Posts from entrepreneurship

Ch-ch-ch-ch-changes

Ch-ch-ch-ch-changes, Turn and face the strange  David Bowie

Just this week I’ve been on the receiving end of a half dozen of those emails. They start with the news that a valued colleague has made the decision to move on. It goes on to thank everyone for a wonderful experience and ends with best wishes.

It’s that time of year. Year end bonuses have been paid. Quotas have been earned. Options have vested. And so people are moving on. Or arriving.

I grew up an army brat. Every spring my dad would come home from work and tell us where we were moving to that summer. I didn’t know that people lived any other way. Each fall I’d find myself in a new school, facing the strange.

So I’m a fan of changes. I crave them. And so when I get one of those emails, I’m happy for the person and hopeful that they will find new challenges and new colleagues and friends in their next endeavor.

But what about the company that is being left behind? Well every departure is an opportunity to rethink the role and the organization. You can’t find an exact replica of the person who has left. But you can find a person who will bring different things. You can split the role in two. Or you can even choose to eliminate it.

My advice to the leaders of our portfolio companies is to embrace change and the possibilities it brings. And, even more importantly, I advise leaders to be open and transparent about the change and how it opens up opportunities for the organization.

The thing I caution against is the tendency to get upset at departures and departing employees. I’ve seen leaders take the mob boss approach of “your are dead to me now” with departing employees. The better approach, which I think is a hallmark of great companies, is the idea that departing employees who leave on great terms are roving ambassadors for your organization. After all, you never know when you are going to come across someone again in business. And it might be a situation where you need something from them.

It sucks to lose a valued colleague or employee or boss. It creates anxiety in the organization about what is going to happen next. But if you are working in or leading a startup you signed up for a boatload of change. Accept it. Embrace it. Make it work for you. Because you can’t make it go away.

The Co-Founder Bootcamp

Co-founder stress and strain is one of the most under appreciated of all the startup challenges. If you don’t have a co-founder, well then you have other challenges, namely having to do it all on your own. But if you do have a co-founder or two or three, I would imagine that figuring out how to get along, stay aligned, communicate honestly and openly, and not drive each other crazy is a big challenge. I’ve seen it so many times. And co-founders don’t like to talk about it because they are afraid that their issues will freak out everyone else; their employees, their investors, etc. That’s why its among the least discussed and under appreciated of all of the startup challenges.

My friend and former partner Jerry Colonna and his colleagues are out to change that. In their CEO coaching work, they come across this co-founder stress issue very frequently. And so they have designed a four day Co-Founder Bootcamp to attack the issue head on. The next one is the first weekend in March.

A concern that I’ve heard from founders is “how are we going to afford $9k per person to do this?”  That’s a great question. My answer is the company should pay for it if it can. And if your investors aren’t in favor of you making this investment in the partnership that drives the business, then they don’t have their priorities straight. Getting the co-founders working right will go a long way to getting the company going right.

If you and your co-founder(s) are struggling, consider four days in the mountains in Colorado in early March with a team of people who can help you work out the kinks in the relationship. It can be a game changer for your company.

What Is Going To Happen In 2016

It’s easier to predict the medium to long term future. We will be able to tell our cars to take us home after a late night of new year’s partying within a decade. I sat next to a life sciences investor at a dinner a couple months ago who told me cancer will be a curable disease within the next decade. As amazing as these things sound, they are coming and soon.

But what will happen this year that we are now in? That’s a bit trickier. But I will take some shots this morning.

  1. Oculus will finally ship the Rift in 2016. Games and other VR apps for the Rift will be released. We just learned that the Touch controller won’t ship with the Rift and is delayed until later in 2016. I believe the initial commercial versions of Oculus technology will underwhelm. The technology has been so hyped and it is hard to live up to that. Games will be the strongest early use case, but not everyone is going to want to put on a headset to play a game. I think VR will only reach its true potential when they figure out how to deploy it in a more natural way.
  2. We will see a new form of wearables take off in 2016. The wrist is not the only place we might want to wear a computer on our bodies. If I had to guess, I would bet on something we wear in or on our ears.
  3. One of the big four will falter in 2016. My guess is Apple. They did not have a great year in 2015 and I’m thinking that it will get worse in 2016.
  4. The FAA regulations on the commercial drone industry will turn out to be a boon for the drone sector, legitimizing drone flights for all sorts of use cases and establishing clear rules for what is acceptable and what is not.
  5. The trend towards publishing inside of social networks (Facebook being the most popular one) will go badly for a number of high profile publishers who won’t be able to monetize as effectively inside social networks and there will be at least one high profile victim of this strategy who will go under as a result.
  6. Time Warner will spin off its HBO business to create a direct competitor to Netflix and the independent HBO will trade at a higher market cap than the entire Time Warner business did pre spinoff.
  7. Bitcoin finally finds a killer app with the emergence of Open Bazaar protocol powered zero take rate marketplaces. (note that OB1, an open bazaar powered service, is a USV portfolio company).
  8. Slack will become so pervasive inside of enterprises that spam will become a problem and third party Slack spam filters will emerge. At the same time, the Slack platform will take off and building Slack bots will become the next big thing in enterprise software.
  9. Donald Trump will be the Republican nominee and he will attack the tech sector for its support of immigrant labor. As a result the tech sector will line up behind Hillary Clinton who will be elected the first woman President.
  10. Markdown mania will hit the venture capital sector as VC firms follow Fidelity’s lead and start aggressively taking down the valuations in their portfolios. Crunchbase will start capturing this valuation data and will become a de-facto “yahoo finance” for the startup sector. Employees will realize their options are underwater and will start leaving tech startups in droves.

Some of these predictions border on the ridiculous and that is somewhat intentional. I think there is an element of truth (or at least possibility) in all of them. And I will come back to this list a year from now and review the results.

Best wishes to everyone for a happy and healthy 2016.

What Happened In 2015

Last year in my What Just Happened post, I said:

the social media phase of the Internet ended

I think we can go further than that now and say that sometime in the past year or two the consumer internet/social/mobile gold rush ended.

Look  at the top 25 apps in the US:

top 25 apps

The top 6 mobile apps and 8 of the top 9 are owned by Facebook and Google. 10 of the top 12 mobile apps are owned by Apple, Facebook, and Google.

There isn’t a single “startup” on that list and the youngest company on that list is Snapchat which is now over four years old.

We are now well into a consolidation phase where the strong are getting stronger and it is harder than ever to build a large consumer user base. It is reminiscent of the late 80s/early 90s after Windows emerged as the dominant desktop environment and Microsoft started to use that dominant market position to move up the stack and take share in all of the important application categories. Apple and Google are doing that now in mobile, along with Facebook which figured out how to be as critical on your phone as your operating system.

I am certain that something will come along, like the Internet did in the mid 90s, to bust up this oligopoly (which is way better than a monopoly). But it is not yet clear what that thing is.

2015 saw some of the candidates for the next big thing underwhelm. VR is having a hard time getting out of the gates. Wearables and IoT have yet to go mainstream. Bitcoin and the Blockchain have yet to give us a killer app. AI/machine learning has great potential but also gives incumbents with large data sets (Facebook and Google) scale advantages over newcomers.

The most exciting things that have happened in tech in 2015 are happening in verticals like transportation, hospitality, education, healthcare, and maybe more than anything else, finance, where the lessons and playbooks of the consumer gold rush are being used with great effectiveness to disrupt incumbents and shake up industries.

The same is true of the enterprise which also had a great year in 2015. Slack, and Dropbox before it, shows how powerful a consumerish approach to the enterprise can be. But there aren’t many broad horizontal plays in the enterprise and verticals seems to be where most of the action was in 2015.

I’m hopeful that 2015 will also go down as the year we buried the Unicorn. The whole notion that getting a billion dollar price tag on your company was something necessary to matter, to be able to recruit, to be able to get press, etc, etc, is worshiping a false god. And we all know what happens to those who do that.

As I look back over 2014 and 2015, I feel like these two years were an inflection point, where the underlying fundamentals of opportunity in tech slowed down but the capital rushing to get invested in tech did not. That resulted in the Unicorn phase, which if it indeed is over, will be followed by an unwinding phase where the capital flows will need to line up more tightly to the opportunity curve.

I’m now moving into “What Will Happen” which is for tomorrow, so I will end this post now by saying goodbye to 2015 and hopefully to much of the nonsense that came with it.

I did not touch on the many important things that happened outside of tech in 2015, like the rise of terrorism in the western world, and the reaction of the body politic to it, particularly here in the US with the 2016 Presidential campaign getting into full swing. That certainly touches the world of tech and will touch it even more in the future. Again, something to talk about tomorrow.

I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

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