Posts from 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:

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.

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. Here’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.

Year end music posts have been a tradition since this blog got started in 2003. For years I would post the top ten (or eleven or twelve) albums that I liked that year. Then as I moved away from albums to tracks, I started creating year end playlists. Here is last year’s playlist.

My music listening has evolved a lot over the twelve+ years of AVC. I was still listening to a mix of mp3s and streaming when I started blogging in 2003. I moved to streaming soon after that, mostly to Rhapsody, and then Rdio (which went under in 2015). But since USV invested in SoundCloud and I joined the board at the end of 2010, I have slowly but surely moved all of my listening there and I currently don’t listen on any other services anymore.

I love to listen to my SoundCloud feed (which is like a Twitter feed for music and podcasts) and favorite the songs that I like best. That’s the discovery mode for me. Then I listen to my liked feed a lot. That is my collection. I liked over 300 songs in 2015.

I went back over those 300+ songs this past week and pulled out the roughly 30 songs that were released in 2015 that have stuck with me throughout the year. These are my songs of the year. Enjoy.

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.

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.

For the second year in a row, USV did an event in Berlin in November and invited entrepreneurs to attend a moderated discussion. Our friends at Tech Open help us produce these events.

This year the USV partners who were able to attend this event were Brad, Albert, and John. The conversation was moderated by Ciaran O’Leary, who is one of our favorite VC co-investors in Europe.

Here’s the video of that moderated discussion. It’s long, at almost one hour, so you might want to chromecast this one to your TV and watch “on background.”

It’s Christmas Day, a holiday in much of the world and one of the biggest religious days of the year. We are spending it with family and friends on a beach in the caribbean. I hope that all of you are spending the day with friends and family. I know that Christmas is a tough day for some and I hope that you have someone close to you to spend it with.

We are on our seventh day of our vacation and have dialed it down to such a level that pulling out a laptop and writing on it is a real effort. As the Gotham Gal says in her post today, that is a good thing every once in a while.

We are back in NYC tomorrow and I plan to write some posts next week, like I did last year, on what happened in 2015 and what I think will happen in 2016. I’m looking forward to that, but for the next 24 hours I’m going to chill out with friends and family and put the finishing touches on a relaxing getaway week on the beach.

We are enjoying the entire Beatles catalog streaming via Sonos in our vacation house this morning. That’s because the Beatles finally decided to put their music on the various streaming services and their catalog arrived today.

The Beatles did not put their music on iTunes until 2010. So it is not surprising that they took such a long time to join the streaming music world.

It is worth noting a few things.

First, you don’t need the Beatles to build a great streaming product. They are a nice to have but not a need to have. It seems that there are no “need to haves” in the world of streaming music as long as you have most of the artists. No one artist is that powerful, even the greatest artist of the pop music era.

Staying off iTunes until 2010 and streaming until 2015 may have made good business sense for the Beatles, but it was certainly not a fan friendly move. It took me all of one minute to load up their entire catalog into our Sonos queue and hit play. That is such a superior experience to loading CDs, one by one, into a CD player, or downloading each and every record from iTunes and then creating a playlist. I am not sure where the line should be drawn by an artist between maximizing profits and maximizing the fan experience. But I don’t think the Beatles drew that line correctly over the past fifteen years.

The Beatles’ music is timeless. Unlike most pop music, the Beatles’s music seems to appeal to generation after generation. We have several generations in our house this morning and everyone is totally enjoying the music.

So I’m so happy that the Beatles finally decided to join the streaming party and we are celebrating that move. But I sure wish they hadn’t taken so long.

I woke up late (for me) this morning, worked out, and when I got around to posting here, my web host (bluehost) was down for what seemed to be like 30-45mins. I’m deep into the vacation groove and wasn’t the least bit bothered by being down.

Now that it’s back up, I’m onto other things. So I’m not going to post anything today.

Here’s Bruce Springsteen and Paul McCartney on SNL last weekend. I watched it today while waiting for AVC to come back up and thought you all might enjoy it too.