Over the past ten years there has been a debate about whether venture is an asset class or a cottage industry. My decision to join NEA started with a core belief that it’s both. I personally love venture capital investing because there is no other industry where working on a grassroots level by supporting 1-2 great people at the start can have macro effects on both the asset class and the overall economy. NEA has a unique strategy that is not only focused on Silicon Valley, the hub of entrepreneurship by many measures, but also on the broader entrepreneurial communities in Asia, in unsuspecting places such as Chicago or DC, as well as, in New York and Boston. I’ve spent several years circling Boston and traveling the well-worn path from Boston to NYC and Boston to the West Coast. I’m excited to expand that route to meet new entrepreneurs.
As I meet with great founders in various geographies, I’m struck by how unique yet similar their approaches are. Some say East Coast entrepreneurs are more focused on revenue or the Midwesterners are more likely to want to bootstrap, but the remarkable ones are all undaunted by physical boundaries, competition or technological limitations. Their drive is immediately evident and inspirational. They are patient yet tireless, creative yet grounded. The ones who I am drawn to in the consumer space are also eternally focused on detail, user experience and customers. And, of course, they have to be seeking a venture investor who appreciates the same things as they do. This is why venture capital is also a cottage industry. Compatibility drives investments first and foremost. An investment may start with a serendipitous meeting. A relationship develops over a period of time (sometimes years), and ultimately (maybe less than 1 out of 10 times), a macro event emerges.
NEA has had several of these macro events over the past couple of years. As I’ve been planning my move (physically to the DC area) and my next few trips (which will continue to involve frequent trips to NYC and Boston as well as many new places), I’ve been reevaluating and appreciating entrepreneurship and venture investing from a new perspective: great ideas are born from great innovators and great innovators are born anywhere. I hope to contribute to the type of success at NEA that affects the asset class, using the only approach that I believe works: building individual relationships with great entrepreneurs wherever they may be found.
We look back at failed internet companies from the 90s that planned to build “it” and make money with “eyeballs” and shake our heads. As if that would have worked given the nascent form of online advertising, the lack of targeting and moreover, the pure lack of eyeballs (only amounting to 50m online). With the events of the last week—namely two previously heralded public companies’ (Facebook and Zynga) stock prices at unpredicted levels and one ominous snafu on the part of a major TV network (the NBC + Olympics + Twitter debacle)—I am left wondering if we’ll look back and shake our heads, wondering how we could have ever expected today’s ad dollars that swarm around social media to have been justified.
There is no question that Facebook is the powerhouse of social media. Having more than $4bn of revenue over the last 12 months, if they can’t figure out social media advertising, I suppose no one will. However, Facebook is no Google because social media advertising doesn’t appear to be as lucrative as Adwords; so far Facebook has a much lower revenue per user than Google. Facebook now has 955m MAUs but only $992m in Q2 advertising revenue and only $1m/day from their nascent social media advertising pillar: sponsored stories. Social media advertising may be an oxymoron. Is a Facebook newsfeed update that one of my friends likes Wal-mart the best they can do? How long will it be before users demand to unsubscribe? These are not ads to the side of the page like Google, these are irrelevant details right in the middle of your stream. For years brands have said that word of mouth marketing is the hands down the best way to get consumers’ attention. Social media IS word of mouth online, but the advertising we’ve seen across it is certainly very different from word of mouth marketing.
This is earth shattering to those counting on big ad budgets, even the “big” digital ad pennies (er, dimes?) that are fractions of their analog predecessors. It will never again make sense for a major network to pay what NBC paid for the Olympics. NBC skimmed by this time because there simply aren’t enough people on social media yet. And, can we ever expect Facebook’s revenue to approach that of Google’s? Add the growth of mobile to the growth of social, the lack of effective ad mediums there, and the fact that mobile is key to Facebook’s future, and I think we all can say the answer is no… unless Facebook (and the companies that work most closely with them, i.e. Zynga) figures out how to make marketing the new advertising. Advertising is dead. Not spiraling or cannibalized. Dead. At least that’s what I think we’ll look back and say 10 years from now.
I’ve noticed a growing amount of advice for business entrepreneurs on how to find a technical co-founder. The advice seems to be “don’t delay if you can’t find one; learn to code.” It’s really important to recognize that recruiting a partner/team is the FIRST test of how much merit your idea has. Selling your vision and INSPIRING others to join you is THE key skill you need to develop as an entrepreneur. In order to get your venture off the ground, you should think about yourself as your venture’s Chief Marketing Officer, not your CTO. Yes, learning to code is getting easier and easier and it adds technical chops to your credibility, but time is precious. If you can either spend time perfecting your pitch/model/idea or learning CSS and Ruby, I’d recommend the former. And, if you can’t recruit a technical co-founder, it’s probably the former not the latter that’s preventing that. I’ve never heard a technical founder candidate refuse to join because the business partner was not planning to write code.
Five years ago the hardest position to fill in an early stage startup was the VP Marketing. Why? Because at the early stages, you need a marketer who shapes the vision in order to broadcast the vision. It’s very hard to get users at the early stages, and traditional online marketing spend is usually a waste then. Same thing for PR. You have to sell the market (just like you did a co-founder and hopefully, investors) on your vision. You have to find users in the most odd, inexpensive ways and you have to drum up cheap “PR.” The need to make business founders into tech hackers is simply a short term fix. The number of startups being created is at a 10 year high, and the ability to recruit is a precursor to your ability to raise money. So, making Founders (business or technical for that matter) into their own Chief Marketers is a trend that should be on the rise.
No one you hire can do a better job telling the story than you, the founder. Put down the CSS and Ruby books and pitch to anyone who will listen until you get it right.
I remember the first time I realized shopping online would be an awesome time saver and a great way to discover new products… about an hour after I used the internet for the first time in the nineties. The first thing I did was to look for clothing, but I quickly realized there was very little inventory online. For the next 7+ years, I was dissatisfied with online shopping options, especially around clothing, health or home products—not the what-you-see-is-what-you-get products like electronics, books, or shoes—because of unclear quality, fit, or returns. Some time over the past 3 years, the tides have shifted (not turned, but shifted). Now, I experience the same painful, inconvenient feeling when I shop solely offline, and more often than not, I feel caught in sort of shopping purgatory where I find myself settling for the best I find available between my online and offline options. I rarely have that delighted feeling that I’ve found something unique, rare, and not available to the masses. While eCommerce has grown rapidly, specialty retailers have slowly shut their doors partly due to the real estate crisis of 2008—though, hopefully that trend is on the mend. The result is frustrated shoppers.
Flash sales and group buying sites have contributed growth in eCommerce and the key to the success that stands out to me is that they surprise and delight consumers with deals on things they didn’t know they needed. However, this is impulse buying and what I’m seeking is curated, product discovery on brand new, hard to find items. Buying leftover inventory is the opposite of buying something new and unique.
Here’s my version of a product discovery experience that while somewhat frustrating, worked… the problem is it is not repeatable and not accessible to the masses:
1) 6 weeks ago I realize I need a new, awesome dress for an event this coming weekend.
2) I poke around online and casually shop when I have time on the weekends.
3) After 3 weeks, I’ve turned up nothing.
4) Week 4: I start to panic; to buy something online I need to find it soon or else it may not arrive in time.
5) Week 4.5: I can’t find anything I like online. I head to my favorite stores in Boston and stop into a few in NYC when I have time (dedicated time shopping amounts to 2 hours tops).
6) Week 5.5: I am panicked. I call my sister in law who is a specialty store owner and buyer. She has a great suggestion for a Haute Hippie dress. At last! The problem is she can’t get it; it’s out of stock. I call a friend who buys for Saks and it turns out they have it. She holds it and I rush in only to find it’s the wrong size!
7) Finally, good news. She locates the dress from another store and has it shipped directly to me at home. (It will arrive today).
So why was this process ideal? I started a search online for a very vague but highly specialized item I had in mind, I refined my taste, I received an excellent level of service (shamefully, for free) and finally, I received the product on my doorstep… .and I only spent 5 hours shopping! How can we package this up for the masses?
Numerous new shopping sites are on to something in curation and discovery. Favorites include: Pinterest, Ahalife, and Svpply. I also love DailyGrommet. But, to find the highly specialized item you’re searching for, can an offline component help close the loop and provide a better level of service than affiliate marketing or consigned shipping?
I don’t yet have the answer (yet) but in the meantime, I’ll make a (shameless) plug for this event next week where we’ll discuss online-to-offline commerce (the phrase coined by Techcrunch last fall) with Tim O’Shaughnessy, CEO of LivingSocial. I believe that offline and online commerce can and should merge, and there will be a resurgence of offline specialty stores partly because of the economic recovery. Hopefully, the stores will find a way to bring in their local online consumers.
This post was originally written for the MIT $100k Blog
Among those starting and investing in consumer internet companies, there are two buzz words that draws many in: “Capital Efficiency.” Indeed, internet companies—as opposed to energy, biotech or infrastructure companies—typically require less capital to get some proof that there is demand in the market due to lower costs of software, infrastructure, and new ways of acquiring customers online. However, like all buzz words, which can be confused over time, these have lost some of it’s meaning when you ask questions such as: what’s the total capital requirement for building a business not just for building a product or initial market tests? What’s the capital requirement to build a $100m revenue company? What is it to build a category leading company potentially worth billions of dollars? Not all of these questions can be answered at the early stages, but in the hopes of staying capital efficient, we often forget that very few internet companies raise less than 10’s of millions if they expect to be worth hundreds of million (Twitter, LinkedIn, Facebook, Groupon, Zynga… the list goes on).
Capital is Required to Disrupt Markets
It may be cheap to start an internet company, but the cost to scale a game changing company requires talented and competitive human capital, which is expensive. Ask any internet startup what its biggest expense is, and all will say people. Couple this need with an ever-changing internet landscape that is continuously ripe, and particularly so at present, for disruption. For example, the web leaders of the past decade in travel, consumer marketplaces, online entertainment and eCommerce all could use new competition. I’m always in favor of conserving capital while a company ensures its product fits a market need, but to build big, the focus has to also include how to structure the company to achieve success 6-12 months from now.
Confusion Between Capital Planning and Company Planning
Don’t confuse capital planning with company planning. This is the surest way to send your company into a downward spiral. The first rule of entrepreneurship is: it always takes twice as long and costs twice as much to achieve what you originally thought. With poor capital planning, you may get to a point where you finally have proof of approach but no longer have enough money to attract and hire the next set of developers or the next critical additions to the exec team. These hires will want to see a runway of capital in the bank before they make a full time commitment. To solve this, you may try to raise a little more money only to hear investors voice concern that you’ve simply built a product not the basis for a company. If you can’t hire, you can’t grow, you can’t invest in the product (regardless of how cheap it is) and then your company stagnates. The spiral ensues.
The Sine Wave
This graph represents my advice to entrepreneurs on capital planning. The Y axis is your company’s key business metric for growth (e.g. revenue, active users, or whatever is applicable). The red lines represent points at which you should raise the next round of capital to realize the most value. At the first red line, you should have proven you have a product and the market is starting to react. At the second red line, there is little additional product risk. The market has responded well. Now you’re ready to scale the business metrics. You need a solid team in place sometime before the first red line and the team should be performing well by the second line.
Capital planning pitfalls occur because growth does not naturally progress along an exponential curve. The growth line does not simply go up and to the right. It fluctuates like a sine wave with peaks of progress and valleys of additional, necessary improvements. This seems like an obvious statement, but it typically requires starting 3 months ahead of where the red lines fall to raise the necessary money. With poor capital planning and Murphy’s Law, you will inevitably run out of capital on an extended down cycle on the sine wave.
The definition of capital efficiency is that you should not spend ahead of growth, but this doesn’t mean that you shouldn’t plan cash ahead of growth. Having extra money for this cushion is a reasonable request, but one that I don’t often get as an investor.
A strategic, disruptive vision with a request for slightly more capital is a better path in my view than simply a product/market plan that only achieves minimal acceptance in what—too often—will become a competitive internet space rife with copycats. Investors with deep enough pockets should be willing to give a little extra cushion for groundbreaking ideas accompanied by a well thought out plan.
The world needs more billion dollar, game changing companies that Aaron Sorkin can make movies about. Be aggressive in your vision and don’t think you’ll break away from the pack without a little extra cash stored up for when you need it most.
Curation, the word of 2008-2009 within the eCommerce world, popularized first by the entertaining shopping site Woot, has now officially expanded to the social media space (see examples). It used to be the long tail that made the internet so full of potential, but it seems information reached its peak and we can no longer search, find and make sense of it ourselves. We only need one result—maybe even just one result per day—if we’re expected to take any action. And action is the key word here. Even Google has tried to make search easier. Instant search gives you exponentially more results but more importantly, allows you to self-curate as you type each little letter of your inquisition.
Not only do museums subscribe to a curated model, but so do retail merchandisers and just about every brick and mortar personal, local, or service business I can think of. Why? Because there is too much for us to discover and access on our own. We need these agents, and we evolved as consumers to learn not how to discern quality products but rather how to discern quality curators. I’m typically a believer in what’s old is new again and cyclical reinvention, but this whole curation trend has me wondering: are we really back to the dawn of time—as offline as a curated museum—in reinventing the way we should discover new information online, too?
There are two problems I foresee as curation is applied to social media: one functional and one economic.
- Functional: We consumers are in a decade long limbo between searched and curated social media. The informational world—linked, tweeted, and blogged—has not been adequately curated and because social media grows exponentially daily, search will never work to solve this problem. I believe social media is not a search experience it is a lean-back style, served medium. Curation is required for serving media. However, given the breadth of information, the best curators are hard to surface and we gravitate instead to whomever has the loudest voice vs. the best researched content or perspective. It’s a traditional problem typically caused by marketing dollars and media machines, but they have been equalized by social media mechanisms like Twitter’s trending topics (which currently include #myhomelesssignwouldsay) and Facebook campaigns as simple as getting Betty White on SNL.
- Economic: Curated businesses command a larger premium over long tail, search driven businesses. Example: Apple vs. Google. I buy that curation creates value. However, curation also requires greater expense. Think of the margins of your local specialty retail shop vs. those of Google. Curation requires procurement, procurement requires personnel and expense. Higher price points + Lower margins = Lower price points + Higher margins. I don’t know how it will play out with social media but the framework remains which typically equalizes value.
The social-media-o-sphere has been buzzing about Malcolm Gladwell’s article in the New Yorker on social media last week. What he touched on is the lacking ability of social media to spark action online. Passive and pensive agreement with social media exists online today, but action is hard to create through the same medium. Curation, in my mind, could bring this call to action. This is what the activists described by Gladwell in the Greensboro, NC Woolworth’s essentially did—they focused on a simple message, distributed via social connections to similar spirits in Virginia and South Carolina. I think we’ll be stuck in the social media chasm until the curation problem is solved in this sphere. The question is when it happens, will we have solved the ultimate problem or will scale be encumbered by the economic downside that typically accompanies curated businesses? Depends on how we solve it I suppose …
I can’t promise it has all of the answers and as always, advice is worth what you paid for it (see #10 on Don’ts). This is meant to be a simplified and common sense guide to raising money and spending it regardless of whether it’s venture or seed capital. The bottom line is think about the alternatives (like bootstrapping) and how you would do things differently. If those alternatives don’t fit what you think is your business opportunity, be aggressive with your capital. Time is of the essence, but be measured and set goals to assess whether it’s working. This is also what your board, co-founders, and advisors should help you with.
It always takes twice as long and costs twice as much as you originally thought. I have been in the venture business less than 5 years and I’ve been involved with three ventures. You could call it a small sample size, but I’ve never seen (or heard of) this principal be disproven. Even if your business takes off faster than you ever thought it would, you may find more doors to open to be even bigger than you imagined.
Whether you are a first time entrepreneur or a repeat, successful entrepreneurs, I welcome your comments, questions and suggestions.