the product or service on the web and make the purchase as easy as possible (Stripe and/or Paypal).
  2. establish the range of pricing you want to measure, start at a number higher than you can imagine anyone paying and end at a number that is equal to the cost to produce your product or service (the cost of good sold)
  3. set the price at the high end of the range
  4. buy some search traffic to your offering (Google Adwords)
  5. measure the traffic to your offer and the conversion rate (Google Analytics)
  6. lower the price
  7. repeat 4 & 5
  8. lower the price again
  9. repeat 4 & 5
  10. continue this process until you reach the low end of the range

Then plot conversion rate against price and you will have the price elasticity of your product or service. It is best to keep everything other than price constant as you move through this exercise. For example, don’t change the adwords campaign as you move through this process.

As you do this, you can also measure what it costs to acquire a customer (CAC) via search. That may not turn out to be the best way to acquire a customer but it’s a very helpful number to know.

You will want to consider this formula as you think about where to land on pricing:

Price > CAC + COGS

That means the price you charge must be greater than the cost you must pay to acquire a customer plus the cost you must pay to make or deliver the service.

If your product or service is sold on a subscription basis, then you must also know the amount and timing of churn to expect and the lifetime value of a customer (LTV). In a subscription offering, the above formula becomes

LTV > CAC + COGS

All of these concepts and math falls under the terminology of “unit economics” and you will often hear investors (including VCs) talk about “understanding the unit economics” of a business. If you don’t know what that means when an investor brings it up, you are unlikely to close that sale.

But I am not writing this to help entrepreneurs raise money. I am writing this post to help entrepreneurs understand how to build a profitable business.

You must know the price elasticity of your product or service. You must know how much it costs to produce. You must know how much it costs to acquire a customer. And if your model is subscription, you must know your churn and lifetime value. From all of that comes the data and knowledge that allows you to optimize price, margins, and profitability. Which, after all, is the goal of a business, all the other bullshit you read on the internet notwithstanding.

What Do I Wish Entrepreneurs Would Ask?

As I watched the video I posted yesterday, I was struck by the last question of the discussion. That question was “what do you wish that entrepreneurs would ask you when they meet with you, but they don’t?”

For me the answer is obvious. I wish they would ask me what I would worry about most if I was an investor in the business. I often give entrepreneurs the answer to that question when they meet with me even if they don’t ask, and they rarely do.

All businesses have challenges, weaknesses, risk factors. These don’t generally get in the way of us investing, as long as we and the entrepreneur(s) are aligned about them and the need to manage and mitigate these risk factors as quickly as possible. We are drawn to an investment by the upside potential of the business and we recognize that every investment we make has significant downside potential as well. Our hope is that the founders and management team can mitigate the downside risk and, in doing so, set the company up to realize the upside potential.

So it is not a negative when pitching to discuss the risk factors. I like to ask entrepreneurs “what keeps you up at night?” There are obvious answers to that question; hiring the right people, shipping product on time, raising capital. But those are common to every business and that’s not what I’m looking for when I ask that question. I am interested in finding out if the founder understands the risks of the specific go to market strategy they have chosen, or the challenges of the market they are operating in, or the difficulties of implementing the business model they have chosen.

If they see those risks clearly and have plans to manage them, that creates alignment and comfort for investors. If they don’t see them at all, that is a huge red flag for investors.

My partners landed on this same answer after talking it through among themselves. As Albert said, entrepreneurs often feel that they have to be selling when they pitch. And many come in telling a rosy story that is all upside and no challenges. That can come off as naive and can be off putting. It is way better to start with the upside. As I like to say, “take me up the mountain and show me the promised land on the other side.” But after you’ve accomplished that, it is wise to explain where the tough spots will be on the way up the mountain and how you plan to manage through them. It’s the latter part that really seals the deal with an investor. You must do the vision part to hook the investor. Reeling them in requires the reality check.

WE Festival 2016

we festival logoThe sixth annual WE Festival will take place in NYC on April 13th and 14th 2016. The Gotham Gal has built this event into the premier networking and learning event for women entrepreneurs. After five years of doing it in partnership with NYU, she has taken it over and is running it together with her sister Susan. I’ve had a front row seat to this process and I can tell you that they have taken it up a notch. I am confident that this year’s WE Festival will be the best yet.

As usual, the event starts with an evening conversation keynote (Rachael Ray is doing it this year) followed by a networking event. The next day is packed with talks, workshops, and networking events. The theme for this year’s event is Resilience, a great mantra for entrepreneurs of all genders.

If you’ve been to the WE Festival in the past, you will know what a special event it is. If you haven’t been to one before, check out this page for an idea of what the event is like.

The central idea of the WE Festival is showing women entrepreneurs that they aren’t alone and that there are many others just like them, some of them farther along, and some not yet even started. It is, at its core, a celebration of women entrepreneurs, thus the term festival in the name.

Attendance costs $100 if you are a student, $350 if you are a WE Festival alum, and $375 otherwise. If this sounds like something you’d like to attend, you can apply here.

Video Of The Week: Building Global Companies Quickly

Bloomberg’s Emily Chang did a great interview with Reid Hoffman earlier this week. I first caught some of it on Bloomberg’s TV channel.  I cannot find the entire video but parts of it are available on Bloomberg and YouTube.

Here’s a segment I like where Reid talks about a course he’s teaching at Stanford on rapidly scaling global companies and how different types of companies require different strategies to do that.

Update: Emily sent me a link to the entire interview on Twitter this morning. It is here

Getting The Deal Done

There’s a scene in Ben Horowitz’ book The Hard Thing About Hard Things when LoudCloud was burning through cash and financing options were challenging and so they went public. The valuation of $450mm was much lower than they had hoped and getting the deal done was hard but they got it done. It saved the company and ultimately the company, after changing its name to Opsware, sold to HP $1.6bn.

Here’s the opening text from a story about that LoudCloud IPO:

Shares in the company climbed 15 cents, or 2.6 percent, to $6.15 on a volume of 15 million shares. This gives the company a market value of about $450 million, less than half the $1.1 billion it planned for in its earlier filings.

Thursday, Loudcloud raised $150 million when it sold 25 million shares for $6 each to large investors such as mutual and pension funds. Lead underwriters Morgan Stanley and Goldman Sachs twice changed the size of the offering to make it more appealing to investors.

Initially the company planned to sell 10 million shares, or a 9.6 percent stake of the company, at a range of $10 to $12. The terms changed to 20 million shares, or a 30 percent stake, at a range of $8 to $10 in mid-February. Thursday, the company altered the terms again, offering 25 million shares at $6 each, or 34 percent of the company.

“It’s desperation,” said Dave Nadig, a portfolio manager with MetaMarkets.com, who said he will not buy the stock. “I think they’re pretty much standing on street corners trying to find people to buy. They need the $150 million to build their business.”

Sometimes you just need to get the deal done. When you are burning through cash and need to finance your company, the terms might suck, but the cash doesn’t. So you do the deal and live to fight another day. Marc and Ben did the right thing at LoudCloud and Jack Dorsey did the right thing at Square.

If you believe in your business and yourself, take the money and get back to work. A financing is not an exit. The price matters less than the cash most of the time.

Long Roadmaps

I’ve been thinking a lot about entrepreneurs with long roadmaps recently. I blogged about this four years ago. And while I captured some of what is special and important about long roadmaps in that post, I don’t think it really does this issue justice.

So I’m back for more on this one.

A big vision is critical for a big success. You have to know where you want to be in a decade or more. That’s where the long roadmap comes in.

But the mistake most entrepreneurs make is the try to ship most or all of their vision in their first product. And that’s a terrible idea.

The best companies start with a very narrow product that nails something pretty simple but powerful. And then they go from there.

This is true in both enterprise and consumer applications.

A long roadmap is comprised of many short and focused roadmaps, each leading to the next one.

It’s like you want to drive from NYC to LA. You start by driving to Philly. Then you drive to Pittsburgh. Then Cincinnati, then St Louis, then Kansas City, then Denver, then Salt Lake City, then Las Vegas, and finally you drive to LA. Each trip is its own thing and you plan it out carefully and then execute it with focus and energy, not thinking about where you want to end up beyond the next city.

Another good analogy is a basketball season. You want to win the NBA championship. But you get there one game at a time.

I was emailing with an entrepreneur last night who has a long roadmap. And we were discussing this very thing. He said he was very patient. And I replied that building a great company is a combination of patience and impatience in equal doses applied unevenly. Impatient short term, patient long term.

A long roadmap helps you be both.

Chris Poole

Back in 2011, USV invested in Chris Poole’s startup Canvas. I worked closely with Chris on that investment and they built something great called DrawQuest. But it did not turn into a sustainable business and eventually Chris shut it down. All through this time, Chris ran and managed 4chan, a service he built and launched when he was 15. Yesterday Chris announced that he had sold 4chan to Hiroyuki Nishimura, a pioneer of Japanese web culture and founder of 2Channel, the inspiration for 4chan.

I have watched Chris struggle with his creation. He felt enormous responsibility for it. Like a child who has issues and you know it but you love him or her anyway. He did the very best he could with 4chan and from where I sit, never really got any credit for that.

Communities are not like other websites and mobile apps. The people who hang out in them feel a sense of ownership of them. The regulars here at AVC feel that way to some degree I am sure. And so running a community on the web/mobile is probably a lot like running a community in real life.

I have sat on condo and coop boards. They are not like regular businesses. They are where people live. And so the debates and disputes are more personal and more emotional. Take that and multiply it by the millions and you get a web/mobile community like 4chan or reddit. Managing that sort of thing is not pleasant.

And yet Chris did it dutifully for over twelve years. Contrary to the beliefs of many in the 4chan community, Chris didn’t take a real salary from 4chan. It was truly a labor of love.

And so when I sat with Chris for lunch last week, a day or two after the sale had finally closed, he seemed more relieved than anything else. This was not a Internet entrepreneur after a big exit. This was something else entirely.

There aren’t many who understand the Internet like Chris. And I’m not talking about the technical architecture (although he understands that pretty well). I am talking about the social architecture of the Internet. I am talking about what people do on the Internet and why. He’s seen the belly of the beast. He’s lived in it. And he’s come out the other side with his soul and his spirit intact. That is a massive accomplishment that dwarfs whatever financial return he made on the sale.

I am not sure I’ve ever been prouder of someone I’ve worked with to be honest.

Some Thoughts On Labor On Labor Day

When one looks back over the history of the development of the modern economy from the agricultural age, to the industrial age, to the information age, the development of a strong labor movement has to be one of the signature events. Capitalism, taken to its excesses, does not allocate economic value fairly to all participants in the economic system. The workers, slaving away to build the railroad, the skyscraper, etc, provide real and substantial value to the overall system and yet, because they are commodified and interchangeable parts, they don’t always get their fair share of the economic value they help to create. So the labor movement provides the market power that each worker individually cannot provide.

The emergence of the middle class in the developed world in the 19th and 20th centuries has as much to do with the emergence of a labor movement as it has to do with anything. And a growing middle class in turn drove economic development as the obtained earning power was spent on needs like homes, cars, education, etc.

I am a fan of the idea that labor needs a mechanism to obtain market power as a counterbalance to the excesses of markets and capitalism. I think we can look back and see all the good that has come from a strong labor movement in the US over the past 150 years.

However, like all bureaucratic institutions, the “Union” mechanism appears anachronistic sitting here in the second decade of the 21st century. We are witnessing the sustained unwinding of 19th and 20th century institutions that were built at a time when transaction and communications costs were high and the overhead of bureaucracy and institutional inertia were costs that were unavoidable.

One has to think “if I were constructing a labor movement from scratch in 2015, how would I do it?”  My colleague Nick Grossman coined the term “Union 2.0” inside our firm to talk about all the organizing tools coming to market to assist workers in the “gig economy.” But I think Union 2.0 is way bigger than the gig economy. The NY Times has a piece today on workers in a carwash in Santa Fe organizing outside of the traditional union system. One can imagine leveraging technology, communications, and marketplaces to allow such a thing on a much larger scale.

I don’t know how much the traditional union system taxes workers to provide the market power they need. But if its like any other hierarchical system that we are seeing replaced by networks and markets, the take rates are in the 20-40% range and could be lowered to sub 5% with technology.

That’s a big deal. And I suspect we will see just that happen in my lifetime. I sure hope so.