Posts from April 2011

Sponsor A Golfer On The Pro Tour

Our best investments have emergent use cases that the founders never considered when they launched them. Kickstarter is showing that in spades right now. When Perry initially imagined Kickstarter almost ten years ago now as a way to raise money for a music festival, he certainly never thought a golf pro would use Kickstarter to raise the sponsorship money he needs to play a season on the pro tour. And yet that is exactly what is happening right now.

I just contributed to Mike D's campaign to raise enough money to spend a year playing professional golf (and make a documentary about it). The rewards are particularly interesting and include golf lessons, a round with Mike D, and even an entire corporate outing. In a sense, Mike is taking the classic big brand sponsorship model and crowdsourcing it with Kickstarter. Awesome.


Disappearing Into The Fire Workshop

One of my all time favorite blog posts about entrepreneurship is the Disappearing Into The Fire post written by my former partner Jerry Colonna. If you haven't read it, do yourself a favor and go read it.

Jerry has been a highly successful VC, then disappeared into the fire himself, and emerged as a fantastic CEO coach who I recommend so much he can't take any more clients right now. So he's responding to that problem by cloning himself. Well actually not quite.

Jerry is starting to do workshops so he can help more entrepreneurs and CEOs. And on Saturday May 14th at General Assembly, he's doing a Disappearing Into The Fire workshop from 10am to 4pm ($200 for the session). I am sure this will sell out quickly so if you are breathing a little fast these days, try six hours with Jerry and a bunch of fellow entrepreneurs. I am sure it will be very helpful. Eventbrite ticket is here.

#VC & Technology

Margins (continued)

Last week in MBA Mondays we talked about margins, which I defined as:

Margin is the amount of money you make on each incremental sale or unit of revenue before factoring in the "fixed costs" of your business.

That led Amish Shah to leave me this comment:

While you focused this post on margin from "incremental sale" (gross margin), I think it's important to acknowledge that there are other margins in the business. And they shouldn't be ignored.

Operating Margin, for example, is another one I like to look at (and you have previously mentioned it is the most interesting line in a P&L). There's a lot of info in there… Salesforce's gross margin looks great at 80% but operating margin is a lot less glamorous at 0-10%, depending on which quarter you look at.

As Amish points out there are other kinds of margins in a business. I like to focus on "gross margin" because I think it tells you a lot about the scalability of a business (as I detailed in last week's post). But operating margin which is gross margin less all the operating costs is another really important metric.

There are relatively low gross margin business (like Apple which has gross margings of 38.5%) which have relatively high operating margins (Apple has operating margins of 29.2%). And as Amish points out, you can have a relatively high gross margin business like Salesforce have relatively low operating margins.

It is important to pay attention to these metrics. You might have two businesses with identical operating margins but one has high gross margins and high operating costs (like Salesforce) and the other has low gross margins and low operating costs (like Apple). The businesses will be very different to manage and will require different teams, strategies, and financing requirements.

#MBA Mondays

Recycling Capital

The Gotham Gal and I have been fortunate to accumulate signficant capital over the past fifteen years. And the vast majority of it is invested in startups. We get distributions from a sale of one company and within months that capital (after taxes) is invested in more startups (including non profit startups). This has caused a few liquidity issues over the years. The Gotham Gal is always saying that we'll set aside a bunch of cash next time and then we go and do the same thing. I guess we can't help ourselves. Investing in startups is more appealing to us than leaving cash in the bank or putting capital into the bond market or the stock market.

When I think about the history of silicon valley and startup ecosystems in general, this is the pattern I see. Entrepreneurs, angel investors, and VCs take the profits from one deal and turn around an invest in more deals. They recycle capital back into the startup economy. If you look at silicon valley right now, particularly in the early stage/angel/angel list market, this is what is going on. Early employees of Google, Facebook, and a bunch of other succcessful tech companies have taken a considerable part of their paydays and become angels. And it makes sense. They work in the startup economy. They understand the technology, the market, and the gestalt of startup life. They are allocating capital to the startup ecosystem.

I bumped into a friend last week who sold his company a few years ago. He spent the required time with the buyer and then left. He's been spending his time since starting a family with his wife and investing in startups. He told me he's not sure he'll make a lot of money angel investing, but he's hoping to at least breakeven. So he's not doing it soley for the returns. He's doing it to stay connected to startups and support other entrepreneurs. I am certain he's not alone in his approach to angel investing.

I've been told that the US venture capital and startup system is the envy of the world. If so, then I think the rest of the world should pay as much attention to the way entrepreneurs recycle their capital as anything else. Yes, the institutional venture capital system is a big part of the success of our tech startup economy. But it starts with entrepreneurs and angels. Most VCs don't supply capital in the first year or so of a company's life. So startups need to get their initial capital elsewhere and that early money is where the real special sauce is. Think about Andy Bechtolsheim's $100k check to Google or Peter Theil, Mark Pincus, Reid Hoffman, and Sean Parker's early angel investment in Facebook. These entrepreneurs were recycling their capital back into the startup economy. Yes, those investments have paid off bigtime. But they also supplied capital when the company needed it the most.

The Gotham Gal and I allocate most of our capital to startups for many reasons. We do think we are going to generate good returns over the long run doing this. We have generated almost all of our capital over the years by investing in startups. But we also do it for the psychic benefits of investing in startups. When you back an entrepreneur early on, it is like making a large gift to a good cause. It feels really good. And when that entrepreneur uses your early support to create something important and valuable, it feels even better. You can't get that kind of feeling earning interest from a bank or trading stocks and bonds. And that's a good thing. Because capital formation for entrepreneurs and startups is the key to a healthy economy. And for all the problems we face in our country, we have a startup financing culture that is the envy of the world. And I'm really happy and fortunate to be part of it.

#VC & Technology

Mark Suster Interviews The Gotham Gal

joanne wilson, mark suster, the gotham gal

I talk a lot about the Gotham Gal on this blog but most members of this community haven't had the opportunity to see her in action. She spent last week in LA and dropped in on This Week In Venture Capital and had an hourlong chat with our friend Mark Suster. They covered a lot of ground, including sales as a key ingredient to entrepreneurship, women in tech, and what it was like to work with Jason Calacanis. It's long, just over an hour, and the audio isn't as loud as I'd like. But if you've got an hour to kill this weekend and are curious about my better half, its a good one.

#Random Posts


We arrived in Palm Springs really late last night and I woke up too early (I always have trouble adjusting to new time zones). So I got up and went out looking for a good espresso. I'm not a fan of Starbucks coffee and since I only have one cup of coffee a day, I try to make it a really good one.

So I pulled out my phone and launched Foursquare and selected the Explore tab and typed in espresso. It looks sort of like this (I pulled this image off the internet):


I was directed to a place called Just Java where I was able to get a very nice macchiato.

I don't use the explore tab when I'm in NYC because I know where I want to go. But whenever I find myself in a new place looking for something in particular, I've been using the explore tab in Foursquare. And it works pretty well.

And as I checkin more, my friends checkin more, and the places I like to frequent get more checkins, the explore tab will get better and better. This is the power of social metadata at work.


How To Allocate Founder and Employee Equity

Joel Spolsky, co-founder and CEO of our portfolio company Stack Exchange, posted an excellent answer to the question in the title of this post on the Stack site OnStartups.

I'm not going to reblog the entire answer here. I'd encourage you to go read Joel's answer. However, I am going to highlight some of the most important points from Joel's post:

  • Fairness, and the perception of fairness, is much more valuable than owning a large stake.
  • Before factoring in dilution from investors, the founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer. [go read Joel's answer to understand how he sets up these layers]
  • It never makes sense to give anyone equity without vesting.
  • Ideas are pretty much worthless.
  • Nobody who is not working full time counts as a founder.

The thing I love the most about Joel's post is he throws darts into a lot of conventional wisdom about founder equity allocation. I particularly like his notion that the person with the idea should not command a premium on equity allocation.

What Joel's post makes clear is that founder equity should be for services to be rendered in the tough initial year(s) when the risk is highest and capital (ie cash comp) is nonexistent. It is not for coming up with the idea, writing a patent, or going without a salary.

And I second with emphasis the focus on fairness. Founding teams that allocate the founders equity fairly stay together a lot more than founding teams where one founder has a much better deal than the others. The same is true of venture capital firms. The most stable venture partnerships are those where the partners share in the carry equally or near equally. At the end of the day, this is as much about respect as it is about money. And when people feel disrespected, they are going to leave at some point.

Great post by Joel. I'm looking forward to the disqussion on this one.

#VC & Technology

The Internet Radio "Super Demographic"

Our portfolio company TargetSpot recently conducted two large research studies on the Internet Radio listener. For those that don't know, TargetSpot is the leading third party advertising network for streaming audio.

I've been an Internet Radio/Streaming Audio listener for over a decade and have always thought that Internet Radio listeners represented an ideal demographic for marketers to reach and influence. The TargetSpot research confirms that and then some. Internet Radio listeners are a "super demographic" and marketers should pay attention to this research and start creating programs to reach them.

Here are some of the findings:

– 39% of the US population listens to Internet Radio regularly

– Internet Radio listeners are affluent and influential

– 80% of Internet Radio listeners spend between 1 & 3 hours per day listening

– 45% of Internet Radio listeners listen on a phone and 14% listen on a tablet

– 73% change stations throughout the day. Internet Radio listeners are not exclusive to any one service

– 56% listen to Internet Radio while shopping

– running an Internet Radio campaign in parallel with a broadcast radio campaign increases response 3.5x

– running an Internet Radio campaign in parallel with an internet banner campaign increases response 2x

The way I see it (confirmed by this research) Internet Radio listeners are the leading edge/cutting edge demographic that try out new things first, recommend them to their friends, and provide the word of mouth mojo marketers are looking for. And they are available to be reached on average a couple hours every day. That's a super demographic to market to.



Margin or margins is a word you hear a lot in business. I want to talk about what it means and why it is important today on MBA Mondays. I did talk about margins once before, in the context of the income statement, back when we were walking through the basic financial statements. But I'd like to talk about the concept outside a strict accounting definition.

Margin is the amount of money you make on each incremental sale or unit of revenue before factoring in the "fixed costs" of your business. Fixed costs would be things like the rent on your office, your administrative team, and the people who do your accounting/bookeeping work for you. The key concept to wrap your head around is some costs rise and fall based on how much revenue you have and some costs are fixed and are the "cost of keeping the doors open."

I have a friend who runs a pickles business called Ricks Picks. His pickles are awesome, but I digress. If you buy a jar of Hotties (spicy sriracha-habanero pickles) from Rick, you'll pay $7.99. That jar of pickles costs him between $4 and $5 to make and send to you. That includes buying local cucumbers from farmers, making the spicy brine, and cooking up the pickles in their industrial kitchen. That includes shipping the pickles to Rick's warehouse and then shipping them to you. Let's say all of that costs $4.50 per jar, then Rick's profit on your pickle purchase is $3.49 per jar. Margin is often expressed in percentage terms, so $3.49/$7.99 is a 43.7% margin.

Notice that I didn't include the cost of Rick's time, his office, the team in his office, the marketing efforts, the cost of his website, his accountants, and a bunch of other costs in that calculation. That is because he has to spend all of this kind of money no matter how many pickles he sells every year.

Now let's think about four different businesses that are well known in the tech business; Apple's iPad business, Google's search business, Amazon's retail business, and Salesforce's SAAS business. Each of these businesses has a different margin structure.

Apple has significant costs associated with manufacturing and selling each iPad. This article in the EE Times suggests that the "bill of materials" (often called the BOM) of parts that are used to make the iPad2 are $270. You can buy an iPad2 starting at $499. If you just subtract $270 from $499, you get $222 of margin on every iPad2. I'm not trying to be accurate here. Apple's margins on the iPad2 could be a lot higher or a lot lower than $222/iPad. I'm just trying to point out that when you make a hardware product, your margins will be impacted by the material costs of making a physical product. Apple's reported gross margins in its most recent quarter were 38.5%.

Amazon typically operates as a traditional retailer in their core e-commerce business. This Oxo kitchen tools set costs $99.99 at Amazon. Amazon purchases that item in bulk from Oxo (or a distributor) for something less. Maybe $60 or $70 per unit. So they have a margin of $30 or $40 per unit. Amazon is not a manufacturer. Oxo is. So Amazon's cost is the price at which the manufacturer is willing to sell it the item at wholesale. Amazon's reported gross margins in its most recent quarter were 20%.

Salesforce is a hosted software company. When you become a customer, they don't have to make anything new to service you. They just open up additional resources on one of their servers and you are good to go. They have very high fixed costs associated with building, maintaining, servicing, and selling their software, but the cost of actually delivering an additional unit of revenue is very low. Salesforce's reported gross margins in its most recent quarter were almost 80%.

Google's search business is a media business with aspects of the hosted software model. Providing search queries to consumers is a lot like salesforce's hosted software business. Each additional search query doesn't cost Google very much. They need to add more servers over time to handle more queries. The revenue those queries generate comes from the adwords paid search service. Some, but not all of that revenue comes self service. Some comes from a salesforce that goes out and sells keywords to large customers. But like the hosted software business, paid search is a high margin business. Google's reported gross margins in its most recent quarter were 65%.

Now that we've gone through a bunch of examples of businesses with different kinds of margins, let's talk about why margins matter. In general higher margin businesses are easier businesses to grow and manage. Lower margin businesses are often very difficult to scale, both operationally and financially.

If you think about my friend Rick, he has to go out and spend a lot of money every summer and fall when cucumbers, beans, beets, and okra are less expensive, higher quality, and fresh from the local farm, make and jar the pickles and move them into his warehouse. That is cash out the door. Then over the rest of the year, he sells the product, gradually getting back the money he laid out plus his margin. As his business grows, that summer/fall production runs costs more and more. And the dollar value of inventory in his warehouse grows. He has to come up with some way to pay for that production. This is called working capital and in lower margin businesses, working capital isssues loom large and are an impediment to growth.

 Let's look at a hosted software business in the mold of They spend money upfront to build and host the software but then as their business scales, the cost of "manufacturing their product" is relatively low. They can grow rapidly without having to come up with huge amounts of capital to finance that growth.

When you think about your business; starting it, building it, scaling it, and financing it, pay a lot of attention to your margins. Understand what kind of business you operate and where it fits in the margin universe. Understand how those margins will impact your operations and your financing needs. There is nothing worse than waking up mid-course and realizing you have a lower margin business than you thought that is more capital intensive than you thought and you are caught without a plan to deal with these issues. I've seen that kind of thing kill more than a few companies.

#MBA Mondays