Posts from entrepreneurship

Building Enterprise Networks Top Down

Most people that are in the VC and startup sector know that USV likes to invest in networks. And most of the networks we invest in are consumer facing networks of people. Peer to peer services, if you will. The list is long and full of brand name consumer networks. So it would be understandable if people assumed that we do not invest in the enterprise sector. That, however, would be a wrong assumption.

We’ve been looking for enterprise networks to invest in since we got started and we are finding more and more in recent years. There is a particular type of enterprise network that we particularly like and I want to talk about that today.

Businesses, particularly large ones, build up large groups of suppliers. These suppliers can be other businesses or in some cases individuals. And these suppliers also supply other businesses. The totally of this ecosystem of businesses and their suppliers is a large network and there are many businesses that are built up around making these networks work more efficiently. And these businesses benefit from network effects.

I am going to talk about three of our portfolio companies that do this as a way to demonstrate how this model works.

C2FO is a network of businesses and their suppliers that solves a working capital problem for the suppliers and provides a better return on capital to large enterprises. Here is how it works: C2FO has a sales force that calls on large enterprises and shows them how they can use their capital to earn a better return while solving a working capital problem for their suppliers. They bring these large enterprises onto their platform and, using C2FO, they recruit their supplier base onto the platform. They also bring all the accounts payable for the large enterprise onto the platform. Once the network and the payables are on the platform, the suppliers can bid for accelerated payment of their receivables. When these bids are accepted by the large enterprise, the suppliers get their cash more quickly and the large enterprise earns a return on the form of a discount on their accounts payable. C2FO takes a small transaction fee for facilitating this market.

Work Market is a network of businesses and their freelance workforce. Work Market’s salesforce calls on these large enterprises and explains how they can manage their freelance workforce directly and more efficiently. These enterprises come onto the Work Market platform and then, using Work Market, invite all of their freelance workers onto the platform. They then issue all of their freelance work orders on the Work Market system, manage the work, and pay for the work, all on Work Market. Work Market takes a transaction fee for facilitating this and many of Work Market’s customers convert to a monthly SAAS subscription once they have all of their freelance work on the platform.

Crowdrise is a network of non-profits, the events they participate in, and the people who fundraise for them. Crowdrise’s salesforce calls on these events and the large non-profits who participate in them. When a large event, like the Boston Marathon, comes onto Crowdrise, they invite all the non-profits that participate in their event onto the platform. These non-profits then invite all the individuals who raise money for them onto the platform. These events and non-profits run campaigns on Crowdrise, often tied to the big events, and Crowdrise takes a small fee for facilitating this market.

I hope you all see the similarities between these three very different companies. There are several but the one I’d like to focus on is the “they invite all the ….. onto the platform”. This recruiting function is a very powerful way to build a network from the top down. And once these networks are built, they are hard to unwind.

We don’t see many consumer networks built top down, but we do see a lot of enterprise networks built top down. And we are seeing more and more of them. It is also possible to build enterprise networks bottoms up (Dropbox is a good example of that). That’s the interesting thing about enterprise networks. You can build them top down or bottoms up. And we invest in both kinds of enterprise networks.

The top down enterprise network is a growing part of the USV portfolio. We like this approach to building an enterprise software business and it does not suffer from the “dentist office software” problem. Which is a very good thing.

Basketball, Startups, and Life

When you watch the San Antonio Spurs (or the Atlanta Hawks this season), you get a sense of a system at work on the court. There is chaos, the players are moving and cutting all over the place, and then a pass is made to the open man and an uncontested layup results. It’s like magic.

My partner Andy wrote a post about chaos and startups a few days ago that briefly touches on basketball. He talks about the Zen Master Phil Jackson:

Phil Jackson believed this too. He wrote “the road to freedom is a beautiful system.” The winningest coach in NBA history believed that his success was developing a framework for his players to guide the dozens and dozens of decisions that they have to make each game, each play. He actually believed then, that his job as a coach during games was just to watch. If he had helped the team develop the right framework, then his role would at its optimum – at decision-making time – simply to sit back and let them process.

Andy’s point is that those advising and investing in startups should do the same – help the startup team develop a framework for making decisions and then sit back and watch them do it.

One thing I know for sure is that those who advise and invest in startups cannot and should not meddle in the day to day decision making. It’s harmful and hurtful to the startup and those that lead it. So operating at a higher level, helping to set the framework for decision making and then sitting down and watching the game be played, is certainly the way to go. Of course that doesn’t mean abdicating the responsibility to have the right team on the court at the right time. Coaches do that and advisors and investors should too.

MBA Mondays Reblog: Sunk Costs

The Gotham Gal and I made a decision recently where we had a bunch of sunk costs. It reminded me of this post and I am going to reblog it today.

—————————————-

Sunk Costs are time and money (and other resources) you have already spent on a project, investment, or some other effort. They have been sunk into the effort and most likely you cannot get them back.

The important thing about sunk costs is when it comes time to make a decision about the project or investment, you should NOT factor in the sunk costs in that decision. You should treat them as gone already and make the decision based on what is in front of you in terms of costs and opportunities.

Let’s make this a bit more tangible. Let’s say you have been funding a new product effort at your company. To date, you’ve spent six months of effort, the full-time costs of three software developers, one product manager, and much of your time and your senior team’s time. Let’s say all-in, you’ve spent $300,000 on this new product. Those costs are sunk. You’ve spent them and there is no easy way to get that cash back in your bank account.

Now let’s say this product effort is troubled. You aren’t happy with the product in its current incarnation. You don’t think it will work as currently constructed and envisioned. You think you can fix it, but that will take another six months with the same team and same effort of the senior team. In making the decision about going forward or killing this effort, you should not consider the $300,000 you have already sunk into the project. You should only consider the additional $300,000 you are thinking about spending going forward. The reason is that first $300,000 has been spent whether or not you kill the project. It is immaterial to the going forward decision.

This is a hard thing to do. It is human nature to want to recover the sunk costs. We face this all the time in our business. When we have invested $500,000 or $5mm into a company, it is really easy to get into the mindset that we need to stick with the investment so we can get our money back. If we stop funding, then we write off the investment almost all of the time. If we keep putting money in, there is a chance the investment will work out and we’ll get our money back or even a return on it.

Even though I was taught about sunk costs in business school twenty-five years ago, I have had to learn this lesson the hard way. Most of the time that we make a follow-on investment defensively, to protect the capital we have already invested, that follow-on investment is marginal or outright bad. I have seen this again and again. And so we try really hard to look at every investment based on the return on the new money and not include the capital we have already invested in the decision.

This ties back to the discussion about seed investing and treating seed investments as “options.” Every investor, if they are rational, will look at the follow-on round on its own merits and not based on the capital they already have invested. But the venture capital business is a relatively small world and reputation matters as well. Those investors who make one follow-on for every ten seeds they make will get a reputation and may not see many high quality seed opportunities going forward. Our firm has followed every single seed investment we have made with another round. In most cases, those investments have been good ones. But we have made a few marginal or outright bad follow-ons. We do that for reputation value as much as anything else. We measure that value and understand that is what we are doing and we keep those reputation driven follow-ons small on purpose.

When it is time to commit additional capital to an ongoing project or investment, you need to isolate the incremental investment and assess the return on that capital investment. You should not include the costs you have already sunk into the project in your math. When you do that, you make bad investment decisions.

 

Community Ownership Of Internet Applications and Services

I kicked off the second topic of the week discussion on usv.com today with a post about community ownership of Internet applications and services.

If you want to read the post and/or join the discussion, go here and do that.

Here’s a teaser to get you interested in doing that:

With more and more web and mobile applications deriving their value mostly or completely from their user base (Facebook, Twitter, eBay, Etsy, Reddit, Kickstarter, Uber, etc, etc), there is a growing sense that the community could or should have some real ownership in these businesses.

I go on to explain a bit about why this has not happened except in very rare cases and what needs to get figured out to make it happen more frequently.

There’s a lot going on, including approaches unleashed by blockchain technology, to make this easier to do and we think this is a trend worth watching and discussing. That’s why we made it the topic of the week.

The Canvas Spindown

Our portfolio company Canvas made the decision to shutter operations early last year. But there is a bit more to entirely dissolve a company. Chris Poole, the founder of Canvas, describes the remaining work he had to do to entirely wind things down in this post.

Chris is a special person. Working with him has been such a pleasure. You get some great things from failure. One of them is my relationship with Chris.

The Reboot Podcast

A few weeks ago Jerry Colonna and I got on Skype and had a 40min chat about startups and what goes on in them. As most of you know, Jerry and I started a venture capital business together in the mid 90s and have been close friends since then. So this is a public conversation between friends, which is usually a recipe for a good discussion.

The first five minutes is some stuff about Jerry’s new business, Reboot.io. It’s worth listening to, but if you want to skip it, click on the soundwave at 5mins in and you will get to the start of our conversation.

DIY vs Delegate

I am a bad delegator and very much a do it yourselfer (DIY). It’s one of the many reasons I am certain I’d make a terrible CEO.

CEOs must delegate. At scale, they should only do three things; set the vision and strategy and continuously communicate it, recruit and retain the very best people, and keep the company funded. Everything else has to be delegated at scale.

But when you start a company, you (and your cofounders) have to do everything yourself. There is nobody to delegate things to. And hiring a bunch of people to do things like schedule your meetings, answer the phones, keep the books, review contracts, interview candidates, etc is a bad idea because it uses up money which is always in short supply at the early stage of a startup. You can, and should, see if there are service providers who are inexpensive who can help. Bookkeeping is one area where that is certainly true. Reviewing contracts and recruiting is harder to hand off to an inexpensive third party. I wish it were not.

I like it when I see a founder team that is resourceful, has range, and can do a lot of this stuff themselves. I like to see them running lean and mean and spending money on the things that really matter (product!!!!!).

But at some point they need to start delegating this stuff. And first time founders often make the mistake of waiting too long to take things off their plates. For one, they like the control and insights they get from doing things themselves. For another, they are often lean to a fault (penny wise and pound foolish).

Knowing when it is the right time to start handing things off and hiring is an art not a science. It has something to do with the availability of resources. And it has something to do with the scale of the organization. When the CEO is still scheduling her own meetings when there are over fifty employees, something is wrong. Investors can help a lot. We have pattern recognition. We can see two very similar companies (size, stage, etc) and compare how much delegation is happening in one vs the other. We can make suggestions.

One suggestion I frequently make is to find a “utility infielder” for your first business hire. This is someone who can do a lot of things well but nothing spectacularly well. This is often someone who has done this role before in a startup and likes working in companies that are between five and fifty employees. There are people who make a career out of this job. It is lucrative if you value equity over cash compensation. You can build a nice portfolio of early stage equity grants doing the “first business hire” gig for two or three years at a time and then doing it again and again.

Doing a startup is an evolution from DIY to Delegate. And timing the evolution is important. If you haven’t done it before, ask people who have for advice on this. Allocating your time (your most precious resource) is critical to the success of your business.

Broken Cap Tables

A “cap table” is a schedule of all the shares outstanding for a specific company. Here’s an MBA Mondays post I wrote back in 2011 on the subject of cap tables. If you want to know how much of a company you own, a cap table is the best way to figure that out.

Cap tables are almost always prepared and kept in spreadsheets, usually excel, but also increasingly google sheets. And, it turns out, they are often wrong.

Henry Ward is the founder and CEO of a company that is aiming to fix that called eShares. Last month USV led a Series A round in eShares and my partner John Buttrick wrote a bit about that investment today on the USV blog.

The reason I tell you this is that yesterday Henry wrote a great post about broken cap tables that everyone in the startup world should read. Here are the four big takeaway’s from Henry’s post:

  1. Most cap tables are wrong
  2. Most investors don’t track their shares
  3. Note holders are often forgotten
  4. Employees suffer most

How does Henry know this? Well part of eShares’ business is converting cap tables from spreadsheets into their cloud based application and reconciling everything to make sure it is correct. They onboard about 100 companies a month right now and they see a ton of cap tables.

Tracking everyone’s ownership in companies is a perfect application for a cloud-based network of owners and issuers. If every company used a platform like eShares, and if all these platforms talked to each other, if there was a common identity standard, then as you move from one company to another over your career, collecting equity along the way, you could access and manage all of your ownership interests in a single dashboard.

This is a service that is incredibly useful to startups and angel investors and VCs. But as Henry outlines at the end of his post, it will ultimately help employees the most. And, as we have discussed here before, employee equity is certainly more broken than cap tables are. Fixing that is a worthy mission for a startup and that is what Henry and his team intend to do.

Hashtags As Social Networks

Our portfolio company Kik launched hashtags yesterday. Kik is a mobile messenger so in Kik’s model hashtags are private or public group chats.

If I send a hashtag to a friend in Kik that says let’s chat about tonight’s knicks game at #knickskik, then that becomes a private group between me and that friend (and any others who we invite). I’ve done that so the #knickskik hashtag is now private on Kik.

But hashtags can also be public. If you have the latest version of Kik on your phone (came out yesterday), type #avckikgroup into a chat and then click on that link. Up to 50 of us can be in that group.

The cool thing about Kik is that it doesn’t use phone numbers like other messengers. It uses usernames and is not tied to your phone number or Facebook username. And so Kik, unlike other messengers, is used for both chatting with people you know (like other messengers) and people you don’t know.

That makes Kik an ideal platform for these public (and searchable) group chats. You can meet people in these public chatrooms and then take your conversations private in a one to one chat in Kik.

Ted Livingston, Kik’s founder and CEO, called this “hashtags as social networks” in a blog post yesterday.  I agree with Ted that Facebook’s model of the one network to rule them all has not really worked and that many of us are using messengers as defacto social networks. My friend Kirk told me that his wife’s family uses a group in WhatsApp like their personal family facebook feed. I think that’s the phase of social networking we are now into and so Kik’s hashtag as social network model makes a ton of sense to me.