Fun Friday: Airbnb vs Hotel

The Gotham Gal and I have been on two weeks of overseas travel. We’ve been in four hotels and one apartment over that time. And I must say the apartment is much more relaxing than the hotels.

Which leads me to the question of where folks like to stay when they travel. In the title of this post I called it Airbnb vs Hotel, but what I really mean is do you like to stay in someone’s apartment/home or in a hotel? The former category could include VRBO, Homeaway, Airbnb, a friend’s apartment, or something else.

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. Indeed.com 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 Indeed.com, 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.

Google Photos Magic

The new Google Photos is a much needed improvement over the prior version. My favorite feature is what I call “magic” but they call it something else. Every once in a while I will get a notification that Google has created a new enhanced version of a photo I took and when I click on it, the photo is much improved.

But yesterday, they took this magic to another level.

We arrived in Vienna late in the day, checked into our room, I opened the door to what looked like a balcony, it was, I stepped out and shot three pictures of our view. That was that.

A few minutes later I got a notification that Google had enhanced the photos and when I clicked on it, Google had stitched all three into this panorama.

panorama

Now there is nothing special about stitching three photos together to make a panorama. That technology has been around for years.

What is special is that a machine decided that my three photos were suitable for making a panorama and did it for me.

In case you are curious, here are the three photos I took.

shot 1shot 3shot 2

That green roofed building is the Opera House. We are going to see an Opera there tonight. It’s not our normal thing to go to Opera but we figured it would be a nice thing to do in Vienna.

Technology In Istanbul

The Gotham Gal and I are winding up a four day weekend in Istanbul. She likes to blog about the places we go and things we do so if you want to read about all that visit her blog. I expect the posts on her blog will be all about Istanbul for the next few days.

There is something about the uptake of technology in Turkey that is somewhat unique. Facebook blew up in Turkey fairly early in its international phase. Foursquare’s Swarm is so popular in Turkey that you would think the product was started here. We’ve seen similar stories in other USV portfolio companies and also companies that have pitched us. So one of the things I’ve been looking at while we’ve been here are clues to the behaviors that make this happen.

The most obvious thing you see is the almost total obsession with mobile phones. Everyone has one and everyone is using them. You might think using mobile phones during meals or conversations is rampant in the US, but in Turkey it is way more rampant. It is clearly the social norm to be on your phone at the same time you are hanging out with other people.

It also seems that the phones are cheap and there also seem to be a number of wireless carriers active in the market. We got good data service everywhere we went in Istanbul. The speeds were great and the data was reliable and abundant. Phones and prepaid cards are sold everywhere. I haven’t looked deeply at any reports on this but on the surface it seems that the wireless industry (carriers and handsets) have done a good job of competing vigorously and bringing price points down and service quality up. Maybe the US could learn a thing or two from Turkey.

We also found wifi to be offered in most venues in Istanbul. I have been using WifiMap (which I blogged about a few weeks ago) and you can get wifi in almost every place you walk into around town. So for people on mobile data plans who want to offload to wifi when possible, Istanbul is a good place to do that.

Turkey also seems economically quite vibrant so most people apparently have the means to afford the basics (phone and mobile data) and yet they are not developed enough that they made massive investments in the last generation internet infrastructure (desktops, laptops, wired internet, etc). So it’s a place where social, mobile, local, messaging can take off as well as anywhere in the word and doesn’t necessarily have other older solutions to these needs.

Here is a slide I found on the Internet that is from early 2014:

turkey slide

Mobile penetration in Turkey was 84% in early 2014, likely higher now, and that is about the world average. But given the size of Turkey, the total mobile population was 68mm in early 2014, as big as many european countries.

So Turkey is a place where technology, particularly mobile, has taken off. It’s a big market and one that seems to adopt things early on. It’s a good market to pay attention to when you think about international strategies and it is also likely a good place to start companies that focus on mobile products and services.

The Coming Change In Monetary Policy

Janet Yellen, the Chairman of the Federal Reserve, has been signaling to the financial markets that the Fed is going to raise rates towards the end of the year. If this happens, it will be the first time in nine years that the Fed has raised rates in the US. And it will be the end of an extraordinary period of near zero interest rates that resulted from the financial crisis of 2008. The near zero interest rate policy allowed banks and brokerage firms to replenish their balance sheets, work off their book of toxic assets, and regain their health. It also allowed the US economy to rebound from the effects of the financial crisis, it allowed homeowners to hold onto homes through difficult financial times, and it allowed businesses to borrow and raise capital at very attractive rates.

A side effect of this period of cheap money is that the tech sector, venture capital, and startups have enjoyed a valuation environment that has been extraordinarily friendly. I wrote about this in March of last year and said:

It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime.

Yellen has also been signaling that the Fed does not plan to make rapid and large increases in rates. So the valuation environment in the tech and startup sector may not change quickly. But it will change. And so will the valuation environment in the stock market. This is because valuation multiples are inversely correlated to interest rates. When rates rise, valuation multiples fall.

So, I am going to watch the Fed’s moves and the market reaction with interest. This may have an impact on the venture capital market and startup valuations so it’s not something to ignore.

Video Of The Week: Gotham Gal at Columbia

Last month the Gotham Gal gave a keynote at the Columbia University’s #StartupColumbia Festival. Here it is.

It’s also our 28th wedding anniversary today. We are celebrating it in Istanbul. Off to the Grand Bazaar to work on our negotiating skills.

Feature Friday: Instant Exchange

Our portfolio company Coinbase launched a new feature this week, that when combined with their local currency wallets, basically creates a global Venmo or Mpesa.

It is called Instant Exchange and here is how it works:

Coinbase offers  US Dollar, Euro, or Pound accounts. You can keep your funds in your local currency on Coinbase. They have had this feature for some time.

So let’s say that I owe a friend in Berlin money for dinner last night.

I could go to my US Dollar Coinbase account, do an Instant Exchange Send which takes dollars out of my account and sends bitcoins to my friend, he does an Instant Exchange Receive in his Coinbase account which instantly converts them to euros and then keeps those funds in his Coinbase Euro account or transfers them out to his bank account. Coinbase will apply its standard exchange fees to the Instant Exchange transactions.

I believe this kind of thing will be incredibly useful, especially in the Coinbase mobile app. Sending money to and receiving money from friends around the world using Bitcoin as the “rails” for money transfer no longer needs to expose either side to exchange rate risk.

As Coinbase expands its business around the world, and offers Instant Exchange and local currency accounts in every part of the world, it can build a global Venmo or Mpesa using Bitcoin as the underlying money transfer protocol.

The Blank Screen

I was at dinner last night with some entrepreneurs and VCs in Berlin and we got talking about my ritual of blogging every day. I told them that many days I stare at the blank screen and think “ugh, what am I going to write about today.”

blank screen 2

They asked if there was any correlation to knowing what I am going to write about and the quality of the post. I told them that I don’t think so. The best posts come out in real time and often they start with me staring at the blank screen. Same with the worst posts.

Posting every day isn’t easy for a host of reasons but for me the hardest is that much of what I work on every day is off limits. I wake up thinking about a drama unfolding in one of our portfolio companies and I can’t blog about that. I wake up thinking about a new product one of our portfolio companies is going to launch and I can’t blog about that. I wake up thinking about a neat company we just met and I mostly can’t blog about that.

So on a typical morning, I run through four or five ideas, tossing each out for a variety of reasons, before settling on something, and then I start writing and I go from there. I enjoy the real time nature of this approach to writing. I often don’t know what the gist of the post is going to be until I write that last line and hit publish.

Sometimes this process produces great insights for me and possibly others. Sometimes it produces garbage. But I’ve come to realize that the daily post, and its quality or lack thereof, is not really the thing. It is the ritual, the practice, the frequency, the habit, and the discipline that matters most to me. And, I would suspect, the same is true of the readers and commenters who frequent this blog.

Steph

A few years ago, my friend Jonathan Klein asked me to come speak to a strategy offsite for his company Getty Images. A few days later, I got a thank you note and he asked me to pick any image from their website for a thank you gift.

I picked this one and he was shocked. He asked me, “of all the famous and important images on our website, why would you pick that one?” I told him this story.

On March 23, 2008, our beloved Georgetown was playing in the NCAA regional finals against Davidson. My son Josh and I were certain this was going to be Georgetown’s year. We had big Roy Hibbert in the paint and a bunch of scoring guards and a tenacious defense. We sat down for the big game expecting a win and a trip to the final four.

Instead we got our first glimpse of Steph Curry. He pretty much singlehandedly beat Georgetown that game and by the second half Josh and I were rooting for him. He was that good and that fun to watch. We knew then that he was going to be something special.

Then in 2009, we watched with horror as the Warriors picked Steph with the 7th pick when we were sure our Knicks were going to get him with the 8th pick. MSG would be a different place with Steph on the floor every night in a Knicks uniform.

I missed last night’s game. We are in Berlin and I had to be up early for a board meeting. So when I got up and checked my phone and saw that Steph and his Warriors teammates had won game six and the NBA title, I was pleased.

LeBron may be the best player in the game right now, and he showed why in this series, but Steph and KD are my favorites. They play the game with an elegance and beauty that I appreciate.

I am really happy that Steph got his ring last night. Josh and I saw it coming 7 years ago when we first saw him in action.