Failure is hardly the worst thing that can happen to you in Silicon Valley.
In fact, failure is a rather warm, safe blanket for most folks around these parts. Unlike most places in the world where public failure could ruin your career, destroy a family, or even bring risk of death from shame… in Silicon Valley, everyone is all too comfortable openly discussing their failure(s). While this is generally a good thing – most people won't learn how to stretch themselves unless they push the boundaries of potential failure – a far greater fear for many entrepreneurs is that of unsustainable success.
Far worse than hitting the ground, most of us are scared shitless of being able to fly high, stay aloft, and keep our arms extended wide as we climb into a big blue sky, reaching for ever higher heights… Icarus, beware.
Indeed, fear of flying is the most frightening thing ever for truly great entrepreneurs. Usually accompanied by a little voice inside your head that says “Crap, any minute now these fuckers are gonna realize i can't keep this up for long, and then i won't be a Golden God anymore.” Exactly.
Of course it's easy to fly high for a few days or weeks. Everyone gets lucky, hits their stride with gusto now & then, sinks a sweet 3-pointer once every 20 shots, writes some challenging routine that compiles the 1st time and works flawlessly, or closes a big deal they didn't think was gonna happen. Sure, you can do that every once in awhile – but can you do it for a month? for a quarter? every day for a year? can you beat last month's number consistently, and can you say with a straight face you'll be able to beat that high-water mark again next month too?
Or are you afraid you might come crashing back down to earth? Are you afraid you'll get tired, and your wings will fail you? Are you afraid you might only be a flightless chicken, with just a really big gust of wind behind you?
Cluck-cluck, motherfucker… we know who's really behind that Mask of Zorro you're wearing. You know you're scared of flying too, aren't you?
Cuz I sure as hell am.
To all of us who strive for unlikely outcomes, it is this dual challenge of consistent and regular outperformance which is our real nightmare. In fact, it's almost certifiably insane to sign up for such a goal – like agreeing to break a world record, and then keep breaking it over and over again, while maintaining perspective and focus, as well as the emotional stability necessary to lead and grow your team. Who the hell believes they can do that? Who the hell isn't afraid they'll falter, somewhere along the way?
Yet, it is exactly this fear of flying which sustains us, perhaps even exhilarates us, motivates us to find the passion, stamina, and renewed energy to stay aloft, to continue climbing higher, up and to the right.
And so: I wish you luck, junior birdmen and women. Your task is not an easy one, and many of you will come crashing back to earth, broken and crying. While i cannot help you stay aloft, and i cannot help remove the fear, perhaps I can remind you that you are not alone.
abstract:menus suck.we need less items, more pictures, and [just] a few recommendations. menus should be online, so they can integrate user data & purchase history to customize selection, offer discounts, and to connect with friends for favorites and referrals / group offers. the market is huge, purchase behavior is frequent, industry incumbents are old, slow, and easily disrupted. everyone eats, everyone is online;what the hell we waiting for?
i’ve been thinking about writing some BS “predictions for 2013” post for the past few weeks, but have been rather significantly unmotivated… few reasons being: 1) i already wrote a predictions on tech investing trends for reuters two years ago & story is mostly the same, 2) most predictions are crap (including mine), and more importantly 3) i’m a lazy bastard, and there’s been some awesome football & basketball happening this holiday season.
so screw it – i have no grand predictions for the new year, except to say that consumer e-commerce and mobile apps are just getting started, and anyone deciding to leave this ballgame early is gonna punch themselves in the face hard in a few years when they realize how much they messed up / missed out… or, in other words: stay the course, bitches! – Q4 data from AAPL, AMZN, & GOOG shows the wind is still at our backs, even if investors think it’s blowing in our faces… they're dead wrong, and/or they don't understand how to take advantage of massive behavioral change in consumer purchasing, internet marketing, social platforms, mobile device adoption, and mobile monetization. yeah, it may be hard, but still easier than ever before.
however, for this post i want to focus on just one very simple & basic thing:
in the next few paragraphs, i will attempt to explain why i believe this is a manifesto for innovation & investing in the coming Food Tech Revolution, and why the market opportunity is nothing less than HUGE.
first, here are a few frequent problems i have when i sit down for a meal:
too many items to choose from, many of which i don’t understand
they don’t know what i like; i can’t remember what i got b4 (good/bad)
have any of my friends eaten here? do they like/hate some dishes?
can't get waiter's attention, 3x times or more (ordering, refills, payment)
places i visit frequently should give discounts to come back regularly
places i visit infrequently should give discounts to try them 1x or 2x
while waiting/eating i might enjoy music, movies, games, other media
okay, that’s plenty of things to fix. let’s take a look at these in more detail.
Problem #1: Too Many Items, Not Enough Pictures, Simpler & More Obvious Recommendations.
The biggest problem with most menus is that there’s just too much stuff to choose from, and most of it doesn’t have associated pictures, certainly not high-quality pictures. While some smart restaurants do feature a few specials (some even with pictures), most places fail at this very simple (largely offline!) innovation. Fewer items with pictures & more obvious recommendations would streamline production, reduce cost, reduce time for customers to order, for kitchens to prepare, and increase customer satisfaction.
Funny thing; none of this even requires technology solutions! This is just common sense – shorter, simpler, more visual menus! Why isn’t this widely adopted, even if offline? Well, probably because no one has systematically demonstrated improved business economics / customer satisfaction that come from simpler, more visual menus. However, we’ve seen it proven in other industries (see: AirBnB), and seems likely high-quality pics of food will convert better, same way that high-quality pics of rentals convert better.
Less Stuff, More Pictures. Seems fucking obvious, right?
But 99% of restaurants don’t do it.
Problem #2: Not Online, No Order History, No Reviews, No Friends, No Loyalty Program. Also, No A/B Testing.
Many restaurants today have a website – though probably not a mobile website or app – and maybe a Yelp profile or Facebook page or Twitter handle – but probably no customer list, retention marketing, or frequency programs. They mostly have no on-premises connectivity, and very few currently have any kind of consumer-facing ordering technology or tabletop menu systems. But let’s presume sometime in the next few years, most restaurants figure out how to deliver connectivity on premises, some type of online ordering at the tabletop, and/or some integration with existing customer mobile devices.
Well, what could we do with that? What problems would that solve?
First, it would be great if the restaurant knew something about my order history and user profile data, and customized the menu selection to my favorite tastes and interests. Obviously if i’m a vegetarian or a person with special dietary constraints, it would be a high priority to match food options with my specific lifestyle choices or health needs. This would again streamline choice, reduce time & confusion, and increase customer satisfaction. Also, new dishes could be recommended that i might like to try for the first time.
Second, if there were any kind of online reviews, it would be great to combine this with the actual menu so i can see whether other people loved or hated specific dishes. (side note: i’ve never seen a restaurant provide negative reviews for its own menu… although occasionally if i ask the waiter, they might tell me whether a dish sucks and/or steer me to something better. If/when this happens, i immediately establish a better relationship with the waiter / restaurant. It builds such tremendous trust when someone tells me what they suck at, and invariably increases my customer satisfaction).
Third, it would be even better if i could see if any of my friends had eaten at the restaurant before, and whether they liked or hated anything in particular. My level of trust would go up even more, and likely our connection to the restaurant and each other would increase frequency / retention, without even doing any active marketing on this subject.
Fourth, by managing customer order history, favorites & specials, and social connectivity, it should be easy to implement a loyalty program and retention marketing program that could increase purchase behavior, customer satisfaction, and frequency. Both individual and group incentives / referrals could provide strong motivation to customers to visit and purchase more often. And, by aggregating data across the entire customer base, restaurants should be able to learn how to optimize their inventory, pricing, and marketing campaigns dramatically better than ever before. (note: why don't we systematically A/B test restaurant menus, pricing, pictures, etc?)
Problem #3: Have to Wait FOREVER for Waiter to Order, Re-Order, & Pay. Also, Nothing To Do While I’m Waiting.
Obviously, one of the biggest pains in the ass when you’re at a restaurant is trying to get the waiter’s attention that you need something, and/or waiting around for them to notice that you 1) need a menu / are ready to order, or 2) have a question about something on the menu, or 3) need some water or another drink, or 4) want to order dessert, or 5) are ready to pay can we get the check? or 6) hey i’ve got a question about my bill, or 7) hey i’d really like that check now please? or 8) EXCUSE ME WILL YOU JUST FUCKING LOOK AT ME WAVING MY GODDAMN HANDS OVER HERE JESUS H. CHRIST ALMIGHTY MY KIDS ARE BOUNCING OFF THE WALLS / OUR MOVIE STARTS IN TEN MINUTES / MY DATE IS HAWT SEXY CAN’T WAIT TO GET HER HOME / SERIOUSLY, WHERE THE HELL ARE YOU AND WHAT IS YOUR DAMAGE?!?!?!?!
(ahem… sorry, lost the plot there for a sec… but you get the picture)
In a world filled with instant messaging, real-time tweets, alerts & notifications, we can’t seem to solve a basic attention/awareness problem – that is, getting some clueless, underpaid, overworked waitperson to pay attention to me and my annoying needs 24x7x365. okay, so maybe it’s not that bad, but i’m sure you’ve been there. and furthermore, the waiter/waitress probably thinks you’re the most thoughtless a-hole ever too, and probably aren’t going to leave a big tip anyway, so why should they bother? (another innovation: waiter reviews? waiter incentives? maybe even a-hole customer reviews?)
In any case, being able to message and connect with the wait staff / kitchen staff, and being able to pay online and whenever you want is likely to improve customer satisfaction (and worker satisfaction!) dramatically, as well likely to reduce turnover time and streamline overall operations. Not to mention, having the ability to check and confirm your order online, as you eat it, and the ability to modify and add/upsell as you go would be absolutely awesome. Again, being able to combine payment with purchase history, social referrals, and customized specials and time-sensitive offers (price optimization for inventory, etc) could be absolutely huge.
Furthermore, once you have connectivity / tabletop devices, the opportunity to do other things while you’re waiting can be a great benefit. Whether this is controlled by the restaurant or simply enabling connection to your existing devices is perhaps less obvious, but i’m confident many models will emerge that optimize for customer choice & enjoyment as well as for restaurant economics. Watching a movie or playing a game at the tabletop may not appeal to everyone, but for anyone who has kids getting fidgety halfway through a meal, you know what a lifesaver having a book or crayons or an ipad or a game can be when you’re about to pull out your hair or commit a family felony.
Summary: Food Tech is High-Frequency, Big Market, Mission-Critical Business. And It Can Be a LOT Better.
Well, i hope i’ve enlightend you and piqued your imagination about the opportunity to make an everyday experience like eating MUCH better via the use of technology and online menus. Note that the current incumbents are ill-equipped to provide most of this innovation – they are big, dumb, old DINOSAURS, much like the newspaper, music, and movie businesses which are getting disrupted as we speak. Yet nobody seems to notice we spend as much or more money on food as any of those other things, and current food technology blows. We can make this a LOT better, and very quickly.
As mentioned above, this is a HUGE market. Everyone eats, 1-3x per day, and many of us eat out at least weekly if not daily. We spend untold amounts of time waiting, waiting, waiting.. to execute a very inefficient and highly unsatisfactory ordering experience, when it could be an absolutely wonderful, amazing, and AWESOME experience – which is what eating food with friends & family should be in the first place. FOOD should be Awesome.
I’m sure i’ve missed a few great ideas, so why don’t you build a startup to address them?
Tweet me when you get a few customers… I’d love to hear what they think :)
Recent articles by the WSJ, Fred Wilson, & others are noting a shift in investor interest to enterprise and away from consumer. If true, this is a huge error… at least for entrepreneurs, angels, and smaller funds. There is no better time than the present to build cheap & scalable software-based businesses that make money. And while there is lots of new potential for using consumer marketing techniques in the enterprise, let's not be too hasty in digging an early grave for the Interwebs, shall we?
Having been in the valley for over twenty years, and an investor in startups for almost ten, I've seen at least 2 investor cycles of switching back & forth from consumer to enterprise. While i agree with Fred it’s helpful to know what themes downstream investors are funding, IMHO most VCs switching from consumer to enterprise are clueless about why they’re doing so. For the few VCs who do have their shit together and have some domain-specific expertise, i am quite confident they will continue to invest in areas they know well whether the market is up, down, or sideways.
As the saying goes: if you don’t know where you’re going, any road will take you there.
Regardless, though I respect Fred greatly, let me state my position for the record – consumer and small business internet opportunities are FAR from “over”, and any such commentary is foolish, narrow-minded, and simply dead wrong (altho, it may indeed be “over” for most large funds attempting to do seed-stage investing at any scale similar to YC or 500). In addition, i most certainly take issue with the statement that it’s “harder than ever to build a large audience”… nothing could be further from the truth. Almost every possible internet distribution channel has MORE users than ever before – whether it be search, social, mobile, video, local, SMS, email, chat, etc. And for those of us who invest outside silicon valley and new york, the global consumer opportunity is huge as well in Asia, Latin America, the Middle East, and other fast-growing internet and mobile markets.
In fact, the assertion that consumer is “tougher” is so absolutely incorrect and provably wrong that i’m puzzled why anyone would even say such a thing. The number of recent internet services that have grown from nothing to hundreds of millions of users is frankly rather astonishing – Pinterest, Instagram, Groupon, Zynga – all of these took less than a few years to get to hundreds of millions of users and in some cases billions of revenue. While Groupon & Zynga have certainly fallen Icarus-like from higher heights, it’s still the case that both are amazing for how fast they grew and acquired users via search, social, and other channels. Perhaps mobile app distribution can be challenging sometimes, due to Google and Apple still learning how best to offer organic or paid distribution on mobile. But regardless we've invested in several startups that have gathered millions of users quickly, and in a few cases tens of millions of users in under a year (ex: 9GAG, PicCollage, Cubie).
But i think most of this discussion is missing the main point. Historically, the venture capital industry has been used to finance high-risk business where significant capital is required to get companies off the ground, usually in two key areas: building product, and acquiring customers. But in today's world,
it's certainly MUCH cheaper & faster to build product than ever before, and due to the explosion in adoption of consumer platforms, it's also cheaper to acquire customers than ever before (altho here is where larger VC can be helpful in scaling up fast). This is why it's such a great time to be an internet entrepreneur – it's REALLY EASY to bootstrap most internet and mobile businesses to at least the operational stage on a very small amount of cash. But in the early days, capital is nowhere near as important to the company as domain expertise. VCs who don't have operational experience in building product or internet marketing probably shouldn't be active investors in early-stage consumer and small business internet services. And clearly this is what we are seeing with the smarter funds – they're waiting until Series A or B when companies have clear traction before they jump in, when they may require larger amounts of capital to finance growth. However, later-stage investors are also aware many companies can get to break-even without raising big rounds of venture capital, and may simply choose to operate on their own cashflow, or perhaps debt-based financing. Thus, bigger funds may miss out on many “small” deals that break out early and/or get to profitability early.
Lastly, there is one other big trend that is likely to force larger VC funds out of consumer and small business internet services: monetization keeps getting better and better, and exits are getting earlier and more often. Altho internet payment services are still a big pain in the ass, in most of the US and EU it's taken for granted you can pay online and have goods delivered to your door. While this isn't the case yet in many big markets in Asia, India, Latin America, and Eastern Europe & the Middle East, give it another few years and it will become commonplace. And as online payments and monetization improves, again we will see less need for venture capital to finance customer acquisition for successful internet businesses. It just won't be cost-effective for big VC to finance all the “little” startups that are going to be built on consumer commerce and small business services. There will be thousands of small wins, but larger funds can't handle the scale required to do so many small investments. Maybe we need something like the SBA small business loan equivalent, but on the the equity side.
So for all of you folks ready to call it a day on investing in consumer internet, i'm happy to see you go… that just means less competition for those of us ready to really dig in and invest at scale in all the millions of new “small” businesses that will emerge and dominate the globe in coming years.
There are probably better things for me to do today, however i feel compelled to respond to the Black Swan Farming post by Paul Graham, founding partner of Y Combinator.
Maybe you can call this post “Grooming for Ugly Ducklings”.
While i respect YC & PG immensely – note that 500 Startups has invested in over 40+ YC startups, and we have generously borrowed(COUGH) many excellent & original ideas that YC developed – at the same time, it's useful to grok the similarities vs. differences between 500 & YC.
Put bluntly: we are both ambitious and we both play baseball, but YC is quite clearly the Yankees, while 500 is more like the Oakland A's. Though i don't profess to be Billy Beane (or Jerry Maguire), 500 is ideologically more focused on being an organization that teaches great hitting & fielding, rather than one that aims to find the best hitters & help them negotiate the best contracts. In other words, we're happy to discover we have a few black swans, but our MISSION is to groom ugly ducklings.
This may sound like 500 is aiming for the minor leagues rather than the majors, but on the contrary, it's more a difference in philosophy and style. We may not always swing for the fences, and we may not always win gold medals, but our athletes put in their hours at the gym & on the field, and they will be just as ready for battle whether on a local or global theater.
However, our role models are Ichiro, Steve Nash, Allen Iverson, & Michelle Kwan, rather than Barry Bonds, Joe Montana, Michael Jordan, or Serena Williams. We'd love to bankroll Michael or Serena, but we know they're probably going to YC and not 500. But maybe we'll go to Canada and find Steve Nash, or go to Germany and find Dirk Novitzki, or go to Japan and find Ichiro before YC does. (note: it's not lost on me that ironically, Ichiro now plays for the Yankees… sigh).
But before we describe our differences, let's first review the similarities.
Similarities: Guilds of Geeks, Big Winners, Scaling VC.
I'm pretty sure Paul & YC care deeply about all the companies they've funded, as we do at 500. This is quite obvious, as both our communities of partners, founders, alumni & mentors have extremely strong ties, and support each other whether they are billionaires or shoeless bums. We are both FAMILIES built on blood, sweat, & tears more than contractual partners based on deal terms, more a Band of Brothers (or Sisters, at least at 500), or perhaps more accurately we are both a Guild of Geeks.
In contrast to the above warm fuzzies, as venture capitalists we also both have fiduciary responsibilities to our investors that require us to focus on our WINNERS. For YC that means the black swan “billionaire startup club” of Dropbox & AirBnB, and more, with still other big wins in the wings that will likely bear fruit in years to come.
500 doesn't have billion-dollar stories yet, but we did just have our biggest exit to date with Google buying Wildfire for $350M, and we are optimistic about our investments in Twilio, SendGrid, TaskRabbit, MakerBot, & others (note: Wildfire & Taskrabbit came out of fbFund, and SendGrid came out of TechStars). We also have high hopes for our own still young accelerator startups, including 9GAG from Hong Kong, which now has both shared 500 & YC heritage. But invariably some of our warriors will fall by the wayside, and while we salute the fallen, we will march forward with the survivors, and feed the strongest and smartest of our soldiers. This is not capitalism, but rather simple survival and competition.
YC and 500 also both focus on SCALE. We are probably the only two investors in the world consistently aiming to do over 150+ investments per year (SV Angel and Google Ventures also invest in many startups, and maybe Sequoia & others via less visible programs ;) altho we go about it in slightly different ways. YC has been growing the class size of its accelerator program, recently with ~80+ companies in the most recent program (~10 of which 500 also invested in). In their next class, i wouldn't be surprised to see them exceed 100 per class. And they will scale using systems and machine algorithms, as well as heuristic optimizations that 500 probably can't match.
500 also runs an accelerator, but we focus on tribe size of 25-30 startups per batch, and invest in another 100+ companies outside of our accelerator (many of whom are also YC, TechStars, SeedCamp, AngelPad, or others). However we primarily scale geographically, through our people and our community, through our own systems and metrics, and through the broadest possible diversity of gender, race, religion, and language. We do a wider variety of investments and variations, and we compete on a more irregular playing field that involves rainbows & unicorns, gnomes & underpants, and sheer naked hustle that leaves most other folks gasping in our exhaust.
But while we both are GUILDS, we both aim for WINNERS, and we both build for SCALE, beyond this is where the comparisons likely end. We are as much different as we are similar. We are as much Sparta and Athens as we are geeks in arms. We are the Underdogs, and they are the Sure Thing.
Differences: Hustlers vs Hackers, Singles not HRs, Global Diversity vs. Alpha Geeks
At the core of our different cultures, 500 is most clearly born from Hustle, and YC is easily King of Hackers. While both YC and 500 would brashly declare we aim for #1 in all things, one of our founders who is of both worlds put it best that YC is for Hackers and 500 is for Hustlers. YC is unbeatable in engineering & programming culture, and 500 is best in show at marketing, design, & story-telling culture. They are chess nerds and we are band geeks. YC made Fire. 500 stole it.
There is mutual respect, but we come from different worlds.
Most relevant to this post, I want to discuss the goal of Looking for Black Swans. It would seem from PG's post this is most definitely YC's mission – to find the biggest & baddest startup founders, and get them to swing for the fences. Not to mention get them the highest possible valuations at demo day.
While there is nothing at all wrong with this mission (in fact, there's a helluva lot right with it, especially if you believe in Peter Thiel's power law theory), this is not at all what 500 is about. We are not going to beat YC at attracting the biggest home run hitters (unless maybe they're from Brazil or India or Russia). We aren't going to ask them to hit bigger home runs… in fact we might ask them to hit more singles, or just get on base more often. And we also aren't going to ask them to aim for $10-15M valuations, or uncapped notes. (note: this is where it sounds like i'm whining, since 500 is an investor in several YC startups, and recently we turned down some great companies at higher valuations we didn't think were matched with current traction).
We understand this may not always be seen as founder-friendly, but in the long run we think it's better for founders & investors to be practical about early valuations, rather than to optimize for highest possible seed round valuation. Valuation may become more important at Series A or B, but for early-stage and seed rounds, you probably want smart money at lower valuations rather than dumb money at higher valuations. Regardless, we think that seed round valuations for good companies at $3-7M are not a bad deal for either founders or investors, and is more sustainable pricing for an ecosystem that will neither crash nor explode in the near future.
Your mileage and traction may vary, but we've seen our fair share of companies raising at $10M+ valuations on demo day who can't raise a Series A at $8M a year later. On the other hand, we know we'll probably miss out on the next AirBnB or DropBox that raises at $15-20M on demo day, and exits 5 years later for $1B or more.
But that's ok, that's just not our game.
We aren't going to get Albert Pujols or Alex Rodriguez out of college, and we won't be able to buy them in their power years. And we won't be able to keep Dirk Novitzki when he becomes a free agent. We just aren't George Steinbrenner. But we sure as hell like Bill James & Sabermetrics.
Lastly, i want to focus on the global diversity item.
Without making too big a deal about it, we think there is a lot of talent that is going overlooked outside the US border, and perhaps even within the US that looks a little different than the next Mark Zuckerberg. Those founders may dress a little unusual, they may wear a dress, or shave their head, or they may speak a different language, or they may hail from Nairobi or Kuala Lumpur or Zagreb or Beijing or Colombo or Recife or Jordan or Manila or Sydney or Montreal or wherever the fuck name of city you've never heard of.
This is not to say that YC doesn't draw startups from all over the world, but perhaps 500 is a little more focused on bringing talent from different corners of the planet to Silicon Valley, and most certainly we're doing a lot of investing outside the valley in places like Brazil, Mexico, India, China, Australia, and Europe. Our investing team speaks Mandarin, Japanese, Portuguese, Spanish, Hebrew, Korean, Hindi, Punjabi, French, German, and will probably speak Arabic and Russian sometime next year.
Make no mistake: 500 is going ALL IN on the growing global market, whether it comes to Silicon Valley, or whether we fly to meet them.
In closing, i want to again praise YC and PG for all that they have done to innovate and disrupt the world of venture capital, and the leadership and bravery they have displayed in doing things different. They are most certainly the Giant whose shoulders we all stand upon, 500 and others included. They are kicking everyone's ass, and they are easily King of the Hill.
TL:DR: This post aims to recap significant changes in the venture capital industry over the past ten years, and then make some [biased] predictions as to major forces at play in the next five years. In particular, I hope to highlight some less obvious [r]evolutionary shifts that people outside the industry may overlook. This is a long piece, so if you're not a fan of inside baseball, skip it.
Big Funds, Big Brands, Big Data.
While institutional LPs know big changes are happening, most focus too much on 1) increasing/decreasing fund size or 2) marketing + branding as the major trends. Both are notable, but the more significant evolutions going on are: 1) a shift towards operators vs financiers as fund managers, along with growth of non-investment staff, 2) use of technology and scalability in how investments are made via tools, data, teams, and process, and 3) the emergence of branded guilds as dominant entities / communities that attract the lion's share of new deals and talent.
It's no coincidence we designed 500 Startups with these evolutions in mind, altho none of the required strategies have been easy to execute and we are still refining our approach. However, all three shifts are related and can be summed up simply as: Geeks are Taking Over Venture Capital. Or, as my friend Marc Andreessen might say, Software Eats the Private Equity World.
Ok, let's dive in and discuss in more detail.
Mega VC, Micro VC
In the past ten years there have been several dramatic changes in venture capital. While a flood of new VCs came into existence during the late 90's internet boom, many had difficulty raising new funds after the crashes of 2000-2001 and 2008, and as a result significantly fewer fund managers exist now compared to a decade ago. Among the remaining survivors, there have been two notable types: huge Mega VC funds with over $1B under mgmt such as Andreessen Horowitz, Greylock, Accel, Sequoia, Benchmark, Kleiner, and Khosla; and smaller, more nimble “Micro VC” funds (typically <$100M) like First Round, Floodgate, Felicis, Harrison Metal, and SoftTech. (note: apologies in advance for the west coast bias; i'm in silicon valley)
These two divergent groups have optimized for very different market conditions and behaviors. Mega VC has focused on the challenges of the post-SarbOx IPO market in the US, and has discovered opportunity in offering larger amounts of growth capital ($10-100M+) to private companies with reduced access to public markets. Meanwhile, Micro VC has focused on sweeping changes in technology and consumer internet adoption that have enabled dramatically reduced capital requirements for building new software companies, as well as accelerated access to customers via search, social, and mobile platforms.
Micro-VC: The Artist Formerly Known as “Super Angel”
The “Micro-VC” funds (also known by the misnomer “Super Angel funds”), started as far back as the mid-90s with Ron Conway and earlier incarnations of his SV Angel fund. Many of these now-trendy Micro-VC funds began as individual angel investors who gradually grew up and started small funds (myself included). One of the earliest and most well-known of the Micro-VC funds was First Round Capital, founded in 2004 by Josh Kopelman, a former entrepreneur who sold Half.com to eBay in 2000. The major change Josh and his team recognized was that startup costs were dropping dramatically in post-crash early 2000s, and by investing in a larger # of smaller seed rounds at $250K-$1M, rather than fewer / later Series A rounds at $2-5M, they could capture more winners & success earlier in the funding lifecycle. First Round became a very active investor in consumer internet and e-commerce, on a rather lean investment budget, with several notable exits (including Mint.com to Intuit in 2009 for $170M).
Other angel investors and smaller funds also copied this innovation, and many of these new Micro-VC fund managers (like me) came from operational backgrounds at companies like PayPal/eBay, Yahoo, Amazon, or Google, rather than finance backgrounds from investment banking or Wall Street. We were familiar with internet startups and technology platforms, and we had experience using email, blogging, search and social techniques for internet marketing. In short, we were a lot more geeky than the previous generation of fund managers, and we started blogging a lot about tech startups and best practices. One in particular i'll come back to later was Naval Ravikant, who with Babak Nivi started Venture Hacks, a blog with tips & best practices for entrepreneurs, and later Angel List, which has dramatically changed VC.
As a result of all this Super Angel / Micro VC activity in the latter half of the decade, many larger, more prestigious Silicon Valley firms began losing some visibility and influence with the entrepreneur community, as that of First Round and Ron Conway and the PayPal Mafia and others similarly grew in influence. The defining jump-the-shark moment for this group was likely “AngelGate”, the Bin 38 dinner meeting of September 2010, where blogger Mike Arrington, founder of TechCrunch, famously accused many of us (yes, I was there) of attempting to collude and drive down prices of early-stage startup deals, especially those from Y Combinator, founded by Paul Graham. (and no, we didn't. but the food was awesome, & the PR wasn't bad either)
Rise of Y Combinator, 1st Branded Entrepreneur Guild
A few years before all this scandalous VC behavior occurred, in 2005 Paul Graham) started Y Combinator. YC began as a small startup accelerator program making very tiny (~$20K) investments, but in a few short years grew quickly to become the most famous (some would also say most dominant) program for aspiring young internet entrepreneurs. In its first 2-3 years, YC was viewed as a rather risky experiment in “spray-and-pray” investing, and PG was viewed as a maverick. However after Sequoia and Ron Conway announced their investment in YC in 2009, and after YC alumni DropBox and AirBnb raised capital on billion-dollar valuations in 2010-11, the program quickly became the gold standard among early-stage startup incubators. YC now runs 2 programs per year, with over 80 companies in the current batch, and is highly respected both by VCs and entrepreneurs all over the world (and their valuations reflect that as well).
However, while YC was growing in prominence & valuation, and scaling the # of companies it was funding every 6 months, something else happened. After the first few years of operations, some 50-100 companies had gone through YC, and many of them stayed in touch and supported each other as well as newer batches of startups that were coming into YC as well. This alumni network of YC founders became extremely helpful & influential, both online and off, and in many ways began bearing some resemblance to a modern-day guild – an association or union of craftsmen, or in this case a union of startups & startup founders that was unlike any other. And in addition to helping each other, they also started funding each other, and even helped YC select future batches of founders.
Now this might sound like a minor development, but actually it's something that is changing the entire playing field. While some attribute YC dominance to Paul Graham's excellent selection of founders, or his ability to coach founders to raise at ever-higher valuations, or the branding of YC overall, i would actually argue that none of these is as powerful as the network of YC alumni, and their willingness to support, mentor, & fund each other to success. IMHO, this is what is really valuable about YC, and why it's difficult for others to copy.
YC is a VC fund that looks and operates like a guild of geeks, and hardly looks anything like a traditional fund comprised of VC partners with MBAs or finance degrees. They are operators, through and through.
Investing in Non-Investment: The “FULL SERVICE” VC
Along with the trend towards hiring VC partners with more operational experience, we are also seeing substantial growth and investment in non-investment staff at several funds, particularly those that focus on early-stage companies. Some of the more notable examples of this include Mega VC Andreessen Horowitz, which has invested considerable resources in growing its in-house recruiting and business development functions. Another new firm that is growing non-investment resources is Google Ventures, which has specialized in several areas including design and data analysis. One other firm that doesn't always get a lot of popular acclaim but has a ton of operational expertise & widely global reach is Rocket Internet.
And of course then there is our own fund, 500 Startups. From the beginning, we focused on “Design, Data, & Distribution”, recruited hundreds of mentors around the world with operational expertise in these areas, built close relationships with major internet platform companies like Google, Facebook, Amazon, Twitter, LinkedIn, YouTube, PayPal, and others, and created and run our own conferences on focused startup topics like Design, Marketing, and Monetization, among several others.
But why are we all doing this? What's the benefit in investing in people who don't write checks or make investment decisions? Why bother with all the extra costs, people, programs, etc? Isn't this just a lack of focus? Well, we don't think so, and we're pretty sure the other firms mentioned above don't think so either. For many early-stage companies still working on their product or developing customers, most of their challenges do not require large amounts of capital nearly as much as they require expertise – particularly in engineering, design, and marketing.
Funds that offer serious expertise and mentorship in these areas have a substantial advantage – both in being able to attract higher quality founders and companies who want access to those resources, as well as the potential to improve financial outcomes by amplifying traction. As founders come to understand which funds are making serious investments in their own operations, they will become more selective about which VCs they choose to work with, and there will be an inevitable flight to quality.
Tools, Tech & Data: Social Platforms, Quora, Angel List
Of course as venture funds scale up and expand their operations, as with any other industry, technology and data can be substantial advantages. While many funds still use faxes and snail mail regularly, 21st century firms are investing in tools & technology that will allow them to move faster, more efficiently, more inexpensively, and ultimately with greater confidence than those that do not.
In fact, it's rather ridiculous and hypocritical for VCs to be investing in technology companies, pushing them to scale, and still not practicing what they preach themselves. Yet even some of the most basic tools such as social platforms like Facebook, Twitter, LinkedIn and other critical information services such as Quora or Angel List or SlideShare are not readily familiar to many VCs. Hell, there are still plenty of VCs who don't even have a blog or use twitter, and many more who have no idea on how to use data services to analyze and collect metrics on their own portfolio. Aside from the branding and marketing advantages great blogging VCs like Fred Wilson, Brad Feld, Mark Suster, and Chris Dixon get from telling stories and communicating, there are many other online tools that can benefit VCs.
While there will always be need for smart, thoughtful, trustworthy and domain experienced VCs who come from traditional investment backgrounds, it is also true these good people will be challenged by others to embrace the same digital techniques and disruption with which our portfolio companies challenge existing market incumbents. Why should VCs be any different?
So if you believe we are moving towards investment platforms that function like other web services, you should certainly be evaluating and using tools like Angel List, Gust, CapLinked, Trusted Insight, Second Market, and many others now emerging as a result of the JOBS Act and financial services innovation. So far, I'd say Angel List has had the most substantial impact on how we do business as investors – we use it almost every day to evaluate new companies, cross-reference other investors, and encourage our own portfolio companies to use it when raising future rounds of financing. My hat is off to Naval & Nivi on all they've done to innovate and grow their service into the juggernaut it is fast becoming. They are truly changing the face of venture capital in very positive ways, for both founders and investors.
Scaling Up & Out: The Valley is Flat (and Global)
Finally, I'd like to bring up how important it is for venture to expand its horizon beyond Silicon Valley, and beyond the US market. Most firms don't have the appetite to invest outside their backyard, but there are tremendous opportunities and talent to be found in multiple geographies all over the world. While it will always require local market cultural fluency and expertise to take advantage of this growth, at the same time many of the platforms and techniques for which Silicon Valley is famous have now gone global. There are now billions of people on Google, Facebook, Twitter, Apple & Android, and the ability for communication and commerce to bring us all closer together is more amazing than ever. Entrepreneurs can be found in every corner of the globe, and emerging market consumers and businesses are growing and connected everywhere.
With programs like our GeeksOnaPlane tours to guide us, 500 Startups has been a frequent investor outside the US – we now have over 50 companies in our portfolio spread across 5 continents and 25+ countries. Our founders have immediate connections to other entrepreneurs, investors, partners, and customers in almost every geography on the planet, and we will keep expanding our reach. Our family is one of many colors, many languages, many currencies, and many wonderful flavors. And we wouldn't have it any other way.
(for those of you who've stuck with me until to the end of this post, I'd like to thank you profusely, and apologize that i don't have a better editor… -DMC)
I'd like to write a different Open Letter to Marissa Mayer, that plays to both her strengths, as well as those of Yahoo. It's a bit off the wall, but if you think it thru with me, I bet you'll agree with the strategy.
Yahoo has struggled for the last 6-7 years – with what it stands for, who's running the show, how to keep its employees, how to compete with Google, and how to take advantage of its amazing assets in content, communications, and community around the world. The last really bold move Yahoo made was probably acquiring Flickr (aside from turning down the Microsoft acquisition offer, or the previous hire of Carol Bartz). Yet by tapping Marissa Mayer as the new CEO, there is still a way for the company to remain relevant, and even perhaps regain some of its former glory.
The answer is simple: Focus on WOMEN.
I'm sure you think I'm being both foolish and sexist with this statement, but consider Yahoo's strengths: it still has huge audience that visits every day for content that appeals to women: fashion, family, shopping, entertainment, and others. In addition to these properties, Yahoo is also strong in email, chat, images, and communications, with frequent & broad usage all over the world.
Now what if Marissa used Yahoo as a bully pulpit, to address the needs of a market that is roughly 50% or more of the global internet population? What if Yahoo began acquiring or partnering with properties specifically relevant to women, like Pinterest, ShoeDazzle, Gilt Groupe, BabyCenter, Oprah, People, Etsy, Ellen Degeneres, Martha Stewart (or BritMorin.com).
What about working with startups doing healthcare & wellness like EcoMom, career advice like Daily Muse, finance education like Daily Worth, children's activities like ActivityHero, and photo sites like PicCollage? (sorry shameless 500 Startups plugs there ;)
What if Yahoo went back to its vision for media and entertainment, and acquired services like EventBrite for ticketing, Hulu or Netflix for video, and perhaps picked up Zynga (which appeals to mostly women) for gaming?
What if Marissa made it known that Yahoo would be the best tech company in the world for hiring women execs, putting women in leadership positions, and advancing the opportunities for women in the workplace (as Sheryl Sandberg is so well-known for promoting at Facebook)?
What if Yahoo expanded its international advantages by focusing on ½ the world's population that is still discriminated against, disadvantaged, and even disempowered in many growing developing nations? Wouldn't that be an awesome way to appeal to women globally, and be the torchbearer for women's issues & content around the world?
While this may sound extreme, this is the Niche To Win strategy writ large – by narrowing its focus to women, Yahoo can beat the pants off its competitors. Both Google and Facebook, run by the geekiest and nerdiest of men, are clearly out of their element when faced with how to address the female customer.
And consider that in previous acquisition discussions, Yahoo was always at a disadvantage to other platform giants – but now, wouldn't any woman-focused startup prefer to join Yahoo, run by a woman, led by women execs, and focused on women customers?
So Marissa, let me suggest you make a bold move as you take Old Purple by the reins – think BIG, think DIFFERENT, and think PINK.
Then go beat the living crap out of the Old Boy Network.
thx 2 Anil Dash & Gina Trapani on brainstorming 4 headline of this post.
Actually, this is quite far from the truth – in fact, you can be incredibly mediocre and still be quite successful. (sounds inspirational, i know, but stick with me for a minute.)
The secret is to find your Niche – that is, the initial customer segmentation / product differentiation combo that enables you to beat your more established, mature competition with a much crappier product.
This strategy is called “Niche to Win”.
Most VCs (especially those with limited operational marketing experience, or in a few cases, those with too much good fortune with big wins) have no understanding of this. They commonly and foolishly advise founders: a) “You’re thinking way too small”, or b) “Your market isn’t big enough for us”, or (sorry Vinod i know you mean well but i don't agree) c) “We only fund Ambitious Entrepreneurs who want to Change The World”.
While this perspective isn’t completely irrational coming from large-fund VCs (>$250M+) who need big exits & returns to satisfy their LP investors, it’s incredibly unhelpful in the short-term for entrepreneurs just getting started, who may be a year or three from understanding their mature market opportunity.
In fact it’s a bit counter-intuitive, but the crappier you are and can still find minimum viable success, the quicker and better you'll be at identifying initial customer-problem framework opportunities that will create possibility for your still tiny little startup to grow up and succeed.
Let me give you an example:
Suppose you're a tiny, new startup working on products for women, and you're competing against Proctor & Gamble, or Johnson & Johnson, or BabyCenter, or ShoeDazzle, or something huge & profitable & successful.
You feel like you can't win right?
Like it's impossible to beat those big incumbents.
But now consider: those companies focus broadly on the huge and largely undifferentiated market for women, perhaps with the only focus being that they are between the ages of 18 and 65.
Now, consider if you NICHE TO WIN, you can focus on products for:
… women ages 25-40
… who have 2 or more kids age 3-7
… who live in urban areas
… who make $50K-125K US GDP or equivalent
… who work for a living
… who feel like they don't have enough time in the day.
Now, it's actually quite easy to focus on a much more narrow demographic, research & discover their common problems, and build products & solutions that focus more specifically on these customers, rather than the broad market segment of all english-speaking women in north america.
Now, you can compete with a much less mature product but much more focused customers, more specific problems, more targeted marketing (that probably costs less to acquire customers ready to purchase), and thus a more differentiated offering. In fact, your product could be far inferior, far more expensive, and far more profitable than a big competitor's product that was designed for a much bigger, undifferentiated audience, but with crappy untargeted marketing. Also likely, because they're a big company, they'll move and innovate much slower than you, so you'll always be ahead of them and they'll never ever catch you.
Ultimately, if you do want to become a bigger company, you will have to grow your market, change product offerings, and compete in multiple customer demographics against those big incumbents – but in the first few months of existence, your job is simply to establish a foothold, to get an initial MVP out the door, and SURVIVE.
If that's your goal, then focusing on a big, world-changing vision is EXACTLY the wrong thing to do. You need to narrow your field, find a very targeted customer, and work on a simple, crappy, focused solution for your customer.
so just Niche to Win, baby.
(apologies, Svbtle doesn't have comments yet. bitch at Dustin to make it happen ;)
when I'm optimistic, I think maybe I'm just a late bloomer.
I know a lot of folks won't understand this perspective, but when I was growing up I was always the smartest kid around. it was expected that I would do great things, by my mom, by my teachers, and most importantly, by me. I don't know whether that's a good thing or bad thing, but high expectations were always around me, and for the first 10-15 years, the results would seem to indicate that was a likely thing.
but after lots of good grades and academic achievement (I skipped 8th grade and another in high school), that kind of stopped happening. I went to college early, and found out that performing well wasn't always based on being smart. hard work and regular, consistent effort was also required… and I wasn't really very good at those things. I also had a lot of trouble in college with too many fun things to do… many of which didn't involve school. I got really good at playing foosball, pool, frisbee, and going to lots of parties and making friends, but I kind of barely made it to graduation. altho I did make dean's list later in college, I was also on probation a few times, and I spent a lot of time doing “recreational activities” (ahem) which caused a lot of pain and hassle for me, and probably even more for my family. I got through those times, but I started to think about all the things I was supposed to be, and the reality was that I wasn't quite getting to the goals that had been expected. I didn't become an astronaut, or an astrophysicist, or a great singer or dancer or pianist, I didn't end up in politics, I didn't join the peace corps, I didnt get a Phd or even a masters degree. by my mid-twenties, I headed west to California in search of myself, barely managed to become a decent programmer who bounced around a few jobs, and wasn't really sure where I was going next.
by my late twenties, I stumbled into running my own consulting firm, which sort of became my first startup. we had a lot of ups and downs, and altho we won a few awards and did some interesting and innovative work, after 5-6 years of trials & tribulations and serious questioning of my own ability as an entrepreneur and leader, I barely escaped bankruptcy multiple times and ended up with only a very small and desperate acquisition that was hardly anything to brag about. I didn't take the job with Microsoft or Intel in the early 90's, and I didn't join Yahoo or Netscape in the late 90's. i had applied to business school at Stanford, but didn't get in. I was fortunate to get a job at PayPal in 2001 after the first dot-com blowup, but it wasn't with any fanfare, and I was struggling to adjust to a new career in marketing, working with people ten years younger than me from Stanford and MIT who seemed to have their shit together a lot more than I did. after 3 years hard work at PayPal, I made some progress, but didn't get any promotions and mostly got shuffled around working with 3 different bosses who really didn't know what to do with me. in fact, I felt lucky I didn't get fired during my time there, and as I walked out the door I was relieved no one had figured out I was a lame duck who didn't know where the hell I was going.
don't get me wrong: PayPal was a great place and I made some wonderful friendships and learned a hell of a lot. my own startup had been a comedy of errs, but i did learn a lot about running a business (mostly what not to do) and learned a lot about myself in the process. I also ran a lot of user groups and events, and realized I was pretty good at marketing, and I really loved technology and the silicon valley culture. but I still felt like an unfocused underachiever, and at 40 hadn't accomplished much other than finding a good woman foolish enough to marry me, and somehow managed to father two wonderful children I was vastly unqualified to raise. I joined Simply Hired for a few years and did some work I was proud of there, but then continued bouncing around at consulting gigs with oDesk, Mint.com, O'Reilly Media and others where I still felt like I didn't quite fit in, and wasn't making the impact I had hoped. at Mint, I was again fortunate to work with some amazing people, but Aaron correctly assessed I wasn't really the right guy for the job, and I felt lucky to just play a small part in a decent success story (Aaron did let me invest some money in the company, which worked out pretty well for me; thanks Aaron :)
so after twenty years in the valley, I had made only a little bit of money, had some modest accomplishments as a programmer, an entrepreneur, and a marketer. meanwhile my peers at PayPal had gone on to create incredible businesses like LinkedIn, YouTube, Yelp, and Yammer, and other kids half my age were seemingly even more ambitious. most folks thought I was a decent fellow, but over the hill with my best days behind me… and I guess I thought so too. I watched as other friends helped make companies like Google and Facebook and Twitter into juggernauts, but mostly I was on the sidelines, only peripherally involved in their big ideas. but I had started doing some angel investing when I left PayPal in 2004, and after finding Mint.com, SlideShare, & Mashery, I figured maybe I had some talent as an investor… since it seemed like I was only a half-assed entrepreneur.
so after some small notoriety in 2007 teaching a class on Facebook at Stanford (strangely, a school where I wasn't good enough to get accepted as a student, somehow let me become a visiting lecturer), I decided I'd try to become a venture capitalist. my timing was of course impeccable, and as i was attempting to raise a small fund in summer 2008 the next huge financial crisis hit, and the bottom fell out of the market. again I was fortunate, and my plan B was to humbly say yes to a job offer by Sean Parker to help do some marketing and investing at Founders Fund. I was likely the only person hired in the entire venture industry in Q4 of 2008 (thanks Sean, I owe you one). I threw myself into the job, and after a year and a half had made some decent picks investing in Twilio, SendGrid, Wildfire, and TaskRabbit among others. along the way, I also got the opportunity to run the Facebook fbFund for a short time, and made some friends at Accel and Redpoint and BlueRun. these folks, along with Founders Fund, Mitch Kapor, Michael Birch, Fred Wilson, Brad Feld, Marc Andreessen, and several other generous souls helped me to finally and barely raise a small fund in 2010 that I brazenly named 500 Startups.
it would have been easy at any point in this journey to rationalize my limited success, and accept being a small cog in a bigger wheel, at likely much better pay and much less stress. but I was still hoping I had a little fire in the belly, and maybe some gas left in the tank to make something more of myself, before I ended up with just a broken spirit and a comfortable life.
and so here I am: still standing in the arena, in hand-to-hand combat with demons mostly of my own making, aiming to make a small dent in the universe. nowhere near a great success story, yet fighting the good fight and perhaps helping others to achieve greatness as I attempt a bit of my own. I'll be 46 in a month, well past the age when most folks have already shown what they're made of. but I'm still grasping for that brass ring.
I don't mean to whine or bemoan my lot in life – I've been far more than lucky, and I've had a great time on this planet. I have nothing to complain about, nor will it be the end of the world if all I get to do in the next 30-40 years is to breathe in the air. all things said, it's been a wonderful life.
but I'm not giving up yet.
I'm still betting my epitaph will read “late bloomer”, and not “failure”.
one thing different here: there won't be as much of my former crazy red bold fonts, and I'm trying to ease off the profanity and ranting (altho there will probably still be a good bit of that). perhaps I'm getting conservative in my old age, or maybe I just feel less need to grab headlines these days. that's probably bullshit (whoops!), but in any case it's still the same old me.
if you want to read some of my old stuff, it's still here, and some of my better posts are here. you can also find lots of my crazy presentations here.
most of my time these days is spent running 500 Startups, and I might occasionally write on our 500 blog as well.
as always these are my own thoughts, and don't necessarily reflect my efforts at 500 Startups. likely unprofessional but still geeky nonetheless.