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What makes a great VC?

I get asked this all the time.

Let me start by giving my definition of a great venture capitalist.

At the end of the day it’s someone who generates significant (actual) returns on invested capital, treats founders with care and respect, learns from their mistakes and is a pleasure to work with (works hard, committed to a portfolio company) and can do this work at this level over a long period of time.

My partner Santo is a good example. He led a number of Series A investments resulting in outsized winners (i.e. over 9 figures in proceeds) in each of our first three funds. The fourth fund is still early but I’ve seen his work and I have little doubt he will keep the streak going. And he treats founders directly and fairly. He has now backed 4 founders in this fund that he backed previously. And we are talking to another one right now.

There are plenty great VCs by my definition above in our in other firms worth highlighting. Without a doubt that list includes Fred Wilson, Brad Feld, Josh Kopelman, Bill Gurley, and Mary Meeker. I should probably stop naming names because I’ll inevitably forget someone (but one thing for sure: any list that doesn’t factor in actual returns or cost basis isn’t useful).

So what are the common characteristics of these VCs?

Well here’s my take: it’s not necessarily someone with direct startup experience. Its not gender. It’s not where you went to school. It’s not pre-venture success. It’s not operating experience. It’s not where you were born and it’s not where you live.

My own observation is its more about endless curiosity, a passion for learning, a rigorous work ethic, an ability to connect and inspire, empathy, patience, and a natural ability to believe what others don’t – and of course some good luck along the way.

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Peter Thiel’s CS183: Startup - Class 9 Notes Essay

Here is an essay version of my class notes from Class 9 of CS183: Startup. Errors and omissions are my own. Credit for good stuff is Peter’s entirely. 

Class 9 Notes Essay—If You Build It, Will They Come?

 I. Definitions 

Distribution is something of a catchall term. It essentially refers to how you get a product out to consumers. More generally, it can refer to how you spread the message about your company. Compared to other components that people generally recognize are important, distribution gets the short shift. People understand that team, structure, and culture are important. Much energy is spent thinking about how to improve these pieces. Even things that are less widely understood—such as the idea that avoiding competition is usually better than competing—are discoverable and are often implemented in practice.

But for whatever reason, people do not get distribution. They tend to overlook it. It is the single topic whose importance people understand least. Even if you have an incredibly fantastic product, you still have to get it out to people. The engineering bias blinds people to this simple fact. The conventional thinking is that great products sell themselves; if you have great product, it will inevitably reach consumers. But nothing is further from the truth.

There are two closely related questions that are worth drilling down on. First is the simple question: how does one actually distribute a product? Second is the meta-level question: why is distribution so poorly understood? When you unpack these, you’ll find that the first question is underestimated or overlooked for the same reason that people fail to understand distribution itself.

The first thing to do is to dispel the belief that the best product always wins. There is a rich history of instances where the best product did not, in fact, win. Nikola Tesla invented the alternating current electrical supply system. It was, for a variety of reasons, technologically better than the direct current system that Thomas Edison developed. Tesla was the better scientist. But Edison was the better businessman, and he went on to start GE. Interestingly, Tesla later developed the idea of radio transmission. But Marconi took it from him and then won the Nobel Prize. Inspiration isn’t all that counts. The best product may not win. 

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Hooking Users One Snapchat at a Time

This is an expansion of my piece published on PandoDaily.

When Snapchat first launched, critics discounted the photo-messaging app as a fad - a toy for sexting and selfies. Their judgements were reasonable. It’s impossible to predict the success of a product on day one, let alone its ability to change user behavior. But hindsight is beginning to prove critics wrong.

Snapchat boasts 5 million daily active users sending 200 million photos and videos daily. That’s an average of 40 snaps a day per user! But why are users so engaged? After all, what real need is the company solving anyway?

Snapchat popularized a new form of expression, using photos and videos as a communication medium. For many, Snapchat is a daily routine - the go-to app for interacting with friends in a playful way. This habit is not a happy mistake but a conscious effort driven by several subtle design choices.

As Nir Eyal describes, habit-forming products must have two things - high perceived utility and frequency of use. In Snapchat’s case, as with most communication services, each individual message isn’t particularly valuable in isolation. But through frequent use, Snapchatters enter the “Habit Zone”, instinctually turning to the product to solve their desire to communicate and feel connected with others. This key insight has enabled the company to craft an experience tailored for high engagement.

Here are five ways Snapchat drives habitual engagement with their product:

Friction-Free Creation

This tweet recently caught my eye:

Just used @Snapchat to “write down” a long wifi password because it loads so much faster than my camera. First unexpected use.

— Jack Altman (@jaltma) July 5, 2013

As Jack mentions, this is far from Snapchat’s intended use case but exemplifies the speed and ease-of-use of the service. After launching the app, the camera is immediately activated, encouraging instant photo-capturing. Traditional photo-sharing apps like Instagram open a feed to consume media, requiring an additional tap to create. This may appear like a minor inconvenience, but in reality, even the slightest friction can have a large impact. By reducing this process to a single tap, Snapchat enables users to capture fleeting moments faster and with less effort. And to capture a video, simply hold down on the screen to begin recording. No need for additional taps to toggle between photo and video modes.

Lowered Inhibitions

On Snapchat, nothing is permanent. Photos and videos vanish immediately after consumption. Some argue it’s a gimmick but in reality, this ephemerality lowers our inhibitions to share. When we are less self-conscious, we are less hesitant to act. We care less about creating the “perfect” photo or message, knowing it will disappear in an instant.

In comparison, the permanence of email or text messaging establishes an entirely different context. The artifacts of these conversations live on forever and we acknowledge the possibility that they could be forwarded or leaked to unwelcome eyes. This establishes reservations, censoring what we share and encouraging more thoughtful and ultimately, less frequent communications.

One-to-One Communication at Scale

Group messaging and social network “feeds” are channels for one-to-many communication. These messages are implicit broadcasts, not directed to specific individuals unless mentioned. In turn, consumers of the message have no obligation to respond and in some cases, may be hesitant to reply in a public forum.

After crafting a message, Snapchat users must select who to send it to. They are given the option to send to one or many individuals yet recipients are unable to discern whether a message was explicitly sent to them or several people. And this is the genius of Snapchat. It enables a single message to have a broad reach while maintaining the intimacy of one-to-one communications, leading to a higher volume of messages sent and increased response rates as users feel more socially obligated to return the favor.

Read-Receipts

We’ve all received an unwanted text message, email, or voicemail and ignored it. We pretend we didn’t see it or delay our response. When senders ask, “Did you get my message?” we make up an excuse. But on Snapchat, there’s no pretending. Each snap includes a read-receipt, informing senders their message was viewed.

This subtle indicator has significant impact on the dynamics of these interactions, creating a social obligation for recipients to reply in a timely manner. This leads to higher response rates and more expedient replies, increasing usage.

Response rates are critical to the success of Snapchat. Without it, users won’t stick around for long. Our craving for feedback and reciprocation is one of the strongest drivers of social products. To illustrate the effect of response rates, I’ll use a very simple example:

Let’s pretend there are two messaging apps, App A and App B. App A’s average response rate - the percentage of messages sent that users reply to - is 80%. App B’s response rate is 20%. For every 1,000,000 new messages sent, another 800,000 are generated in App A and only 200,000 in App B. In turn, these additional messages have a compounding effect as the original sender replies (assuming response rates remain constant). After 9 interactions, App A generates an additional 3,463,129 messages from the initial one million sent, 13x more than App B’s 250,000 messages.

But response rates are just one piece of the equation. Cycle time, the amount of time elapsed between each message, also has a significant influence on engagement[3]. If it takes an average of 4 hours for users to respond to each message, App A will send its 4,463,129th message after 36 hours. However, if the app’s cycle time is reduced to 1 hour, the same number of messages will be sent within 9 hours, intensifying engagement.

Feeding Curiosity

The human brain feeds off of variability. When things become mundane and predictable, we become disinterested. Consider your own reading habits. After finishing a book, are you motivated to read it again? Once the mystery is gone, so is our interest. But humans are unpredictable and its this variability that makes social products engaging and long-lasting.

Snapchat communications are highly variable. Each message is composed of various forms of self-expression, captured and created at that moment in time. When notified of a new message, one might question, “I wonder what it is. A photo, a message, a doodle, a video? Where is my friend? What are they doing? Is this a message just for me?”

These questions fuel our curiosity as we hold our finger on the screen to view, knowing the snap will disappear forever in an instant. Ephemerality encourages us to treasure these moments, capturing our attention and transforming ugly photos into novel interactions. This variability keeps things interesting, increasing our motivation to remain engaged to uncover the mystery.

As people continue to use the service several times per day, behaviors emerge that perpetuate engagement and retention. Soon, they are hooked and unlike the ephemeral communications it produces, engagement persists as users turn to Snapchat again and again.

TL;DR

Snapchat succeeds because it encourages frequent use by:

Making it easy and quick to create photos or videos

Reducing inhibitions with temporary communications

Creating a social obligation for users to reply to explicit, one-to-one communications

Increasing response rates and timeliness of replies using read-receipts

Motivating consumption through novel, highly variable interactions

Want to learn the secrets behind other habit-forming products like Instagram, Twitter, and Pinterest? Subscribe to my email list to receive a free copy of the upcoming book, Hooked: How to Drive Engagement by Creating User Habits, by Nir Eyal in collaboration with myself.

[comealivebaki]

The Palmyra ruins before and after ISIS

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Four Numbers That Explain Why Facebook Acquired WhatsApp

WhatsApp Co-Founders Jan Koum and Brian Acton

Earlier today, Facebook announced its acquisition of WhatsApp for $16 billion. It’s a spectacular milestone for the company’s co-founders Jan Koum and Brian Acton, and their remarkable team.

From the moment they opened the doors of WhatsApp, Jan and Brian wanted a different kind of company. While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View. As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.

This approach has served WhatsApp well and its users better. WhatsApp has done for messaging what Skype did for voice and video calls. By using the Internet as its communications backbone, WhatsApp has completely transformed personal communications, which was previously dominated by the world’s largest wireless carriers.  

For the past three years, it’s been our privilege to work shoulder-to-shoulder with Jan and Brian as their close business partner and investor. It’s been a remarkable journey, and we could not be happier for these talented underdogs whose unshakeable beliefs and maverick natures epitomize the spirit of Silicon Valley.

Those less familiar with WhatsApp and its wonderful product will marvel at how a young company could be so valuable. Many of those people will be in the U.S. because there’s no other home grown technology company that’s so widely loved overseas and so under appreciated at home. WhatsApp reminds us of other companies that we partnered with – like PayPal, and YouTube – whose founders chose a similar path to Jan and Brian. Today PayPal and YouTube are both household names around the world. Tomorrow the same will hold true for WhatsApp.

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Growth Hacking 不只是 Creative Marketing，別忽略背後的資料科學與方法論

這兩天 Growth Hacking 很紅，有人覺得 Growth Hacking 像是個入門行銷課。有人覺得這我很多年前就做了，不過是舊瓶裝新酒。Growth Hacking 的基本精神很簡單，不過如果把這精神套在任何事情上，那就忽略了 Growth Hacking 背後的資料科學與方法論。

像有人覺得人生也可以做 Growth Hacking，我覺得這就套太廣了，基本上沒有辦法做假設與測試的事情就真的離 Growth Hacking 太遠了。如果只是自己主觀覺得怎麼做是好或不好，沒有指標，沒有測試，沒有分析，就只是行銷概念而已。

但，就像把 Growth Hacking 當仙丹可以治百病一樣，以為 Growth Hacking 只是舊瓶裝新酒而覺得沒用或自己很久以前就已經在實踐了，我覺得也不對。

如怎麼做 User/Revenue Accounting，Behavior Cohort，甚至 High Tempo Testing，這些融合了經驗與資料科學的新指標或 Framework 都是近幾年才冒出來的。Sean Ellis 有一篇投影片在講他們怎麼建立 Growth Team，看看他們怎麼做 Growth，我們真的已經達到他們的水準了嗎？

Building the Ultimate Full Company Growth Team from Sean Ellis

台灣很多團隊都了解成長重要，可是可能以為 Growth 只是概念或心法而已，反而忽略了深入了解方法論與實作。

而事實上是，就我認識的台灣團隊而言（取樣少，有遺珠之憾），能夠 by Feature 做 A/B testing 的公司幾乎沒有，縱使我覺得我已經說明清楚了做 Funnel 與 A/B Testing 的重要性。大家似乎還是執著於推出新的功能，或是停在把 Growth Hacking 當行銷概念用的階段。

而弔詭在，真正能夠對成長造成影響的，反而不是那些被大家（或少部分人）知道的合理行銷概念（如這一面 onboarding 該怎麼做比較對），而是那些還不被人知可是藉由行為分析挖掘出來（或亂猜）的新用戶行為，再加以改進發揚光大。重點是那些你知道是對的，可是別人以為是錯的或沒注意的事情。

這也像是把 Growth Hacking 想像成那��銀彈（像之前提到記者想要的銀彈），但其實真的要做或能做的，是設定好一個 Framework，然後持之以恆的測試成長（Work Hard）。

我覺得 Lean Startup 也是面臨類似的氣氛，教課的人可能一輩子都沒有做過好的 User Interview/Customer Validation，很多人也覺得不就是舊瓶裝新酒，反而是針對方法論的討論少了些。

相較之下 Design Thinking/UX 我覺得台灣的討論就好像實際多了（如 HPX）。

小時候讀 Extreme Programming 的時候有一個規定我覺得很奇怪，就是要全部的條件都實現了，才可以說自己在做 Extreme Programming。我覺得也太嚴苛了，其實光做一兩個也是有幫助呀。不過現在就比較有感覺到，如果有些人沒有做完全可是就下了好或不好的結論，大家討論反而不容易聚焦，也沒辦法體會整個理論交互作用所帶來的提升。

[comealivebaki]

How to Build a Unicorn From Scratch – and Walk Away with Nothing.

This is a grim fairy tale about a mythical company and its mythical founder. While I concocted this story, I did so by drawing upon my sixteen years of experience as a venture capitalist, plus the fourteen years I spent before that as an entrepreneur.  I’m going to use some pretty simple math and some pretty basic terms to create a really awful situation in the hopes that entrepreneurs reading this might avoid doing the same in the real world.

As I’ve seen over many years and many deals, in all but the most glorious outcomes, terms will matter way more than valuations, and way more than whatever your cap table says.   And yet entrepreneurs – often with the encouragement of their stakeholders – optimize for the wrong things when they negotiate their financings.  

This is my attempt to paint you a picture of why this is such a bad idea.  The situation I present is fake, but the outcome is remarkably similar to those I’ve witnessed.  Don’t let this happen to you.

Let’s start with our entrepreneur, whom we’ll call Richard.  He’s founded a breakthrough company.  Let’s call it Pied Piper.

Richard attracts Peter, a newly-wealthy budding angel investor, who agrees to put in $1 million as a note with a $5 million cap and a 20% discount.  

With his $1 million, Richard builds a small team of people, rents an Eichler in Palo Alto, and gets to work.  Once he is able to demonstrate his product, he heads to Sand Hill Road.  He’s in a hot space in a hot market.  He nails his pitch, and the term sheets roll in.

Because Richard is extremely sensitive to dilution (after all, he’s seen The Social Network) he wants the highest valuation possible.  (Early in my career, another venture capitalist called valuation ‘the grade at the top of the paper’ – and I’ve never forgotten that.)  The highest valuation, $40 million pre-money, comes from an emerging venture fund, let’s call them BreakThroughVest (BTV).  BTV is excited about this deal, but has ‘ownership requirements’ of at least 20%, so they insist that to support that valuation they need to invest $10 million. Plus, they want a senior liquidity preference of 1x to protect their downside since they feel the valuation is rich given the stage of the company.  

Richard is thrilled with the valuation and the fresh capital for only 20% dilution.  The prior investor, Peter, is stoked that he is getting his $1 million investment converted into roughly 20% of this super hot company, and now with the validation of an external term sheet he can mark his position up to $10 million, a 10X!  This helps Peter validate his position as a savvy angel and solidify his syndicate following on AngelList.  

Term sheet signed. Champagne popped.  A few weeks later, funds wired.

With the $10 million, Richard rents space in SoMa on a seven-year lease, hires lots more people, and within a few months he is able to roll out the minimally viable product to test the market. Awash in the buzz of his fundraise, a feature in Re/code, and some early user traction, Pied Piper is perceived as the emerging leader in a nascent, winner-take-all market. While they are not yet monetizing their users, the adoption metrics are off the charts.  

Pied Piper attracts the attention of a tech giant we’ll just call Hooli. Hooli’s consumer group wants access to Pied Piper’s data. With Hooli dollars behind Pied Piper, Pied Piper could inundate the market with consumer facing advertising to build their user base and upend competitors given the massive network effect of the product. Hooli approaches Richard with the idea of a large strategic round. In the deal, Hooli would invest $200 million for equity while in return the two companies would enter into a business development agreement on the side in which Pied Piper guarantees to spend that money in a massive consumer campaign on Hooli’s ad platform. They float the magic “B” valuation. Richard goes to sleep dreaming of rainbows and unicorns.

Richard fantasizes about being named a member of the Unicorn Club by the press.  His employees calculate the huge paper gains on their options – they will all be instant millionaires – and since no one is more than ¼ vested, they are all highly motivated to stay in spite of long, long work hours.  BTV is thrilled with the 20x markup on Pied Piper, since they are about to hit their LPs up for a new fund.   The original investor, Peter, has achieved legendary status – his $1 million has turned into approximately $200 million on paper.  He’s on the YC VIP sneak preview list, he’s been offered a spot on Shark Tank, and Ashton just called to try to get into his next deal.

Of course, that $200 million for 20% stake also comes in with a senior 1x liquidation preference in order for Hooli to create sufficient downside protection and thereby justify the $1 billion valuation to their board.  

Richard, Peter and BTV all agree it is worth doing. With $200 million to spend on the most massive consumer-facing ad campaign in this sector’s history, the $1 billion valuation will seem low in retrospect.

Except, it doesn’t end up happening that way.  

The ads start running, but the conversion rate is low. Pied Piper shows Hooli the atrocious metrics and demands out of the advertising commitment, but Hooli won’t budge: Performance metrics were not pre-negotiated, and furthermore the ad group that recommended the investment did so in part to prop up their revenues with Pied Piper’s money ‘round-tripping’ into their coffers. The ad group is counting on that money to hit their annual numbers.  

Pied Piper is forced to run the whole campaign, blowing through all $200 million.  The good news:  They increased their user base by 10x. The bad news: The resulting business model those users end up actually supporting equates to more of a ‘market valuation’ of $200 million. In more bad news, turns out Richard incorrectly estimated the cost of supporting those users, most of whom are taking advantage of the ‘free’ part of a freemium model.  Support costs skyrocket.  

Word about the poor conversion leaks out.  The advertising stops when the money runs out. Growth slows to a trickle when the advertising stops. New investors sniff around, but with the preference overhang of $211 million, they are concerned about employees being buried under that structure and therefore being unmotivated to continue. They ask prior investors to recap, but the investors don’t want to give up their preferences: Pied Piper is now looking like it might be worth far less than the paper valuation, which means those preferences are very valuable as downside protection.  Furthermore, BTV is out raising their fund, and the last thing they want to do is write down their 10x markup on the Pied Piper investment.  

The board is now super unhappy about the massive miscalculation of support costs, awful user conversion, gargantuan ad overspend, the lack of growth the company is experiencing, and the departure of a few key employees who’ve seen this movie before and have done the ‘overhang math’.  Richard as CEO is out of his element – the problems are huge and the company needs more money, which he is incapable of raising given his lack of experience navigating waters like these.  Unfortunately, it is the CEO’s job to fix problems and raise money, and if he can’t do it, someone else has to.  So the board (which now controls the company with 60% of the stock) votes to remove Richard as CEO.  They recruit an interim CEO (let’s call him George) to quickly take the helm.  George says he’ll take the job on two conditions:  One, that they create a 5% carve-out for him and the go-forward employees (he’s done the overhang math too) and two, that they extend the runway so he has time to either turn this thing around – or sell it.

The company is not profitable and the current investors are tapped out.  “Let’s extend the runway using debt,” says BTV.  Maybe things will improve with time – or at least perhaps they can get their fund closed before they have to take the write down.

They lean on their good friends at PierLast Venture Bank who cough up $15 million in debt, with a senior preference and a 2x guarantee. Onerous terms to be sure, but hard to get debt with a balance sheet like this. Unfortunately, Pied Piper is burning $2 million a month on office space, cloud services, customer support, and expensive employees who are needed to build the next generation of the product. Without support they’d have to shut down existing customers and revenue, yet without development of the new release that they hope will save the company, they will have nothing to sell. Since they can’t cut their way to glory, they have to simply hope they can grow into their valuation.

Time ticks by while the company plods forward with very slow growth. Market pressures force them to lower prices, pushing profitability off.  A few key developers leave. Once again, they are facing the prospect of running out of money in 90 days. Current investors are worried.  Not only do they not have funds to put into the deal, but once payroll is missed they could be personally liable for the damage. Not good.  

Luckily, WhiteKnight, a public company with a complementary product and plenty of cash, offers to buy Pied Piper. The offer is $250 million. It’s not a billion – but it’s still a big, impressive number. It’s not that easy to create a company worth a quarter billion real dollars to someone else.  That’s huge!

The venture debt provider PierLast is very nervous about Pied Piper’s balance sheet and looks to the VCs to either guarantee the loan or get the sale done. They want their $30 million. Hooli is likewise pushing to sell, after all they are guaranteed the first $200 million of any proceeds, after repayment of 2x debt to PierLast, while the company would have to be worth over a billion for them to see any further upside given that they only own 20%. Their calculus is that this is about as unlikely as seeing a real unicorn given the state of the company.   BTV, who no longer has any capital left to invest from their original fund, has recently closed their shiny new $300 million fund, so they decide it is time to take their chips off the table. They vote to sell too, getting their $10 million back. Peter, while sad about the outcome, has developed a huge syndication following on AngelList and has recently benefitted from an early acquisition that netted him $3 million on a $250k investment. Can’t win them all, but he’s at peace.  Even Richard votes yes to the sale:  He still has a board seat but given the company’s lack of profitability and lack of any other sources of capital, turning down this deal would mean insolvency, missed payroll - and personal liability.  George (the interim CEO) and the key go-forward employees demand their $12.5 million carve-out.  Tack on more money for lawyers and ibankers, and…

Oh wait, that’s more than $250 million.  Oops.

Ergo, Richard ends up with nothing.

So what can we learn from Richard’s grim fairy tale?

Terms matter

Liquidation preferences, participation, ratchets – even the very term preferred shares (they are called ‘preferred’ for a reason) are things every entrepreneur needs to understand. Most terms are there because venture capitalists have created them, and they have created them because over time they have learned that terms are valuable ways to recover capital in downside outcomes and improve their share of the returns in moderate outcomes – which more than half the deals they do in normal markets will turn out to be.

There is nothing inherently evil about terms, they are a negotiation and part of standard procedure for high risk investing.  But, for you the entrepreneur to be surprised after the fact about what the terms entitle the venture firm to is just bad business – on your part.    

Cap tables don’t tell the real story

For any private company with different classes of stock, the capitalization table is not-at-all the full picture of who gets what in an outcome.  

In the above example, each of the three investors held 20% of the stock and Richard and crew held 40%, yet the outcome was vastly different because of those aforementioned pesky terms and preferences.  

Before you close on any round, you should create a waterfall spreadsheet that shows what you and each other stakeholder would get in a range of exits – low, medium and high. What you will generally find is that, in high, everyone is happy.  In low, no one is happy, and in medium (which is where most deals settle) you can either be penniless or “life-changingly” compensated, depending on how much money you raised and what terms you agreed to.  It is simply foolish to sell part of the company you founded without understanding this fully.

This is why it is so crazy to me that many entrepreneurs today are focused on valuation – the grade at the top of the paper. They are willingly trading terms for a high number. Before you do so, run the math on the range of outcomes over multiple term and valuation scenarios, so you fully understand the tradeoffs you are making.

Venture capital is not free money. It’s debt. And then some

People mistakenly think of an equity investment as ‘only’ equity dilution. After all, if you lose everything, your venture investor can’t come after you for your house like a bank lender could. However, most all venture transactions are done for preferred shares with a liquidation preference, which means all that venture money is guaranteed to be paid back first out of any proceeds before you get to make a dime. The more money you raise, the higher that ‘overhang’ becomes.  And interestingly, the higher the valuation, the higher the delta of value you need to create before the investor would rather hold on to the end instead of getting his or her money back (or a multiple thereof, as some terms dictate) in a premature sale if things are looking iffy.  And what company doesn’t go through iffy times? 

Stacked preferences can create massive problems down the line

This one is a hard to articulate in a blog post. Plus, I am a venture capitalist who on occasion puts said senior preferences in my term sheet. They exist for a reason – again often to do with the valuation and the risk/reward tradeoff the investor needs to make using the downside protection of a senior preference against the minimization of dilution the entrepreneur wants to achieve with a sky high valuation. They are not inherently bad.

But regardless of why they are there, the more diversity of value and terms in each round, the more you will create a situation where your investors (who are almost always also your voting board members) will have very different return profiles on the same offer. In the above example (and again I apologize for simplified math but it is directionally accurate) Hooli is getting their $200 million back on a $250 million acquisition. They own only 20% because of the high valuation they paid. So for them to instead double their return, the company would have to go public for $2 billion!  This is a case of the bird in the hand being worth more than the two in the very distant bush.  

Investors are portfolio managers: You are not

You are betting usually 10 years of your life and all your available assets on your startup. Your investor is likely investing out of a fund where he or she will have 20-30 other positions. So in the simplest of terms, the outcome matters more to you than it does to them. As I noted above, when you have stacked preferences, each person at the table may be facing a vastly different outcome. But now layer onto that their fund or partner dynamics. Ever heard the expression, “lose the battle but win the war?”  I’ve seen behavior that would seem crazy, until one considers what is going on in the background. For example in the above, BTV is out raising a fund and depends on that 10X markup to validate their abilities as investors. Facing a write down, a fire sale – or an extension of runway using debt (and not incurring any accounting change) – which one do you think least impacts the most important thing they are doing right now?  For our angel Peter, whose star has risen with this legendary markup, what value is there to him of taking a $1 million loss right now instead of just leaving a walking dead company out there and on his books (although this company is not technically walking dead because, since it is not profitable, it is not walking. But I digress.)  

Most reputable investors do not engage in this sort of optics, and many of us who have been through the dot com bust are actually rather aggressive with our write downs to accurately reflect a sense of true value in our portfolios.  Also, most investors who are also board members wear multiple hats and take their fiduciary responsibilities very seriously – I know I do. But, I bring up these behaviors because I’ve witnessed them more than once out there in the real world. As an entrepreneur, you should at least think through the motivations of others, both when you are structuring investments as well as when you are considering a sale. They will on occasion matter… a lot.

What to do

Now that I’ve scared you, let me reiterate that most investors I deal with are great, ethical people. If I didn’t think of venture capital money as good for entrepreneurs on the whole, I wouldn’t be a venture capitalist. But we VCs do a lot more deals than you entrepreneurs do, and you need to go into them with your eyes open to the downside consequences of the terms you agree to.  

Here’s what I recommend:

Focus on terms, not just valuation:  Understand how they work.  Read this book.  Use a lawyer that does tech venture financings for a living, not your uncle who is a divorce attorney, so you are getting the best advice. Don’t completely delegate this because you need to understand it yourself.

Build a waterfall: Once you understand the terms being offered, build a waterfall spreadsheet so you can see exactly how each stakeholder will fare across the range of potential exit values (yes by stakeholder, not by class of stock: Investors often end up owning multiple classes, and likewise different people in the same class may have very different circumstances that will influence their behavior even in the same outcome.)

Don’t do bad business deals just to get investment capital: I know, duh, right?   But I’ve seen otherwise brilliant entrepreneurs get entranced by these big number deals with big corporates, only to deeply regret them later when they cannot be unwound. My advice, separate the business development contract from the equity contract. Negotiate them individually. If the business development deal would not stand on its own merits, don’t do it.  

Understand the motivations of others:  This can be quite tricky, but I believe you should at least think through what might be the motivation of the others around the table. Is that junior partner going to get passed over for promotion if he writes down this deal? Is that other firm fundraising right now? If you don’t know, ask. I always aim to be transparent with the entrepreneurs I work with about what my and DFJ’s goals and constraints are, independent of my role as a director.  

And finally…

Understand your own motivation: What are you doing this for? So you can see your face on the cover of Forbes? So you can have thousands of employees working for you? So you can be a member of the billion dollar Unicorn Club? Perhaps it is to do something you are personally excited about and in a reasonable amount of time, maybe take enough money off the table to live in a nice home, pay for your kid’s college and your retirement. I’m not saying one is more correct than the other, I’m just saying that your own goals will dictate whether you should even raise venture at all, how much to raise, and what to spend it on. If you raise $5 million and sell your company for $30 million, it will likely be a life-changing return for you. If you raise $30 million and then sell your company for $30 million, you’ll end up like Richard.  

[comealivebaki]

Dear Startups:  Here’s How to Stay Alive

There are storm clouds gathering over Silicon Valley – and it’s more than just El Nino.  

As a venture capitalist, I see a lot of data points within the private company marketplace.  Every Monday, I sit in a room with my partners and we discuss dozens of companies, both portfolio companies as well as those we are considering for investment.  When a market turns, we tend to see the signs earlier than the entrepreneurs working on the front lines.

This market?  I’d say it has turned.

It is going to be hard (or impossible) for many of today’s startups to raise funds.  And I think it will get worse before it gets better.  But, hey, my entrepreneurial friend, who ever said it was going to be easy?  One of my favorite expressions is: “that which does not kill us makes us stronger.”

So which is it going to be for you?  Tougher?  Or dead.

Fortunately, (unfortunately?) I’ve been to this movie before, during the dot-com “nuclear winter” – anyone remember that?   I’d like to think I’ve learned some things from that painful experience.  

I’ve seen companies live, and I’ve seen them die. And I’ve concluded that certain behaviors separate the two.

Which behaviors, you ask? Here are a few from my downturn playbook for how to stay alive.

Stop clinging to your (or anyone else’s) valuation:  You know what somebody else’s fundraise metrics are to you?  Irrelevant.  You know what your own last round post was?  Irrelevant. Yes, I know, not legally, because of those pesky rights and preferences.  But emotionally, trust me, it is irrelevant now.  We even have a name for this – valuation nostalgia.  Yes, it was great when companies could raise those amounts, at those prices, blah, blah, blah, but the cheap-money-for-no-dilution thing is largely over now. The sooner you get on with dealing with that, and not clinging to the past, the better off you will be. As my DFJ partner Josh Stein says, “flat is the new up.”  

Redefine what success looks like:  I had lunch last week with a friend of mine who broke her leg in three places four months ago.  “I used to think a successful weekend was 10+ miles of running,” she said.  “For now,  success is going to have to mean making it to the mailbox and back without my crutches.”  When a market like this turns, in order to survive, it is critical to redefine what success is going to look like for you – and your employees, and your investors, and your other stakeholders.  Holding on to ‘old’ ideas about IPO dates, large exits and massive new up rounds can ultimately be demotivating to your team.  If you can make it through the downturn, you will have those opportunities again.  But for now, reset your goals.

Get to cash-flow positive on the capital you already have (AKA, survive): My DFJ partner Emily Melton said this in our last partner meeting:  “Must be present to win.”  I used to say it at T/Maker (the company for which I was CEO) in a slightly different way:  “In order to have a bright long-term future, we need to have a series of survivable short term futures.”  You need to survive in order to ultimately win.

You know what kind of companies generally survive?  Companies that make more money than they spend.  I know, duh, right?  If you make more than you spend, you get to stay alive for a long time.  If you don’t, you have to get money from someone else to keep going.  And, as I just said, that’s going to be way harder now.  I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round.  What if there is no next round?  Don’t you still want to survive? 

Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible.  But for the vast majority of startups, this should be possible.

So, for those of you in the latter group, I want you to sharpen your spreadsheet, right now, and see if, by any hugely painful series of actions, you could actually be a company that makes money.  ASAP.  Or at least before you run out of money.   Because that’s the only way I know to control your own destiny.  You don’t have to act on it (although I would), but at least you will know if you have a choice.  

And if you absolutely, positively, cannot get there without more capital?  Then you need to…

Understand whether your current investors are going to get you there:  Guess who else cares about whether you live or die?  Yep, your current investors.   Another duh.  That’s why they are your best source of ‘get me to cash flow positive’ financing.  And yet, even though we all know this, why is it we don’t actually (1) create the plan that gets us to cash flow positive ASAP, and then (2) go to our backers and get their commitment that they will see us through  (or know that they won’t, because if they won’t, the sooner we know that, the sooner we can go out and do something about this.)  I know many VCs hate to be put on the spot about this, but I think entrepreneurs have the right to ask, and to know.

Stop worrying about morale:  Yes, you heard me right.  I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about.

You know what hurts morale even more than cost- cutting and layoffs?  Going out of business.  

I was at a conference once where someone asked Billy Beane how he created great morale at the A’s.  His answer?  “I win.  When we win, morale is good.  When we lose, morale is bad.”  

Your employees are smart.  They know we are in uncertain times. They see the stress on your face.  They worry about their jobs.  What do they want to see most?  A decisive plan for survival, that’s what – even if some of them have to go.   Trust me, a clear plan is a real morale turn-on.  

Cut more than you think is needed:  Yes, this is simple, but not easy.  It is so easy to justify why you want to lay off fewer people.  However, when you do, by and large, you’ll be laying even more off later.  Why we humans seem to prefer death by a thousand cuts is a mystery to me.  Don’t.  It’s easier on everyone if you cut deeper and then give people clarity about the stability of the remaining bunch.

Scrub your revenues:  Last week an entrepreneur pitched us, and his ‘current customers’ slide was alight with bright, trendy logos of bright, trendy venture-backed companies.  You know what I saw?  A slide full of bright, trendy, money-losing, may-not-survive companies.  (Luckily, in this case, the entrepreneur referenced these customers because he thought VCs would like to see that their smart startups use his stuff, but he actually had a lot of mainstream customers too.  He has a new slide now.) This, I think, was one of the biggest surprises from the last dot-com bust – we all knew we had to cut our expenses, but no one thought about what our customers might be doing. And guess what? They were all cutting costs too – including those costs which comprised our revenues.  Or worse, they were going out of business. If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried.  And yes, it sucks, but it is better to be worried than surprised.

Focus maniacally on your metrics: I know a few CEOs who delegate the understanding of their financials and their business metrics to the CFO, and then stop worrying about all that ‘numbers stuff’.  Don’t do that.  You have to know your numbers inside and out – they are your life blood.  You also have to know which metrics drive the business, and focus on them like your survival depends on it – because it does.  Figure out your canary (or canaries) in the coal mine (by that I mean the leading indicators that tell where your business is headed and whether it is healthy) and watch them weekly, or daily, or in real time, whatever is possible.  And, have a plan in advance about what you will do if/when the metrics go south.  Many of the best companies to have survived the last downturn became super data-driven, and were constantly course-correcting to make small but continuous improvements in their operations with what they learned.  

Hunker down:  These markets generally take a long time to recover. Longer than you think. And, it might get worse. So don’t plan for the sun to start shining tomorrow. Or next month.  Or next quarter.  Or maybe even next year. Sorry.

Having just thoroughly depressed you, let me say that I’ve seen amazing transformations by companies who adapt early to the new reality.  Severe budgets give clarity.  Smaller teams often find greater purpose in their work.  Gaining control (by becoming profitable) feels really, really good.  Watching your competition (who didn’t read this) die, feels – can I say it? – well let’s just say that when your competition goes out of business, you often gain their customers…and that’s a very, very good thing.  

Some of the greatest companies were forged in the worst of times.  May you be one of them.

[comealivebaki]

Taiwan Lantern Festival 2016 #台灣燈會 #airplane #飛機 （在 桃園高鐵站）

[comealivebaki]

Taiwan Lantern Festival 2016 #台灣燈會 #大同寶寶 #Taiwan Culture（在 台灣高鐵桃園站 THSR Taoyuan Station）

[comealivebaki]

Taiwan Lantern Festival 2016 #台灣燈會 #white crane（在 台灣高鐵桃園站 THSR Taoyuan Station）

[comealivebaki]

Taiwan Lantern Festival 2016 台灣燈會（在 台灣高鐵桃園站 THSR Taoyuan Station）

[comealivebaki]

Growth Hacking 不只是 Creative Marketing，別忽略背後的資料科學與方法論

這兩天 Growth Hacking 很紅，有人覺得 Growth Hacking 像是個入門行銷課。有人覺得這我很多年前就做了，不過是舊瓶裝新酒。Growth Hacking 的基本精神很簡單，不過如果把這精神套在任何事情上，那就忽略了 Growth Hacking 背後的資料科學與方法論。

像有人覺得人生也可以做 Growth Hacking，我覺得這就套太廣了，基本上沒有辦法做假設與測試的事情就真的離 Growth Hacking 太遠了。如果只是自己主觀覺得怎麼做是好或不好，沒有指標，沒有測試，沒有分析，就只是行銷概念而已。

但，就像把 Growth Hacking 當仙丹可以治百病一樣，以為 Growth Hacking 只是舊瓶裝新酒而覺得沒用或自己很久以前就已經在實踐了，我覺得也不對。

如怎麼做 User/Revenue Accounting，Behavior Cohort，甚至 High Tempo Testing，這些融合了經驗與資料科學的新指標或 Framework 都是近幾年才冒出來的。Sean Ellis 有一篇投影片在講他們怎麼建立 Growth Team，看看他們怎麼做 Growth，我們真的已經達到他們的水準了嗎？

Building the Ultimate Full Company Growth Team from Sean Ellis

台灣很多團隊都了解成長重要，可是可能以為 Growth 只是概念或心法而已，反而忽略了深入了解方法論與實作。

而事實上是，就我認識的台灣團隊而言（取樣少，有遺珠之憾），能夠 by Feature 做 A/B testing 的公司幾乎沒有，縱使我覺得我已經說明清楚了做 Funnel 與 A/B Testing 的重要性。大家似乎還是執著於推出新的功能，或是停在把 Growth Hacking 當行銷概念用的階段。

而弔詭在，真正能夠對成長造成影響的，反而不是那些被大家（或少部分人）知道的合理行銷概���（如這一面 onboarding 該怎麼做比較對），而是那些還不被人知可是藉由行為分析挖掘出來（或亂猜）的新用戶行為，再加以改進發揚光大。重點是那些你知道是對的，可是別人以為是錯的或沒注意的事情。

這也像是把 Growth Hacking 想像成那個銀彈（像之前提到記者想要的銀彈），但其實真的要做或能做的，是設定好一個 Framework，然後持之以恆的測試成長（Work Hard）。

我覺得 Lean Startup 也是面臨類似的氣氛，教課的人可能一輩子都沒有做過好的 User Interview/Customer Validation，很多人也覺得不就是舊瓶裝新酒，反而是針對方法論的討論少了些。

相較之下 Design Thinking/UX 我覺得台灣的討論就好像實際多了（如 HPX）。

小時候讀 Extreme Programming 的時候有一個規定我覺得很奇怪，就是要全部的條件都實現了，才可以說自己在做 Extreme Programming。我覺得也太嚴苛了，其實光做一兩個也是有幫助呀。不過現在就比較有感覺到，如果有些人沒有做完全可是就下了好或不好的結論，大家討論反而不容易聚焦，也沒辦法體會整個理論交互作用所帶來的提升。

[comealivebaki]

50 篇貼文！

[comealivebaki]

【台北名列Slack使用人數最多的城市~*第十名*~】 剛看到Slack官方部落格在今年二月的統計資料 台北居然名列第十名，而且計算基準是以使用人數來算耶，意思是台北Startup人數比想像中來得多且活躍吧？講到新創事業或環境，大家常提美國矽谷、大陸杭州與北京中關村、愛爾蘭Web Summit、芬蘭Slush、英國倫敦， 台灣台北的定位呢~大家都在找，我也在找，一起加油!

Slack也加油呀~好棒的營運數據呢~ 500K日活躍用戶 60K個活躍團隊使用slack 135K個付費用戶 Slack團隊現在有103人，分散六個國家，還有一人環遊全球飛啊飛。