Posts from June 2012

I'm asked this question all the time. Is it team? Is it the idea? Is it product? Is it market?

The answer is that it is all of them and most importantly it is the way they all come together in a single company. Why is this the right team to do this? Can they package their idea correctly for the market? Is the market ready for their product?

I saw this 15 second clip at the end of one of the startup stories videos and it does a good job of explaining this "the way they come together" notion.

We've talked quite a bit about the fragmentation of social media here at AVC. Blogging at WordPress, sharing photos with your friends on Facebook and with the world on Instagram, Tweeting at Twitter, Checking in on Foursquare, Pinning on Pinterest, Tumbling on Tumblr, sharing video on YouTube and audio on Soundcloud. This is where things are going.

There are many reasons for this fragmentation and we've discussed them. I think the big reasons are the move to mobile where features are delivered via an app on your home screen rather than inside some monolithic web app and the desire to curate application specific social graphs instead of one graph to rule them all. 

But regardless of why this is happening, it is happening. And so there is an opportunity to aggregate all of this activity on a single URL where followers can see the totality of a person's social activity.

Enter RebelMouse. Created by former Huffington Post CTO Paul Berry, RebelMouse launched last week in invite only mode. You can request an invite, it's not a velvet rope kind of thing.

Here's my RebelMouse:

Here are some other RebelMouse pages:

Dennis Crowley

Om Malik

Media Redefined

Reuters

Huffington Post

On the upper left of every RebelMouse page there is a link to find other pages to look at. Discovery is pretty raw at this time but there is clearly an opportunity to do a lot more with it.

Check it out.

It's feature friday and today I want to talk about our portfolio company Foursquare, which put out a completely redone app this week on iOS and Android. Blackberry is coming shortly.

I've got a few simple frameworks for thinking about things. In social media, one of my main ones is the tenet that 1% of the users will create content, 10% will curate it, and the rest will consume it.

Foursquare has, for most of its life, focused on the 1% who want to checkin to places and share those chekins and related data like tips and to dos, with their friends. They have close to 10mm people who do that actively. That's a lot if you think about it in the context of the 1% rule.

About six months ago, Foursquare launched explore which was a consumption experience. Users who don't want to checkin can get value by exploring cities using the data created by the 1% who are checking in.

But what about the 10%? How do users curate Foursquare without checking in?

Enter the like button. It seems so trivial. It seems like every social app I use has a like button. But in the past 24 hours, I have gotten something like a dozen likes on the four or five checkins I have done since the new app launched. That's new meta data that is being created on my checkins by other people. It's a way for people who will use the app largely for consumption to create important data signals without having to checkin.

Sometimes it is the littlest things that are the biggest things. In the new Foursquare app, which is really really good, I think it is the like button that will be the biggest game changer.

1996 was the year that my career took off, the year that NYC's startup community took off, and the year that the commercial internet took off. It was a big year and an inflection point in my life.

It was also the year that Jerry Colonna and I started Flatiron Partners. We got that firm off the ground very quickly and very unconventionally. I had been working closely with SOFTBANK Corporation of Japan on an investment in a company called FreeLoader, founded by Mark Pincus and Sunil Paul. When we sold FreeLoader, SOFTBANK approached me about joining their investment team in the US.

I convinced SOFTBANK that there was going to be a lot of Internet startup activity in NYC and that backing me and Jerry to start a firm in NYC was a good idea. Jerry thought we might be better off with two backers instead of one (he was right), and we went to Chase Bank and got them to join the project. That's how Flatiron came to be. SOFTBANK, Chase, Jerry and me were the four partners in Flatiron when we got started.

SOFTBANK was just coming onto the scene in the US. Their founder and CEO Masayoshi Son was on the cover of Business Week in the summer of 1996. That same week the SOFTBANK Ventures team in the US did an offsite in Boston. We were walking through Harvard Square coming back from dinner and we saw Masa on the cover of Business Week in the newstand in the square.

I am not sure who took this picture, but it captures all of this and more for me.

From left to right, you have Rich Levandov, me, Gary Rieschel, Charley Lax (up front), Jerry Colonna (in the back), and Brad Feld.

Every one of these folks is still active in the startup world.

Rich is a managing partner at Avalon Ventures and he invested in Zynga along with me and Brad (the Pincus connection lives on). Rich is also on Reece Pacheco's board and this post came out of a convo that Reece and I had about Rich in the comments to yesterday's post.

Gary runs one of the top venture funds in China. Charley runs an early stage venture firm in Boston. Jerry is the best CEO Coach in the business. And Feld is Feld.

Relationships are the currency of business. I cherish my relationship with all of the folks I worked with back than and this picture is representative of all that. It sits on the bookshelf in my office. I showed it to Reece last night. And I'm showing it to all of you this morning.

Hunter Walk has a post up suggesting that "social proof" is not as helpful of an indicator of startup quality as it once was.

I have always hated the idea of social proof. It's just the herd instinct at work. It's nonsense.

If you can't figure out why you like an investment and why it will be successful, don't make it.

Yesterday my partner Andy and I met with a company that has had a hard time raising capital. I talked to a bunch of big name investors about it and they all hated it. I told Andy "that makes me like it even more."

We may or may not make this investment. We have to do our work, figure out the market, make the calls on the management team, and figure out how big of a business it can be and whether we can make a good return on it. But we don't care who else wants to invest. In fact, I'd prefer if nobody else wants to invest in it. That would be great.

Make up your own mind. Don't follow the herd. Don't chase.

I don't disagree with PG when he says that Facebook's IPO performance (or lack thereof) has the potential to impact valuations in startup land. I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening.

But let's put Facebook's current valuation in perspective. At the closing price of $26.90, Facebook commands a valuation of $57.5bn (according to Google Finance). Facebook had around $4bn of cash prior to going public and raised about $10bn so let's assume they have $14bn in cash on the books. That means Facebook has an enterprise value of roughly $43bn.

In its last quarter Facebook had $1bn of revenue and 40% pre-tax operating margins. If we annualize those numbers, that would be $4bn of annual revenue and $1.6bn of annual pre-tax operating margins. Let's use pre-tax operating margins as a proxy for EBITDA, because this whole post is back of envelope quality analysis and please take it for what it is.

That means that Facebook's enterprise value is greater than 10x current revenue run rate and greater than 25x EBITDA. These are big multiples folks. I am happy to take those numbers for any company out there.

Clearly Facebook is a premium company and commands a premium valuation and entrepreneurs should not expect to get 10x revenues and 25x EBITDA for their companies in a sale or an IPO. But even at half those numbers there are fantastic returns for investors and entreprenuers to be had.

If speculators are disappointed with the performance of the Facebook IPO it is because they had ridiculous expectations of what rational investors would pay. The market has put a premium valuation on a great company and we should be happy about all of that. I certainly am.

This is the third post in the MBA Mondays series on People. The number of people you have in your company at any time is a very important part of getting the company building process right. Too many and you will slow things down, burn through too much cash, and increase management overhead for no real benefit. Too few and you will be resource constrained and unable to grow as fast as you'd like.

I will say upfront that different types of businesses will require different employee bases and that my experience is really limited to software based businesses and within that sector, mostly consumer internet projects. So if you are working outside of the software business, I am not sure how useful this post will be.

I have a strong bias on this topic and that is that less is more. Time and time again I have seen the entrepreneur who wants to hire quickly fail and I have seen the entrepreneur that is a bit slow to hire succeed. If you took the time to corrrelate success in all of the venture investments my various firms have made over the years with one variable, it might be most highly correlated with a slow hiring ramp, at least in the first few years of company building. Being resource constrained can be a very good thing when you are just getting started. It forces you to focus on what's working and get to the rest of the vision later on.

I have tackled this topic of headcount before in the post on Burn Rate. This is what I said:

Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage. Most MVPs can be built by a team of three or four engineers, a product manager, and a designer. That's about $50k/month when you add in rent and other costs. I've seen teams take that number a bit higher, like to $75k/month. But once you get into that range, you are starting to burn cash faster than you should in this stage.

Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. This is the stage after release, when you are focused in iterating the product, scaling the system for more users, and marketing the product to new users. This can be done by the same team that built the product with a few more engineers, a community manager, and maybe a few more dollars for this and that.

Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. You start to hire a management team, a revenue focused team, and some finance people. This is the time when you are investing in the team that will help you bring in revenues and eventually profits. I would recommend keeping the burn below $250k per month at this stage.

A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. That is not the number you pay an employee. That is the "fully burdended" cost of a person including rent and other related costs. So if you use that mutiplier, my suggested team sizes are 5, 10, and 25 respectively for the three development stages listed above.

So 5 or less while you are building product, 10 or less when you are finding product/market fit, and 25 or less while you are working on generating revenues and locking down the business model. That's a rule of thumb for software based businesses that don't require a large direct sales force or some other significant labor cost.

Of course, there are all sorts of reasons why these numbers might not work for your business. This is just a "rule of thumb". You can use it as a baseline to think about whether or not you need those extra heads. But you might convince yourself that you do. And you may be right.

But above all else, restrain yourself from hiring early on. Just because you can does not mean you should. Team dynamics are easier in a small group. They get harder in a larger group. Things don't happen as quickly in larger groups. More management overhead is needed. All of these things work against you as a startup trying to get somewhere before someone else does. So hire slowly and wisely instead of quickly. You will be happy you did.

I guess this weekend will be google analytics weekend, given my post yesterday and today. In light of the rumors that Facebook may purchase the Opera browser, I got to thinking about how quickly browser market shares move. If the AVC blog audience is a good sample, then the answer is pretty quickly.

Here's the breakout of browser market share on AVC in the month of May 2006:

IE was dominant with over 60% of the AVC audience using it in May 2006. Firefox was coming on strong and Safari was tiny with about 5% of the users.

In just two years, the landscape had shifted rapidly.

In May 2008, Firefox was ascendant and over half of AVC readers used it. IE was still popular and Safari had doubled its share among AVC readers.

Two years later, in May 2010, the market was shifting again.

Firefox was still on top but was falling and Chrome was taking share from it. Safari had doubled again, and IE usage was in freefall.

And fast forward to today, we see a different story again.

Chrome is by far the most popular browser among AVC readers. Safari and Firefox usage has declined a bit. And IE contnues its decline.

All of this share shifting has happened in the relatively short timeframe of six years. There is apparently very low loyalty to browsers in the AVC community. I suspect our crew here is more likely to try something new and shift than the broader Internet, but even so, this is something to think about if owning a browser is part of your lockin strategy. Apparently that doesn't work too well.

UPDATE:

There was a question about OS market share. This is what the current OS market share on AVC looks like:

I took at look at Google Analytics this morning and was a bit surprised to see the makeup of the top ten sources of traffic to AVC in the past month.

If we compare this to May 2010, when AVC got almost exactly the same amount of visitors, you can see that the makeup of traffic has changed a fair bit.

Search, Twitter, Stumbleupon, Facebook, and Disqus have all risen a fair bit as sources. Direct, Feedburner, Hacker News, and various specific sites have waned as sources of traffic.

Mobile visits have also doubled in the past two years from 11% to 22%. Frankly I thought they would be even higher by now.

What this tells me is platforms are ascendent as drivers of audience, particularly platforms like Twitter that are optimized for mobile.

It is also nice to see Disqus cracking the top ten. And the characteristics of the Disqus traffic is very different from the traffic that comes from the other top ten sources. The Disqus audience stays longer and is way more engaged. That makes sense. I hope to see Disqus rise in the top ten as they do more to drive traffic around their network.

It makes me think that Disqus could use a mobile reading app that shows Disqus users the interesting conversations happening in their network in real time. I would certainly be a big user of that.

But no matter how you slice it, we are in the era of mobile platforms. That is pretty clear to me this morning.