The Syndicate Blogcast: Startups | Startup Investing | Tech News | Angel Investors | VC | Venture Capital | Private Equity | Crowdfunding | Fundraising
Summary: The Syndicate Blogcast show is an extension of The Syndicate podcast, featuring long form articles on the future technology, ecommerce, business and life. The mini-sodes deconstruct high level startup, business and tech issues to help investors and operators better understand and win the market. Recurring topics include: Facebook, Google, Amazon, Apple, Ecommerce, Blockchains, ICOs, Cryptocurrencies, Marketing, Fundraising, Venture Capital, Startup Challenges, Business Development and more. The Blogcast comes in addition to The Syndicate – the place where investors and startups combine to create crazy businesses and even crazier returns. The Syndicate podcast is a deep dive on the angel investors and VCs behind the big name startups. We interview the best and brightest investors, syndicate leads, GPs, limited partners and startup founders to create an original, off the cuff discussion on startup investing.
Panelists: Roger Ver Roger Ver, often dubbed Bitcoin Jesus is one of the earliest investors in and proponents of Bitcoin. He’s made hundreds of millions, if not billions off his investments and was also an early investor in bitcoin.com, blockchain.com, Zcash, BitPay and Kraken. He led a fork of Bitcoin, known as Bitcoin Cash to address scaling problems with Bitcoin’s infrastructure and Core team which created quite a stir. Clay Collins Clay Collins is one of the top internet marketers in the world. After leaving home at age 15 to start his first software company, Clay has gone on to cofound Leadpages and raise $38M. Clay is also the co-founder of Nomics, the API/analytics software for enterprise level crypto investors and runs the popular crypto podcast Flippening. Paul Veradittakit Paul Veradittakit is a Partner at Pantera Capital and focuses on the firm’s venture capital and hedge fund investments. Pantera Capital is the earliest and largest institutional investor in digital currencies and blockchain technologies, managing over $250M. Since joining in 2014, Paul has helped to launch the firm’s second venture fund and currency funds, executing over 30 investments. Paul also holds board seats, mentors a few accelerators, and advises startups. Prior to joining Pantera, Paul worked at Strive Capital as an Associate focusing on investments in the mobile space, including an early stage investment in App Annie. Are you an accredited investor? Apply to join our angel syndicate if you’d like to access our deal flow. Like this? You will love our new podcast: FringeFM which explores edges of human understanding and sci-fi tech: Subscribe on iTunes and Stitcher. Panelists: Roger Ver Roger Ver, often dubbed Bitcoin Jesus is one of the earliest investors in and proponents of Bitcoin. He’s made hundreds of millions, if not billions off his investments and was also an early investor in bitcoin.com, blockchain.com, Zcash, BitPay and Kraken. He led a fork of Bitcoin, known as Bitcoin Cash to address scaling problems with Bitcoin’s infrastructure and Core team which created quite a stir. Clay Collins Clay Collins is one of the top internet marketers in the world. After leaving home at age 15 to start his first software company, Clay has gone on to cofound Leadpages and raise $38M. Clay is also the co-founder of Nomics, the API/analytics software for enterprise level crypto investors and runs the popular crypto podcast Flippening. Paul Veradittakit Paul Veradittakit is a Partner at Pantera Capital and focuses on the firm’s venture capital and hedge fund investments. Pantera Capital is the earliest and largest institutional investor in digital currencies and blockchain technologies, managing over $250M. Since joining in 2014, Paul has helped to launch the firm’s second venture fund and currency funds, executing over 30 investments. Paul also holds board seats, mentors a few accelerators, and advises startups. Prior to joining Pantera, Paul worked at Strive Capital as an Associate focusing on investments in the mobile space, including an early stage investment in App Annie. Are you an accredited investor? Apply to join our angel syndicate if you’d like to access our deal flow. Like this? You will love our new podcast: FringeFM which explores edges of human understanding and sci-fi tech: Subscribe on iTunes and Stitcher.
Originally posted on mattward.io “Moving first is a tactic, not a goal….It’s much better to be a last mover.” — Peter Thiel On the surface this seems contrarian. When is being last better than being first? Steve Jobs understood this. Apple didn’t make the 1st MP3 player or the 1st smartphone. Yet in consumer tech, Apple is synonymous with both. Uber being one of the most known startups has called for plenty of media coverage over it’s success and faults but while that’s been going on a big problem has arisen. Drivers and riders have NO LOYALTY. The reason I use Uber or Lyft or any one of a dozen services is a result of price, availability, and marketing. A better offer from ANY competitor and I’m gone. Initially of course this was not an issue when they had 100% market share of the ride sharing platform, obviously that’s changed as the markets gotten saturated hence why they are in for trouble. Closing thoughts What do you think? Is Uber screwed? Would you rather run Uber or Airbnb? Can Dara save Uber from itself and its business model? These questions are not considered enough by the tech community. Uber is arguably the greatest hit in history of VC (at least of pre-IPOs). The bigger they are, the harder they fall… and the bigger their appetite. I’m bearish on Uber and incredibly bullish on Airbnb. Thoughts?… Learned something? Click the share buttons on the side to say “thanks!” and help others find this article. Originally posted on mattward.io Originally posted on mattward.io “Moving first is a tactic, not a goal….It’s much better to be a last mover.” — Peter Thiel On the surface this seems contrarian. When is being last better than being first? Steve Jobs understood this. Apple didn’t make the 1st MP3 player or the 1st smartphone. Yet in consumer tech, Apple is synonymous with both. Uber being one of the most known startups has called for plenty of media coverage over it’s success and faults but while that’s been going on a big problem has arisen. Drivers and riders have NO LOYALTY. The reason I use Uber or Lyft or any one of a dozen services is a result of price, availability, and marketing. A better offer from ANY competitor and I’m gone. Initially of course this was not an issue when they had 100% market share of the ride sharing platform, obviously that’s changed as the markets gotten saturated hence why they are in for trouble. Closing thoughts What do you think? Is Uber screwed? Would you rather run Uber or Airbnb? Can Dara save Uber from itself and its business model? These questions are not considered enough by the tech community. Uber is arguably the greatest hit in history of VC (at least of pre-IPOs). The bigger they are, the harder they fall… and the bigger their appetite. I’m bearish on Uber and incredibly bullish on Airbnb. Thoughts?… Learned something? Click the share buttons on the side to say “thanks!” and help others find this article. Originally posted on mattward.io
Originally posted on mattward.io Those words terrify entrepreneurs. You get one chance to make a first impression. And fear of failure often ruins that. Overconfidence is equally harmful though. And one way or another, most startups screw this up. It isn’t easy. It isn’t hard either though. Short, sweet and to the point. That is what you should be aiming for. “I help startups grow, scale and find funding.” … that is okay. It gets the point across. But it isn’t quite specific enough. You need to do better. Who is your target customer? Identify them. There are NO mass market products or problems. Trying to please everyone pleases no one. You NEED an initial base of target customers or you won’t succeed. For me, I advise and invest in early stage tech startups… But every company is kind of a startup. Heck, Gmail was in beta mode for years. So when does a startup stop being a startup and start being a company? Is Airbnb a startup? Google? Uber… You need to be specific. You need to be something for someone or you are just nothing for everyone. Find your niche and fill it. Become a badass in that space, then and only then can your company think of expanding to serve a larger market. How you help is important too Con artists overpromise. Entrepreneurs do the same. In essence we are all salesmen. But to sell, you can’t smell like bullshit. Bold claims better be backed up by something cause these days investors won’t fall for anything. An idea and fancy pitch deck won’t get you funded. This isn’t the 90s. A catchy idea needs a clear business model and strong team to back it up. How do I help startups? How do you help your customers? That is the question every startup MUST answer in their pitch. The devil is really in the details. You could take 10 minutes to explain your company, or you could take 10 seconds. Attention spans being what they are, you need to hammer home fast. You have 10 seconds to grab my attention, 30 seconds to wow me… What is your plan? Source: MindfulMooves Elevator Pitch Examples: Slack — We help businesses and organizations communicate with a simple chat interface. Uber — We help individuals get from A to Z with a simple ride sharing app. Amazon — We help people buy and sell things online. Facebook — We help individuals stay connected and share experiences online. It can be that simple. We help X achieve Y. That is the formula to start any pitch. It grabs your attention and instantly explains your business. It isn’t overly detailed but it covers the basics, who and how. Your pitch should change depending on your audience. What about Why? Why you are building this business is often key. Why determines whether investors and employees get on board. And fyi, to make a lot of money isn’t a good reason. It does not drive emotions, only dollars. And WHY is what drives you. Passionate entrepreneurs solving personal or large scale problems are more driven and motivated to win. They deal with the highs and lows of entrepreneurship and keep fighting. Folks looking for the quick cash don’t. As an investor/advisor, I avoid the latter. The money matters. It matters a lot. But without a bigger driver your business will almost surely stall. And burnout can be a big problem. [LIKE THIS ARTICLE SO FAR? THEN YOU’LL REALLY WANT TO SIGN UP FOR MY NEWSLETTER OVER HERE — AND GET SOME FREE BONUSES!] Your company should be a mission. What is your vision of the world? What are you working to create? This captivates people.
Source: FanArt Originally posted on mattward.io Get rich or die trying — that’s a common mantra among entrepreneurs, gangsters and drug dealers. I know that was my mindset. How can I hustle my way to a million bucks? That was the question I asked myself every day, and night. Looking back, this was the wrong question to ask. But as Kanye says: “Money ain’t everything, not having it is” — Kanye West When you’re broke and need a quick buck fast, nothing else matters. Food, shelter, survival… these are all dependent on wealth. And the poor rarely plan in advance — it is all hand to fist. Short term cash vs. long term success After graduating college I moved to Southeast Asia to save money. In “digital nomad” hubs like Chiang Mai, Thailand and Ho Chi Minh City, Vietnam, I easily get by on $1000/mo. That drastically increased my runway to figure out what I was doing. Living among hustlers, I quickly learned the world of internet marketing. I saw the fads, the trends, the ups and downs and the “success” of many lifestyle businesses. After building the #1 crowdfunding podcast (only to realize that people looking to raise money couldn’t pay), I subsequently sold the business to an agency. They monetized better, dealing with professional creators looking to raise $100k+. As for me, I’m not an agency guy (not a great manager and hate dealing with clients). The Amazon “pivot” It wasn’t exactly a pivot, but I followed the money. I saw folks preaching Amazon FBA (fulfilled by amazon) as the business of the future. Just source and manufacture products, sell on Amazon and you’re set — and here is XYZ course on how to make millions. Like many struggling for dough, I was intrigued. While in China designing a convertible laptop case/standing desk hybrid, I decided to give FBA a go. With weeks between finished prototypes, living on the couch with 3 Chinese roommates I’d met online (that didn’t speak any English), I had some free time. I researched the market, found a niche and got started on Amazon. Things went fast. Prior to launch I’d listened to every podcast and read every guide about selling on Amazon (this was spring of 2015). After launching my 1st product and pushing the limit on rules and algorithms, my sales started to take off. I was quickly overwhelmed and needed to scale up. What started as an $8k investment in product quickly became a thriving business, fueled by Amazon. I started the FBA ALLSTARS podcast, an avenue to share my story and strategies and get consulting clients. That quickly grew that to a top 3 show. And I needed a tagline, so I said “Step One to 7 Figures.” I set a crazy goal of a 7 figure exit after only a year…. And I somehow pulled it off. There was just one problem…. The shortsighted gold rush I thought I had it all figured out. I’d built a successful, profitable business. I’d built a top podcast that more than covered my expenses (allowing me to re-invest 100% into the business). But I was so dumb… The big money isn’t in the business, it is in the tools. As a seller and a podcaster, I used tools to run my business and manage a large operation with a small staff. And I profited as an affiliate, recommending the tools I loved — the money was good. But the better business was the software (or scammy make money online courses which I’d never touch). Many of my “friends” in the business built very successful SaaS companies, practically overnight. I helped sellers with SaaS products go from beta to 1000s of monthly paying customers, shortsightedly missing the opportunity. And the Amazon opportunity was and is enormous. But I missed the jackpot, because I couldn’t see the big picture…. $100, $200, $500k MRR — I know and helped at least a dozen startups hit these and higher milestones....
Hardware is hard. Consumer hardware is even worse. As an ex ecommerce seller with years of experience manufacturing overseas, I can tell you dealing with suppliers, MOQs (minimum order quantities), quality control, cash flow and even LTV are tough. Unlike SaaS where you build it once and sell again and again with almost no added costs, hardware requires cash. Manufacturing 10s or 100s of thousands of products requires massive upfront investments that most startups cannot afford. And while every sale helps make up those margins, it is still nowhere near SaaS. Worst still is LTV (lifetime value of a customer). And like a one night stand, one and done isn’t efficient in the long run. Fishing vs farming Constantly acquiring new customers takes time and money. CAC (cost of acquisition) kills your margins. High unit costs make economics even worse. Most startups and brands fall into the fishing category. They launch product: let’s say a smart lock, an autonomous drone or a time machine… then they think about the business. “Well, obviously we Kickstart this, right?” As an ex-crowdfunding consultant, I saw this all the time. The “build it and they will come” mindset kills more businesses than Facebook. Without proper planning, founders often scale unsustainable business models Single purchase behavior is a like treadmill. Without repeat buyers or recurring revenue, businesses must constantly fight the same battle. Exceptions to this rule build strong organic acquisition channels (see this post). But even then, one and done loses every time. Farming is a 10–100x better business model. Rather than kill or be killed, startups that acquire recurring customers need a much lower hit rate to succeed. Why hunt rabbits when you can domesticate them? Source: Drawception The same is true of customers. Companies that effectively milk customers merit MUCH higher valuations and become more sustainable, long lasting brands. Repeat vs recurring There are two ways brands build success: repeat customers and monthly service fees. As a rule of thumb, these represent B2C and B2B businesses respectively. As an investor, I only invest in hardware/IoT companies with recurring revenue components, ie typically B2B plays. But today we are talking consumer. (For more on the B2B side of hardware/software plus IoT, see this interview below with Nick Moran, an accomplished VC in the space). Later in the article we will discussing B2C recurring revenue businesses and how hardware can be your businesses trojan horse. Repeat buying behavior There are several ways to prop up LTV here. Traditionally these include: New products — shoes, socks, shorts, shirts etc… Consumable products — toothpaste, contact lenses, lipstick etc… Replacements — new iPhone, new laptop, new fridge etc… Accessories — earbuds, Xbox games, HDMI adapter etc… Are you an Apple fanboy? You are on this article because of Apple, let’s start there. News broke recently that Apple was screwing customers, surprise surprise. The company that brought you the iPhone was conveniently slowing older ones down, right after new versions were released. In my opinion Apple is scumbag company. It didn’t use to be. But recently under leadership of Tim Cook, Apple has been only focused on numbers 3 and 4 above — the least innovative and most expensive...
Two days ago I had the privilege of moderating a roundtable with some of the smartest futurists and forward thinkers in the industry. Our panelists included Tim O’Reilly, James Allworth, Ben Gilbert and Jeff Morris Jr. [VIDEO REPLAY] The State of Consumer Tech Roundtable with Tim O’Reilly, James Allworth, Ben Gilbert… It was an interesting experience. They say you are the average of the 5 people in your life and these four certainly padded my total — and informed my perspective on the future. There was one point in particular that Tim on the nature of disruption and innovation. During the panel I pushed back some, with time however this truth becomes more and more apparent. Tim rightly pointed out, there is no such thing as a J curve. Sure short term graphs show up and to the right, but eventually everything levels out. There are only so many billions of potential consumers, pushing beyond that is impossible. And technology naturally plateaus. Moore’s Law is pushing its physical limitation already (at least in terms of economic feasibility), and many other technologies have displayed similar trends. But with every new plateau the new normal shifts further and further. “If I have seen far, it is because I stood on the shoulders of giants.” — Isaac Newton The interesting intersections Technological innovation is interesting. Ultimately however, each innovation can only go so far. The most intriguing areas are found on the fringes, where multiple innovations meet. Today genetic sequencing is hot. But scientists have been studying the human genome for years. The intersection with AI and machine learning is particularly interesting because DNA is so vast. No human could ever understand or analyze DNA. Instead geneticists employ basic ML (machine learning) to find and analyze relevant genome sequences. Using data, companies like 23andMe can then accurately pattern match to known research and provide personalized conclusions: “you may have a 15% higher risk of heart disease” And in genetics we are still in the early innings. But with advances in gene therapies, medicine delivery, 3D printing, artificial intelligence and robotics, is a future of cyborgs really so far off? I would argue no. And as innovation is generally additive/transformational, this implies our S curve actually continues upward — in a lumpy, stepwise manner. Hockey sticks can hurt though There is a potential problem with conventional venture analysis. As a rule, any graph with up and to the right growth gets investors excited. But this only paints a small portion of the picture. Yes, founders found product-market fit but that isn’t always enough. What about the market? Actual total addressable market (ATAM) Investors always ask about the TAM (total addressable market). In general this is helpful, but not as much as you would think. The best startups are reinventing the world and creating new markets. If Uber’s addressable market was just the market for taxis/black cars, Benchmark wouldn’t be suing them (for the real problem with Uber’s business model, see this post). Instead this innovative “taxi” company redefined transportation and is destroying car ownership globally. They MASSIVELY exceeded original expectations. But this is generally not the case. In businesses where startups look to take on incumbents, it is often about stealing market share. In these scenarios TAM is largely unchanged. Great businesses can still be built in this manner, but the upside is capped (as opposed to almost unlimited). So the question VCs NEED to ask is: is the ATAM greater than or less ...
The internet has changed. The world of the walled garden is here. This creates interesting dynamics, problems and opportunities for startups. It is exciting, and terrifying. Let me explain. My background is ecommerce and Amazon. In 2015 I invested ~$8k in product and managed to scale my “startup” to a 7 figure exit at the end of year one. If you are scratching your heads, you should be. Building and flipping a business in a year is dumb. But my goal was just to make some quick cash selling products online, primarily via Amazon. It worked. And through the process I built a top 3 Amazon podcast, met hundreds of FBAers (Amazon sellers), and helped 1000s build businesses on Amazon. As I grew, I started to wisen up. What started as a personal challenge suddenly become scary. Let me explain. Platforms are like distribution on steroids Platforms and marketplaces like Amazon, Android and the App Store are unparalleled acquisition engines. Never before in the history of mankind could companies, let alone startups access this scale and breadth of consumer. The world is literally there for taking. Starting a hardware startup? Kickstarter can help. Building an ecommerce app? Shopify’s add-on store speeds its up. Not a developer but got a great idea? There are even UI and chatbot based platforms for creating apps. The power and resources at founders’ fingertips are unprecedented. And so is the speed at which startups scale. Zynga.org was a rocketship, riding on Facebook’s coattails. The social network grew and viralized distribution, allowing Marc Pincus gaming company to ~10x in under two years. 260M+ MAUs (monthly active users). That is unheard of in gaming, at least it was. In the world of platforms, this is starting to become normalized. But there is a huge problem. Platforms are great, until they aren’t Zynga, more than any other company, took advantage and built an incredible gaming business directly through the Facebook Graph API. Over time, Facebook began making changes to how developers could interact with specific data and just as quickly as Zynga grew, they fell — and fell far. There are many companies, big and small, that have suffered a similar demise. — Ben Schippers: TechCrunch And I knew of sellers who shutdown overnight, with no warning. Amazon’s a double-edged sword. All platforms and marketplaces are. When it is good, it is great. But playing on some else’s playground often ends in tears. There are two ways this happens: rules/algorithm changes copy/paste competitors Both kill startups. The age of the algorithm The first and most obvious example would be Google. Google indexed the world’s information and built the leading search browser, with 77–80% of worldwide searches. That makes Google powerful. SEO and organic search make and break businesses. And throughout their history, Google has done just that. The infamous Panda updates broke the backs of many businesses. Imagine adding a wall around a local mall. The number of visitors drops drastically. Businesses collapse and the mall defaults on the mortgage. Those are the metaphorical examples of a small algorithm change. And they happen, even with the best of intentions. Google wanted to clean up search. They saw marketers manipulating results, creating backlinks and gaming the system to get more visitors. So Google fights back, adding penalties for overly specific and frequent backlinks. These hurt many sites, not just the grey and black hat players. And entrepreneurs (and mom and pop sites) had NO warning and NO recourse. Even Ebay lost 80% of it is organic search thanks to Google’s Panda 4.0 updates. This was 2014. This can happen to anyone. But blacklisting is even worse
Yes, that headline and image is meant to be provocative. Startups need to sell. Attention is critical. But not clickbait. So grab your coffee and let’s go (btw that definitely isn’t me!). First, a quick backstory My background is ecommerce and Amazon. In 2015 I invested $8k in product and managed to scale my “startup” to a 7 figure exit at the end of year one (all while traveling the world). If you are scratching your heads, you should be. Building and flipping a business in a year is stupid. But my goal was learn and make some quick cash so I could focus on things that actually mattered. Somehow it worked. And through the process I built a top 3 Amazon podcast, met hundreds of Amazon sellers and helped 1000s build businesses on Amazon. But startups NEED 100% Forget the “give me 110%. soldier” Sure, it sounds cool to say but 100% is it. There is not higher gear — and this stress kills entrepreneurs. Starting a business is really freaking hard. I spent a year of 80–100 hour weeks, grinding, hustling and trying every trick in the book to make things happen. Some worked. Many didn’t. It didn’t matter though. I was 100%, I was all in. That takes its toll. You can only give 100% for so long, especially when you heart isn’t really in it. And I was doing it just for the money — that isn’t enough. Founders NEED to be obsessed with what they are building. How else can you handle the stress, rejections and sleepless nights…? The importance of obsession People tell you to follow your passion, that isn’t enough. Passion is a good start, but I’m passionate about peanut butter. A banana with peanut butter is heaven on earth, nothing beats it. But I sure as hell don’t want to start a peanut butter company. That small snacky passion isn’t a driving force for me. It won’t keep me going day in and day out. And the market is competitive. There are plenty of peanut butter brands and almost no differentiation or innovation. Instead, the best founders are obsessed with an idea. They set out to radically change the world and follow their obsessions to its logical conclusion — success, or failure. But as an investor, I’ll bet on intelligence plus obsession any day. When Zuckerberg first described Facebook or Elon explained Tesla’s mission, it was clear these cats were hooked. They were incredibly smart, driven and drinking the kool-aid. Whether you are building a venture scale startup or bootstrapping a business, commitment is everything. There will be huge highs and horrible lows — it is a roller coaster. Between the stress of running out money, the pressure to push product and the problems hiring and managing great talent, starting a startup is arguably the most grueling (and rewarding) work. Only the obsessed survive, everyone else quits or sells out early… Managing is hard The best founders build great teams, using their obsession and charisma to attracts followers. They know they cannot possibly do alone, so they surround themselves with complementary talent. This is something I have always struggled with. Most of my career has been a one man show with a large outsourced team. I’m a builder, not a manager. When it comes to managing people and optimizing existing success, it gets dull for me. I have never been “obsessed enough” with the mission to push through. And most founders are not natural leaders. Instead they grow into the role, not out of desire but out of necessity. When you are obsessed with a goal, you sacrifice yourself for the mission. The shiny object A.D.D. issue Yes, I have attention deficit disorder — never diagnosed (but spend enough time with me and it is easy to see). This makes shiny object syndrome challenging. In the past I got distracted easily. A new PPC strategy, Instagram ads,
“If you’ve got a dream and your dream doesn’t require a team, you need to dream bigger.” — Unknown When working with startups (both as an investor and advisor), I like to focus on incentivizes. The more aligned your organization is, the better the performance will be. Commissioned sales people are hustlers. Ever buy a used car? They do anything to get the sale, but they don’t care about the dealership. The majority of their compensation comes from sales. They don’t get a piece of the bigger pie, so why help other salesmen? It is a bit of a dog eat dog world. The other extreme (Corporate America) is just as bad. If you are working at a startup, you don’t want just a job. Your goal isn’t simply a paycheck and benefits — you want meaning. And upside. Founders are crazy. They have to be to fight to bring something radical new way to the world. And they magnetize others to follow them. But early startup employees are crazy too. They believe in the vision of building something bigger — but they also “own” the company in a sense. This is their baby, they have a stake and they create the culture from day one. But it isn’t all fun and games… A pirate’s life for me? Being a pirate is a lot like joining a startup — a rebel on the high seas setting sail into the unknown in search of treasure and adventure. And the seas aren’t smooth, anything but actually. But the rewards can be life changing. For ships to function, the entire crew must be aligned. Every mate has his (or her) job. Everyone relies on everyone else. There is little room for error, and the opportunities to die are endless. The pirate captain Everyone knows the captain’s in charge — at least that’s the myth. The reality, much like any situation is that leaders succeed (and survive), only when their crew permits it. Too much trouble, running out of food, stock price plummeting… mutinies occur. The collective pick the person most able to help them achieve their goals. If it is not you, you are out. It is a bit like game theory. That is the motivation for this post: the pirate’s riddle. In essence, a captain has 100 gold coins. How does he divide them among the 4 members of crew to maximize his share — keep in mind the majority can throw him overboard if they feel cheated (here is the riddle if you want to try and solve it). The riddle isn’t important, the consideration of others in the equation, specifically the equity equation is. Startup equity How much is too much? That is the number one question I get from founders. We are hiring a VP of this or a head of that and I don’t know how much equity to give them. Fred Wilson has a great system here, but says “for your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula”. Alternatively, Leo Polovets of Susa Ventures presents another well thought out, data-supported strategy. At 1–10 person companies, 0.5% — 2.0% is a pretty common range, though some companies fall outside of this range. For 11–50 person companies, 0.1% — 1.0% is typical. For 51–200 person companies, 0.01% — 0.2% is typical.
Software as a service is the new heroine. Companies and individuals sign up for free trials and are instantly hooked. It is a hell of a drug. For B2B customers this is especially true. Most businesses hate change. When the ball is rolling, the last thing you want is overhaul the entire new system. You stick with what is working, the easy solution. Even if it means a few more dollars. Dollars be damned. Time is money to these guys and saving days, weeks or even months from switching software is usually a no-brainer. If your product solves a pain point for companies and customers, you are in business. Software is eating the world. You have probably heard this. It is true. AWS, Salesforce, Slack, Shopify, Intuit… These companies don’t have physical assets. What they provide and sell is a service, a SaaS product. These are some of the most valuable and powerful companies in the world. They don’t focus on physical products. They aren’t buying real estate. They don’t invest in cars, gold or bitcoin. They build businesses others NEED to have and are willing to pay for. The beauty of SaaS lies in the margins. Once a piece of code is built, it costs almost nothing to run and maintain. You can scale servers, bring on more devs and the costs never balloon out of control. They stay very small and manageable — a low percentage of the actual price. And more and more, companies are moving towards these models. The reason: revenue. Recurring revenue is king. It is the thing all investors and VCs look for. It is the mark of a healthy business. How consistent are your cash flows? That is business basics 101. Money in versus money out. The 7 keys to killing it with SaaS Part 1. Acquiring customers In its simplest form, acquiring customers is a must for every business. How do you get individuals or organizations to pay? That is the big question. And for every business this is different, not the approach but the end result. To get customers, you need to get in front of prospective customers. You need to show the value of your product and explain how it will make their lives better, easier etc… (For sake of argument let’s say you have an awesome product) (If not, please stop reading and go talk to customers. Figure out what the heck they want and would pay for. Find their pain and fix it.) Okay. So assuming you have a good product, how do we get you users, customers, etc… The strategy depends on the product, the market and the price point. The higher the price, the more touch points you will need with prospective customers and the harder it will be to get impulse buys or downloads. Let’s cover the strategies and pros and cons of each. Ways to get customers: Referrals Paid Ads Social Media Affiliates Partnerships Marketplaces Content Creation 1. Referrals aka Word of Mouth This is the best, most popular and scalable way to build a business. When your product or service is EPIC and people love it, they talk about it. Every new user they bring is gold. $0 CAC. But it is really goddamn hard. Things don’t just GO VIRAL. There is a science and a bit of luck involved. Net Promoter Score or NPS is the best way to measure virality. It involves polling customers to find their thoughts and affinity towards your brand/product and how likely they are to share with a friend. There are a lot of ways to increase NPS — the most obvious are a great product and killer customer service. But virality can also be engineered. Airbnb offers a free stay for any friend you refer. Groupon gave great deals for large groups.
“Moving first is a tactic, not a goal….It’s much better to be a last mover.” — Peter Thiel On the surface this seems contrarian. When is being last better than being first? Steve Jobs understood this. Apple didn’t make the 1st MP3 player or the 1st smartphone. Yet in consumer tech, Apple is synonymous with both. That was no accident. This is Thiel’s theory in practice. Wealth accrues not to the first but to the monopoly, the company that captures the market, makes consumers forget all others and rides the waves as long as profits pour. They are the last. There is no successor coming. That is where the money is made and that is where startups and businesses should strive to be. Move slow and be boring? Not at all. That isn’t what Thiel’s talking about, that is horrible advice. Just look at the Windows phone or Kodak’s digital camera. This isn’t about perfectionism either. Lean startup principles still apply. You want to move fast and probably will break things. But don’t sacrifice the “it” factor it takes to win. The iPhone killed the Blackberry because it was 10x better. It wasn’t about rushing a competitor to market, it was about building the perfect enough product to crush the competition and with a innovative moat that got stronger and stronger over time — ie the App Store. Steve Jobs succeeded where RIM failed because of his team. They convinced him a 3rd party app store would outperform Apple’s dev team. They were right. Today, even against Android, Apple’s App Store keeps people coming back. The flywheel moat Apple’s first mover advantage, not in the smartphone space but in the 3rd party app store succeeded beyond their wildest imaginations. Developers raced to build apps and businesses around the iPhone and the customer experience got better and better. And with more users came more devs and more apps and a never ending cycle of value creation — the vast majority of which accrued in Apple’s oversea bank accounts. This example illustrates what ALL startups should shoot for — an increasingly defensible business model. The reason — competitive pressures and customer acquisition costs. Businesses without this defensibility almost always struggle with profit and unit economics. Look at Instacart or Uber, on the surface both great businesses. Dig deeper and you reveal weak foundations. Let me explain. Uber’s a bit like a house of cards No, that isn’t a reference to their management, Kalanick, or the Benchmark lawsuit. It goes deeper. Ride sharing is a local business. And with local businesses like this, the local network effects are incredibly strong. Uber spends a bunch to enter a city, onboards drivers, and pays to acquire customers. As more riders and drivers start using the system, it becomes more and more efficient and the unit economics start to make sense. This is the reason Uber, Didi, Grab, Lyft and dozens of other ride sharing services raise so much money. It is a land grab and VCs are racing to control their fiefdoms. But there is a big problem. Drivers and riders have NO LOYALTY. The reason I use Uber or Lyft or any one of a dozen services is a result of price, availability, and marketing. A better offer from ANY competitor and I’m gone. The same is true of drivers. Most Uber and Lyft drivers use two phones and drive for both. Whichever company gets them more business is king (of the day). Suddenly Uber’s moat doesn’t look quite so deep. It gets even worse. Buying friends Every city Uber enters they spend big bucks. But any other ride hailing app can do the same. How does Uber win? They enter cities sooner and outspend the competition. They buy riders and drivers. But anyone else can do that too. China challenged Uber and won, forcing them to leave with their tail between th...
If you haven’t heard, Amazon won ecommerce. Bezos’ juggernaut is the most powerful marketplace and brand the Western world has ever seen (get my analysis here as an ex 7 figure Amazon seller). But it isn’t the only game in town. Every year new startups appear, looking to compete and grab their piece of the pie. As an ex-Amazon seller (and host of a top Amazon podcast), I can say for certain that the majority of the action in ecommerce is on the brand side. It gets easier and easier to source and manufacture product and put your label on it. These businesses ARE NOT fundable. There is no disruptive innovation, there is no world shattering business or venture scale profits in the pipeline. That is fine. But if you are here, you want to go big. You’re an investor or an operator interested in venture scale ecommerce and looking for an edge. There are two fundable categories of ecommerce: marketplaces and ecommerce brands. To date, the majority of the money and returns have been via marketplaces. Look no further than Amazon, Ebay and Etsy. (NOTE: SaaS/Shopify for ecommerce merchants was not included in these categories as it is a B2B SaaS play.) When it comes to marketplaces, I have covered the topic extensive. I will link to these articles here to avoid repeating myself. The Cult-Like Religion of ICOs and End of Amazon? The 5 Types of Network Effects and How to Hack Them Brand’s business models are getting more interesting, lets take a look. There are 4 types of disruptive ecommerce businesses: Direct to consumer brands Subscription companies Delivery companies Experiential commerce companies Let’s look at each of these, their outliers and what the future holds. Direct to consumer brands Recently, mega companies have been created by disrupting traditional supply chains. Brands like Casper, @Harry’s and Warby Parker are leading the way. These direct-to-consumer brands cut out the middlemen by selling online and owning manufacturing to give customers better value for their money. So while consumers save a ton; the brands get to boost their margins (fewer mouths to feed), control their supply chain and build defensibility into their business. They all take it a step further as well. The brand becomes the experience. Casper delivers a mattress in a box. Then it inflates automatically and ready to use. How cool is that. And Harry’s and Warby Parker deliver premium products and a premium experience at pretty affordable price. Their focus on brand keeps consumers coming back because customers love their products. And their NPS and word of mouth work wonders for marketing (Warby Parker — NPS: 91) (Source: NPSBenchmarks.com)
As an angel investor, I am always looking for transformational businesses. And marketplaces are arguably one of the strongest and most time-tested business models of all time. From early Rome and milenia earlier, merchants conducted commerce in markets. Thanks to efficiency gains for both buyers and sellers, the market thrived. Sellers could set up shop and instantly access customers. And buyers found everything under the sun, all in one place. While initially these merchants operated caravans to cover more ground, reach more consumers and acquire more valued commodities, the model has changed. Today more and more commerce happens online. You buy an iPad, book a room, grab an Uber and get Ticketmaster tickets to the last game — all online, all in 10 minutes. Everything is conducted online and marketplaces are the means that make this happen. They are the backbone of the modern economy and are constantly changing and evolving, adding efficiencies while stripping out waste. (For more on the dangers of marketplaces and Amazon, be sure to read how Amazon is killing ecommerce.) Why marketplaces make so much money Marketplaces are like matchmakers. They hook you up with a product or service and take a small commission (sometimes from buyers, sometimes from sellers — occasionally both). Marketplaces are middlemen in the truest sense of the word. Yet marketplaces have replaced many of the middlemen of old. Wholesalers and distributors? Most marketplaces don’t need them. The reason markets have evolved as they have is the reduction of waste. Time, energy and cost are continuously optimized, making the experience better for buyers and sellers. The network effect of marketplaces are known as the flywheel. The more travellers on Airbnb, the more homeowners want to list their properties. And of course more choices and destinations means consumers are more likely to join or refer friends… and so on and so forth. The law of diminishing risk The bigger they are, the harder they fall, normally. The problem with this statement is that it almost never applies to marketplaces. The reason: the larger the market, the more valuable it is for everyone involved. Everyone is winning. This makes displacement and disruption incredibly hard. Up-and-comers must 10x the value to convert the faithful. How can you 10x a system that is ever increasing in value for its users? So unlike most conventional business models where rewards diminish as efforts increase, marketplaces buck this trend. While direct profits are more challenging to impact at scale and individual users add less and less to the overall, every user adds buffer to the business model. Markets become exponentially more defensible — the risk goes down. Hence why venture valuations explode as marketplace companies start to reach scale. VCs recognize that much of the battle is already won in the hearts and minds (and most importantly wallets) of users. NOTE: An important distinction — Almost all two sided networks are considered marketplaces for the purposes of this article and analysis. For example: Uber is a marketplace, and a service. ICOs upset this balance Blockchain business models have blown up the world of traditional VC lately. Startups, many with little more than an idea, a white paper and a vision are raising 10s if not 100s of millions of dollars. The froth is crazy. (To read about the boom, bust and re-birth of ICOs, check out this post.)
Amazon’s is the most monopolistic and well positioned marketplace the Western world has ever seen. Last year they did $136B in revenue with double digit growth every year. Yet they haven’t even scratched the surface. The US food retail and food services industry represents a $5.35T market (with $800B+ in grocery alone). That is 40x Amazon’s total global sales – everybody’s got to eat. The food space is the future frontier, and Amazon is betting big. On August 28th, 2017, Amazon decided to buy Whole Foods. Consider this D-Day. The world of groceries will never be the same. Here is why. Amazon’s been salivating over food delivery for years. But, try as they might, their efforts have fallen flat every time. Amazon Fresh had $10M in revenue in Q1 of 2016. That is chump change for Bezos. (NOTE: For more on Amazon, my experience with the company and how they will kill ecommerce, see this post.) The network problem Amazon is a market. Amazon is a network effect. The reason why the company runs so well is so highly valued is its network of 3rd party sellers and massive customer base. Jeff Bezos founded Amazon on July 5th, 1994. Since then the company scraped and fought its way to market leader status, constantly growing areas of the business. They started with books. Books seemed easy enough to sell online and customers like options (just look at libraries). Bezos committed to crushing it with books. “Books, books, books. That is all we are ever going to sell.” That was the mantra early on. Amazon committed and as they grew a larger and more diverse customer base, other options presented themselves. They branched out into media and digital and quickly Amazon started morphing into a full fledged Everything Store. But the base was crucial. They attracted customers and used the demand to pull sellers to the site. With that the flywheel was born. Imagine if Amazon had started selling everything from day one. There would be no message for customers, confusion for sellers and chaos all around. Systematic Network Expansion Today Amazon is doing the same with Whole Foods. Amazon’s existing supply and demand structure was lacking. Despite the most advanced logistics network in the world, Amazon couldn’t quite get grocery. The reason lies in the nature of the product. Selling widgets is easy. 1,2, 2000… it doesn’t matter how much inventory and what type of products you stock. As long as you wait long enough, eventually you will sell them. It isn’t ideal but with enough money, turn time (speed of sales) is not critical. This isn’t true with food. Milk spoils. Eggs break or go bad and bananas are blobs after a few days. Groceries have to go fast or the business collapses. This is part of the reason food service businesses are so hard. You need choices so customers can choose but with too much stock, waste and spoilage will wreck your profits. Amazon suffered this problem for years. Amazon COULD NOT offer perishable products online. What would they do if they didn’t sell? Eat the lost? And there is no way they could get brands and 3rd party sellers on board without the demand. Whole Foods solves this. Whole Foods is one of the most well known and respected grocery brands. Their fans love them, their health conscious options and the incredible customer service/experience. Plus Whole Foods has locations in all the major urban hubs. Take a look at your average Whole Foods shopper. They are young, have money to spend and are culture and health conscience. This was not Amazon’s demographic initially – meaning Whole Foods opens up a whole new segment of the market to Amazon. But it is much more important than that. Whole Foods is a functioning, balanced, profitable network.
With great power comes great profit, and then even the innovative get fat and lazy. This was the paradigm pre 2000s. Rome rose and fell. Microsoft’s monopoly was cracked. Kodak created the digital camera and kept it from customers. The bigger they are, the harder they fall and the harder they fight. But historically failure was inevitable — no man, country or company ever reigned supreme in perpetuity. Chaos and innovation simply would not allow it. Fast forward to today. We are entering a world where this may no longer be the case. The companies of today are infinitely more powerful and resourceful than the empires and industry moguls of old. Established, valuable networks are nearly impossible to create, replicate or overcome. A 10% upgrade isn’t enough, you need 10x. Historically this was hard but inevitable. New changes and technologies propelled era after era out of existence at rapidly increasing rates (recently much in relation to Moore’s Law). Today is different Unlike even 10–15 years ago, tech giants are creating the bulk of the wealth and innovation in the economy. Companies like Facebook, Google and Amazon have more money than most small nations and more control than any one government, should they so choose. These giants don’t just fight competition, they destroy it. The leaders of today have learned the lessons of old and acquire promising startups often and early to protect their own ass. They have the most talent, the most money, the most data and no moral quandries with flat out copying competitors. Copy and paste In an era where user experience is everything and data is king, how can startups compete? US Anti Trust laws are dated. They define monopolies not by their power and control, but by negative impacts (specifically price gouging) experienced by customers. When you search for dinner and Google shows you your favorite restaurants, knows your preferences, suggests a great vegan cafe and books you a table, how can consumers complain. It is seamless, “Google just gets me.” But Google scraped Yelp’s database, showed reviews, cloned an OpenTable and booked a place, all without leaving your search browser. And guess what, the government does not care. Let’s not even start on Snapchat and Instagram. Snap’s growth has flatlined and Instagram appears unstoppable. Source: Recode Try it before you buy it Almost all giants have all been accused of Microsoft like monopolistic tendencies. They lure startups in with talks of acquisition, pick apart the tech, pass on the deal and build it in-house. Then thanks to network effects and enormous, engaged user bases, Facebook, Amazon and Google can deploy and dominate the market — just ask Dave Morin. And when Google and Facebook control the channels where startups acquire customers, a small tweak to the algorithm ensures their competitors drift in obscurity. Sounds like anti-trust is in order. But… More powerful than govt And this is why we find ourselves attending congressional hearings on the alarming power of tech and its ability to influence elections (on a sidenote, America has aggressively influenced dozens if not 100s of elections worldwide so it is hard to really whine about being on the receiving side). But these hearings and debates are a joke. The regulators assigned do not understand the underlying issue — network effects and user experience. Amazon’s a great example of this. Amazon aims to kill all 3rd party sellers, yet brands CANNOT afford not to sell on Amazon (more on this here). The rewards are too great. Like eating fastfood, it is great in the short term and deadly in the long run.