Posts from June 2015

What is the capital markets environment for startup tech companies?

I think these two charts tell most of the story:

Seed and Series A is more or less healthy. Series B is getting overheated. Series C and beyond has gone crazy.

Public markets are rational. Tech stock performance has been strong but is driven by strong revenue growth and good business fundamentals generally speaking.

The disconnect is entirely between the late stage private markets and the public markets. That’s where things are unstable.

There are some who suggest the mini run in the price of Bitcoin this month is related to the crisis in Greece. I wouldn’t know about those sorts of things.

But one thing is clear to me. Photos like this one from the NY Times showing people lined up outside a closed bank do not produce confidence in the banking system.

The hardcore cryptocurrency community wants to control their money themselves, with ownership of the keys to it, and the ability to move it when and where they want.

That’s a comforting thought when the alternative is to trust a bank.

Here in the US, we have FDIC insured deposits, a relatively safe and secure financial system, and even in the depths of the financial crisis of 2008, bank customers could access their money when they needed it. But there were a few scary moments.

In other parts of the world, none of that is the case. Which is why I continue to think that we will see more rapid adoption of bitcoin in the less developed world first.

Maybe in Greece. Who knows?

One of the things that entrepreneurs, founders, and CEOs obsess over is holding onto their team. When I propose some sort of difficult decision to a CEO, I am often met with the response “the team will freak out and we will lose them.” And I understand where this emotion comes from. You spend so much of your time recruiting, training, and managing a team and getting them into a place where they can execute for you and you can’t imagine having some of all of them walk out the door. Neither can I to be honest.

But teams come in all flavors. There are highly loyal teams that can withstand almost anything and remain steadfastly behind their leader. And there are teams that are entirely mercenary and will walk out without thinking twice about it. I once saw an entire team walk out on a founder. That company survived it, remarkably.

I’ve been thinking a lot about the factors that go into determining whether your team skews loyalist vs mercenary and what you might be able to do about it. Here are some of the most important factors:

1) Leadership. At the end of the day, people are loyal to a leader they believe in. Leading is not managing. Although it is impossible to lead if there is no management. But leading is that special thing. It is charisma, it is strength, it is communication, it is vision, it is listening, it is being there, it is calm, it is connecting, it is trust, faith, and belief. The best founders are great leaders. They may be shitty managers which means they need to find managers to help them. But they are great leaders. One of the things we look for in founders is leadership. If we want to follow them, we believe that others will too.

2) Mission. People are loyal to a mission. I’ve seen super talented people walk away from compensation packages 2-3x what they currently make because they believe in what they are working on and think it will make a difference in their lives and the lives of others. This is why investing in mission driven companies can produce great financial returns. Mission driven companies have something most companies don’t have. They have “why” that keeps the team together through difficult times and when the compensation isn’t close to “market”.

3) Values and Culture. My friend Matt wrote a post about Values and Culture the other day. I read it and responded “values are the house and culture is the furniture”. He thought that was about right. People want to work in a place that feels right to them. They need to feel comfortable at work. In the way that a welcoming home with comfortable furniture is pleasant to be in, a company with good values and culture is pleasant to work in.

4) Location. I spent the past week in europe. In Berlin, Paris, Istanbul, Vienna, and Ljubljana. These are very different talent markets that the bay area or NYC. In the Bay Area and NYC, your employees are constantly getting hammered to leave for more cash, more equity, more upside, more responsibility, and eventually it leads to them becoming mercenaries. It is incredibly hard to hold onto a team in the Bay Area and NYC. If you are building your company in Ljubljana, Waterloo, Des Moines, Pittsburgh, Detroit, or Indianapolis, you have a way better chance of building a company full of loyalists than if you are building it in the Bay Area or NYC.

If you mess up any of these dynamics, you can easily turn your team from loyalists to mercenaries. Changing leadership is the most common one. Almost every time I have seen a founder leave and be replaced by a new CEO, I have witnessed a significant exodus of talent from the company. It is better if the new CEO comes from within, but even then I have witnessed a significant exodus of talent. When the CEO comes in from the outside, it is almost always much worse.

If you move your team from Philadelphia to NYC or from Des Moines to the Bay Area, expect more turnover. Expect to turn loyalists into mercenaries. These talent starved locations create mercenaries. It’s the nature of the beast.

So what can you do to build a company full of loyalists instead of a company full of mercenaries? First you must lead. If you think you are a good leader, get better. If you think you are a great leader, you can get better. Get coaching and focus on becoming the best leader you can be.

Second, build a mission driven company. Make sure you are doing something that matters. If all you are doing is trying to make money for yourself, then all your employees will try to do is make money for themselves.

Third, invest in values and culture. Matt’s post is a good starting place for some tips on how to do that.  Build a welcoming home and put comfortable furniture in it. I mean that metaphorically of course. But the office does matter too.

Finally, think about being somewhere other than the Bay Area or NYC. Yes, they are great places to start companies, find talent, and get investment. But they are also places where others start companies, get investment, and find your talent. It’s a ratrace, a treadmill, and it’s grueling. If you can avoid it, you owe it to yourself to try.

There are many reasons why the startup sector feels stretched to me. But possibly the most significant one of all is the increasing amount of mercenary behavior I am witnessing in it these days. Hopefully this post will help you avoid that as much as possible. It’s hard these days.

I’m on an eight hour flight back from Europe today and have plenty of time to write so I’m going to skip video of the week this week (but not entirely) and write down some thoughts about the week that was in the US.

Three important things happened this week.

The first was the Supreme Court rejecting the argument that the Affordable Care Act should be struck down because the federal government was subsidizing health care in states that refused to set up their own insurance exchanges. This was a big legal victory for the Affordable Care Act (the second one at the Supreme Court) and could be the thing that seals the deal for this legislation. The Affordable Care Act is performing much better than most people, even its proponents (including me), thought it would. Many more americans are insured, insurance rates have not skyrocketed, nor has the budget deficit, and it is hard to find any indications of job losses resulting from it. Every year that it remains the law of the land make it more likely that it will remain the law of the land. It has become more popular as it has become better understood and people are actually getting affordable health care insurance when they can’t get it from an employer.

The second was another ruling by the Supreme Court. This one on marriage equality. You could feel this coming for a while now. As more and more gay people have come out of the closet over the past thirty years, more and more people know and love gay people. And we want them to enjoy the fruits of life the way we enjoy them. It is only natural that society would come to this place and it is wonderful that our Supreme Court got there in more or less the same time. If you haven’t read Justice Anthony Kennedy’s closing paragraph in the majority ruling, you should. It says it well.

The third was The President delivering a moving rendition of Amazing Grace at the funeral for Clementa Pinckney.

This wasn’t noteworthy because of the President’s voice. It is good but not great. It was noteworthy because it showed his considerable leadership skills and ability to connect with compassion in a time of national healing. Say what you will about Barack Obama, and it has all been said again and again in the comments to this blog, he is a very talented leader and politician and has grown into the role nicely in his second and final term. He was not just singing for those murdered in a church in Charleston last week. He was singing for America to find a way to come back together and heal the racial wounds that have been front and center in this country for much of the past year.

I particularly like the way he emphasized and paused at the word United as he was saying United States of America at the end of that clip. He was sending a message and I got it loud and clear.

It was a good week for Barack Obama and it was a good week for America. I’m landing in America in a few hours. I’ve missed it. It is my home and I love it dearly, particularly this week.

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.

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.

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.

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.

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.

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.

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:

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.