Posts from March 2013

The Verge has a post up that says the winners of the If I Had Glass campaign are largely Twitter users with big follower counts and links to a list of all winners. Sadly, my twitter account is not on that list. Back on February 20th, I saw the campaign launch and immediately tweeted this out:

#ifihadglass I would wear them on the subway too

— Fred Wilson (@fredwilson) February 20, 2013

I wasn't joking, although it was a reference to Sergey's subway ride. I will wear my glasses on the subway when I get them. If you want to invest in the services that are going to be built for these devices, then you need to own these devices.

Fortunately I know a few winners and I will get my hands on Glass early on. But if anyone at Google is reading this, I'd love to buy a pair of my own.

Ricky Van Veen says what you share defines who you are. So I am sharing this talk with all of you.

I am into quotes. Always have been. And one of my favorite things about Tumblr is they have a specific post type for quotes:

I find quotes around the web (and mobile) and post them to Tumblr (often with Tumblr's awesome share bookmarklet) all the time. And then they get reblogged. And I reblog quotes I find on Tumblr too.

I don't think there is a better place on the web to share quotes than Tumblr. It's one of the many things I love about it.

Here's a quote I reblogged from yesterday's comment thread onto Tumblr.

I have said many times that early stage VC is a lot like baseball, if you get a hit one out of every three times, you are headed to the hall of fame. And if I look back over my career, and also over the track records of the firms and funds I have helped manage, that is pretty much the hit rate I have seen. By "hit" I mean an investment that returns 5x or better. But of course, many of these hits return 10x or even 100x every once in a while.

So what happens with the other two-thirds? Well that is the part of the startup world that we don't talk too much about. Sometimes an entrepreneur will take an early exit. They will have raised a small amount of outside money, will still control the company, and will get an offer they can't refuse, and take it. That's a win for the entrepreneur but not for the VC. But it is a happy outcome for everyone anyway. That's maybe 10% of the total outcomes. So at least 50% of the outcomes are not a win for the VC or the entrepreneur.

So what happens when things don't work out? There are generally two scenarios.

The first is the "slog it out" scenario. This one is in many ways the most painful. It means that there is a business that can be built, but it won't be one that makes the VCs much money and because it takes so much time and money to "slog it out", it doesn't make the entrepreneur much money either. And in many cases, the entrepreneur chooses to leave and the company has to recruit outside management to operate the business.

In the "slog it out" sceanrio, the VCs are often left holding the bag. They have a lot invested in the business and have a responsibility to figure out how to get it out. In some cases, the entrepreneur sticks around and slogs it out along with the VCs. I have great admiration for the entrepreneurs I have worked with who have slogged it out. There is very little upside for them in this scenario. Mostly they do it out of a sense of responsibility. These "slog it out" businesses can go on for a long time. I am involved with some that are well into their second decade and I am afraid that they may be headed into a third decade. I have heard these kinds of companies called "zombie companies and "the living dead". That's a bit unfair because there is no way a company can operate for two or three decades without being able to sustain itself. VCs do not keep pouring money into these businesses, maybe they do that for the first five years, but not after that. These "slog it out" companies turn into real companies eventually but just not companies that have the growth trajectories or strategic profiles that make them great acquisitions.

The second scenario is "hit the wall". In this scenario, the company runs out of cash and there is no more coming from the investors. The company cannot sustain itself and one of two things happens. There is a fire sale or an acqui-hire, or there is a shut down. The fire sale is the preferred outcome and VCs and entrepreneurs have gotten pretty good at finding homes for the teams in recent years. There is such a vacuum of talent out there that a fire sale can often be arranged just for the talent that a company has assembled. But often the fire sale cannot be arranged and the company has to be shut down. Again, the responsibility for an orderly shut down often falls onto the VCs to manage. In a shut down, the employees must be notified and paid through the date of the shut down. All required tax payments must be made. Liabilities such as leases and bank borrowings must be managed. In particularly messy situations, a bankruptcy filing is required.

There are two interesting things here that I always think about. The first is that even the very best investors in the VC business only get a hit about 1/3 of the time. That means that they have their share of "slog it outs" and "hit the walls" too. I am certainly in that camp. The second is that we end up spending an incredible amount of time and energy (hopefully not money) on the 2/3 of our investments that don't work out. When everything goes well, you really don't need that much from a VC. Of course, I have added value in all of my winners. But its the ones that don't work that I have left my blood, sweat, and tears on. And that's the paradox of being a VC that cares. Which is the only kind of VC you want to work with.

Back in the early days of the ATM machine, you could only transact on ATMs operated by your bank. If you were a Chase customer, you needed to find a Chase ATM to take cash out. That, of course, was a pain and the banks recognized it and formed roaming networks. The one I recall best was NYCE, which was formed by NatWest, Chase, Manny Hanny, Chemical, Barclays, Marine Midland, and Bank Of New York.

The same thing has happened with mobile wifi networks. If you are a T-Mobile Hotspot customer, you can often roam on a Boingo network or some other mobile wifi network.

Roaming is a great solution to the problem when multiple businesses offer a proprietary commodity service. The customer is forced to choose one provider but in effect the service is identical from vendor to vendor.

And that is the case in subscription music services. I have used Mog (now owned by Beats which is rebranding it as Daisy), Rhapsody, Spotify, and Rdio. They all offer essentially the same libraries. The listening experience is almost identical. They differentiate with slighly different user experiences. Some are more social. Some are faster. Some offer better curation. But in my opinion they are all proprietary commodity services and a roaming service that would allow a subscriber to Rdio to log into Spotify would be a good thing for a lot of reasons.

And the music industry really ought to want to see this happen because they are coming to realize that subscription music services can bring in significant revenues. This is an important future business model for them. But they should not make the mistake they made in the mp3 market where they essentially gave one company, Apple, the dominant position in the market. If the music industry came together, like the banks came together to create ATM roaming networks, to create a subscription music roaming network, they would create a dynamic where no one subscription music service could create the kind of network effects that would allow them to become the dominant subscription music service. And that is very much in the music industry's interest.

It is also in the consumer's interest. Just yesterday my friend Kirk found some new music because he follows me on Rdio. But I can't do the same thing with my friends who are on Spotify. Because all of these services are silos, by definition of their paid business model. If a roaming network existed, there would be more social music discovery, listening, and, I believe, uptake of the paid subscription model by consumers.

Of course, a roaming network could be started by an entrepreneur who thought this was a decent business to be in. It does not require a music industry consortium to come together to create this. But regardless of how it happens, I think it should happen. And I hope it does.

I met Nelly Yusupova as we were recruiting software engineers to teach computer science in the NYC schools. She's a software engineer and entrepreneur with a passion for sharing what she knows with others. A few weeks after we met, Nelly came to see me to tell me about a two day bootcamp she runs called TechSpeak for Entrepreneurs.

TechSpeak for Entrepreneurs teaches entrepreneurs how the software design and build process works. Nelly had observed, as have I, that entrepreneurs who are not deeply technical spend too much money, time, and effort trying to get their ideas turned into software products. Many hire the wrong people, get a product that doesn't meet what they wanted, and worse of all, many get ripped off in the process. The idea behind TechSpeak for Entrepreneurs is to help entrepreneurs avoid these mistakes. The agenda/curriculum for the two day bootcamp is here.

There are bootcamps coming up in Phoenix, the Bay Area, and NYC:

Phoenix, AZ   Apr 05-06

Silicon Valley, CA   Apr 13-14

New York City, NY   May 04-05

The NYC bootcamp is at Columbia University and there is a week left to get an early bird discount. Here are the details of the NYC bootcamp:

I recently had lunch with Mark Leslie, a successful entrepreneur and CEO, who now teaches at Stanford and works with startups, often as a board member. He told me about a paper he and a colleague published in Harvard Business Review called The Sales Learning Curve. I read the paper and it articulates something I have seen quite a few times myself.

The paper starts out with this observation:

When a company launches a new product, the temptation is to immediately ramp up sales force capacity to acquire customers as quickly as possible. Yet in our 25 years of experience with start-ups and new-product introductions, we’ve found that hiring a full sales force too fast just leads the company to burn through cash and fail to meet revenue expectations. Before it can sell the product efficiently, the entire organization needs to learn how customers will acquire and use it, a process we call the sales learning curve.

Not only does the organization need to learn how customers will acquire and use the product, it is also true that the product itself may not be exactly what the market wants. In other words, launching a product is not the same thing as acheiving product market fit. The organization may need another six months, a year, or even longer to get to prodcut market fit.

One of the things I have observed over the years is that a hard charging sales oriented founder/CEO can often hide the defects in a product. Because the founder is so capable of convincing the market to adopt/purchase the product, the company can get revenue traction with a product that is not really right. And that can hide all sorts of problems.

I am thinking of a company, which will remain nameless, that ended up selling itself in a fire sale. The company had strong revenue traction early on, and with that traction raised a big round of financing, which then led to a big increase in headcount, for both sales force and product/engineering, and then faced a lot of churn in its customer base. That led to a very difficult period where the company worked hard to iterate on the product while maintaining this high burn rate. In the end the burn rate killed the company and in my opinion it never really found product market fit.

Like Mark Leslie advises in The Sales Learning Curve, it is dangerous to ramp up headcount and burn until you are certain that you have the right product and the right people and processes in the organization to support the product. And early revenue traction, often driven by a passionate founder, can be a nasty head fake. Try not to fall for it.

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The Return Of MBA Mondays: I am going to try a new take on MBA Mondays, suggested by one of you in the comments last monday. I am no longer going to write posts on specific topics as I was doing. I am going to take a page out of the "case method" and tell stories that have a lesson, hopefully based on real situations that I have lived through. I don't know how well this will work, but I am going to give it a try.

Last month, I pointed to a talk that Nick Grossman gave at Princeton where he laid out the principals of Regulation 2.0. This slide is from that talk.

Regulation 2.0 is a framework that we have been working on with a bunch of others who are rethinking what government means in a networked world. In the Regulation 1.0 world (the one we are in now) regulators are required to give you permission to do things. In a Regulation 2.0 world, as long as you report openly and transparently about what you are doing to the government and everyone else, you are free to innovate and operate. But you are accountable to live up to the rules that are set by the regulators and the data you report about your actions will be measured against those rules.

I thought about all of that when I read about Mayor Bloomberg's team of data crunchers in today's New York Times. This group, which is described as "the half-dozen post-collegiate techies", operate with a budget of less than $1mm a year and yet have been able to solve many tricky problems for city hall in the past three years.

This story is a good example:

Last fall, the city’s Department of Environmental Protection wanted, finally, to crack down on restaurants that were illegally dumping cooking oil into sewers in their neighborhoods

The antiquated answer would have been to have the health department send inspectors to restaurants on blocks with backed-up sewers and hope by chance to catch a busboy pouring the contents of a deep fryer into the street.

number-crunchers working from a pair of cluttered cubicles across from City Hall in the Municipal Building dug up data from the Business Integrity Commission, an obscure city agency that among other tasks certifies that all local restaurants have a carting service to haul away their grease. With a few quick calculations, comparing restaurants that did not have a carter with geo-spatial data on the sewers, the team was able to hand inspectors a list of statistically likely suspects.

The result: a 95 percent success rate in tracking down the dumpers. With nothing grander than public data, the Case of the Grease-Clogged Sewers was solved.

This story reminds me so much of the story Steven Johnson told in the Ghost Map and many of the stories he tells in his current book, Future Perfect. It should not be a surprise that Steven is one of the folks who have been working with us on this Regulation 2.0 framework.

As more and more of the data about what goes on in our world becomes available via network organizing structures, we will be able to regulate much more lightly, thus lowering the cost, and burden, of government and allowing innovation to prosper.

New York City, under Mayor Bloomberg, has been leading the way in using data and technology to locate and address problems in an efficient manner. But there is so much more that can be done in this direction. I hope that his efforts are adopted and evolved by his successor and all governments in the coming years.

One of the secrets of the venture capital business is the magic behind a successful partnership. It is one of those things where the total is way more than the sum of the parts. At USV, I’ve been lucky to work with Brad for ten years, Albert for eight years (starting with his stint as President of Delicious), John for three years (but really for many more than that), and Andy for almost two years.

Each of us brings something different to the partnership and like a winning basketball team (we are also five), each person knows their role and delivers when it counts. Each partner has a hot hand for a while, then cools down, then gets hot again.

The hottest hand at USV in the past few years belongs to Albert who has been killing it. Many of you know him from his blog called Continuations. I finally got around to watching AVC community member Rohan’s interview with Albert and it captures much of what makes Albert so great to work with. So I am making Rohan’s interview the video of the week: