Master of 500 Hats

Thoughts on Angel List, "Social Proof", "Spray & Pray", & The Network Effects of Large Scale Investing

(ok folks, i've gotta take the kids to basketball practice in a few hours, so will try to power through this -- that means limited crazy fonts, profanity, wild pix... sorry little monsters, next time ;)

3 major points i plan to cover in this post:

1) Angel List Fucking Rocks. Period.  it's the single greatest innovation in our industry in the last 5 years (aside from LinkedIn, Facebook, Twitter, & Quora) and it's great for almost all participants. and while social proof can be abused / misused, so can gasoline... doesn't mean you shouldn't fill up your gas tank and go back to riding horses. if you want to effect change, either Engage Fully, or Compete.  inaction/boycotts are rarely useful & should be largely be ignored.

2) on average, "Spray & Pray" investing -- aka a High-Volume, Diversified & Quantitative Investment Strategy -- is not just "ok", it's actually BETTER than "Focused" investing (at least w/o insider or hidden knowledge).  in fact, it is incredibly hypocritical and patently FALSE for the VC industry -- which has NEGATIVE IRR over the past 10 years, and historically poor performance -- to criticize high-volume strategies as being somehow crazy.  if anything, their inaction and lack of innovation in the face of poor performance is the Insanity, and most of them (& their LPs) should be ashamed for lack of stewardship.

3) in the future, "Value-Added" investing will come more & more from domain-specific knowledge (engineering, product, design, marketing, customers) and less & less from investors with large networks & rolodexes who make "introductions", as their value is disrupted & marginalized by social platforms like LinkedIn, Quora, and Angel List.  specifically, regarding Consumer Internet & Web Infrastructure investing -- people who DO NOT have skills in programming, design (visual or other), scalability, SEO/SEM, design, social platforms, viral marketing, affiliate marketing, mobile devices, etc -- will begin to fail out of the investing industry, and will be of limited value other than writing checks quickly... perhaps at higher-than-market valuations in order to compete. which is much worse strategy than "spray & pray".

UPDATE: to clarify further for Fred Wilson & others -- i am NOT espousing a PURELY "spray & pray" philosophy... rather the full story on what i'm saying is that a quantitative, high-volume investment strategy filtered based on reasonable assessment of team, product, market, customer & revenue along with domain-specific expertise, and selective follow-on investment with incremental knowledge of company metrics and progress CAN result in good outcomes.

or at least i hope so, because that's what i'm doing.

alright, let's get started.

#1: Angel List is the Single Most Important Innovation in Venture Capital in the Past 5 Years

background -- links to a bunch of previous posts about Angel List that have been written by Scoble, Bryce, Jason, & Suster which i will summarize below:

Scoble: wow, Angel List is a pretty amazing hype machine for startups, and a great way for entrepreneurs to raise capital. had no idea how much impact it has... pretty cool.

Bryce: i don't like the social proof aspect / herd mentality generated by Angel List, and i've got plenty of quality dealflow. taking my ball and going home.

Jason: gee Bryce, that's small-minded. Venture Capital is/has changed, and you risk becoming irrelevant w/o participation. [+typical Jason no-holds-barred criticism, perhaps unfair perhaps not]

Suster: i like Angel List mostly, altho some parts of it give me pause. mostly good for investors and startups, altho some n00b angels are gonna get fucked.. and in meantime their lack of financial discipline could also fuck up the rest of us. caution: keep using but tread carefully.

other folks also weighed in via twitter; notably Naval, Shervin, Peter Chane (& Percival did nice funny ;)

so arguably i'm the most active current user of Angel List -- i've done ~20 deals there, either that i've listed and/or invested in. maybe George Zachary is more active but we're 1 & 2 i think. (funny how the biggest users of Angel List are actually VCs, eh?). it's not a majority of my activity, but it's significant -- 500 Startups has invested in ~100 deals since we got started last year, mostly at seed stage (altho we recently started our incubator / accelerator program in the past few months).  we plan to continue doing ~100 deals a year, and i'm sure Angel List will be a significant part of those (maybe 20+% ?)... altho even *i* can't possibly keep up with the deal pace that's currently happening on Angel List. but that's not a bad thing.

so here's my take:

1) i'm an unabashed fanboi, and i think Angel List is awesome -- for both startups and (most) investors.  it is likely the single greatest innovation in the venture capital industry since Paul Graham started Y Combinator 5 years ago. period. Nivi & Naval deserve high praise, both for AL & for VentureHacks.

2) there is perhaps a little too much emphasis on Social Proof, however Naval is not creating the herd mentality, rather he is simply recognizing its value and attempting to harness it.

3) without question, Angel List provides greater visibility for a lot of startups raising capital who would otherwise not have as much access to investors. this is very good for entrepreneurs. and while Start Fund and Yuri/Ron investing in YC was a brilliant move w/ huge PR impact, BY FAR, Angel List is/will have 100x more impact on the industry than the Start Fund (which currently only focuses on YC companies).

4) for most investors, Angel List is helpful -- either to get access to dealflow they would not previously have seen, to supplement their existing dealflow, or to see what is happening at earlier stages and inform later stage decisions.  it's also helpful to connect investors to other investors (ex: i follow several hundred other investors on AL & i'm learning about them as much as startups).

5) for a few (mostly new, mostly angel, investors -- but not only them), Angel List accelerates herd mentality, and the emphasis on social proof can perhaps crowd out / overwhelm other useful signals (product, market, customers, revenue, team, etc).  for these investors, Angel List is kind of like Crack for Nerds... actually that's not it; it's more like Sex for Virgins. wait, here it is: Angel List is like Dangerous Sex with Super Models for Virgin Nerds.

yeah that's it -- imagine if you're Urkel and all of a sudden you get to find out who the newest Sports Illustrated hotties are, who they're screwing, and then SOMEHOW you discover an opportunity to SCREW THEM YOURSELF TOO! (omg, where do i sign?!?)  ok, so you get the picture.  this is probably why Bryce left the party. or maybe it's because he's a Mormon with 5 kids, and doesn't need to do any more screwing around... doh! (sorry i know that will offend some folks, but i couldn't resist... and Bryce is a friend even if i disagree with his stance.  Bryce: sorry if your kids are reading this.)

Now before i get into any real criticism of Angel List, let me again restate -- it's the single greatest innovation in Venture Capital since PG started YC 5 years ago.  it's awesome, and it has dramatic benefits for entrepreneurs... AND investors too.  it is likely the FIRST online system to have a material impact on the startup investing world (aside from valuation databases like VentureOne / VentureXpert / etc). Nivi & Naval also created VentureHacks, which (before Quora anyway) is the single most valuable resource for entrepreneurs in understanding venture capital & angel investors.  

So, what don't i like about Angel List?  not much. i don't like the fact that the voting arrows have a crappy UX, and it's a little hard to scroll through all the deals & investors sometimes... in fact, i'd even like a little MORE social signal, by figuring out a way to rate influence / reputation on Angel List, so that some investors count more than others (because they DO, not because i don't like a level playing field). but really, that's about it right now... and it's getting better all the time.

but to the extent Social Proof is a "problem" -- and i don't think it is, just its perception in weighting on Angel List relative to other items -- i CERTAINLY don't think you fix it by leaving.

as with most issues, Change happens either through VIOLENT participation, or VIOLENT competition.  in other words, most boycotts suck in terms of impact.  

either you engage fully and attempt to make change happen from within, or else you should go create a competitive alternative and attempt to make change by offering a better solution. either of these are rational perspectives, but non-participation is simply lame, & largely why i take Bryce to task for doing so (or at least, once he blogged about it publicly). silent non-participation is anyone's right, but vocal non-participation is like Cursing Darkness rather than Lighting a Candle.

#2: On Average "Spray & Pray" Beats the Shit Out of "Focused" Investing (btw it's called "Diversification")

i'd also like to clarify my investment philosophy and pace, and criticisms of "spray and pray" investing, as well as differences between me & other high-volume investors like Ron Conway (whom i still respect tremendously even if he thinks i'm an ass), First Round Capital, Y-Combinator, Tech Stars, and others.

Mark Suster was surprised when i took mild offense to his left-handed compliment about me being a "higher-volume investor who did well in spite of that behavior".  damned by faint praise, i will fully OWN the fact that i've called my fund 500 Startups and will probably always be known as a high-volume investor first, value-added investor second.  

in time, perhaps our fund will also be known for Design, Data, & Distribution, but for now i'm happy to be labeled as your Canonical Clueless Carefree Spray & Pray Bitch. i will now EMBRACE and REINFORCE the "Spray & Pray" label until i ABSOLUTELY DESTROY its relevance thru repetition and ridicule -- and furthermore i think it's the rest of you "focused investors" who think you add so much goddamn value that are full of it. BRING IT, mofos. (for the record, it's almost always 95% entrepreneur, 5% investor. "focused investing" is perhaps more accurately "focused selection" -- it's rarely the case that the investor adds much value after the investment, other than check... and if they do, it's mostly just introductions... more on that below.)

"Spray & Pray" is usually a disparaging term used by those who don't about those who do. in almost every case where i hear it, it's biased commentary by large VCs who do later stage investing at a much lower volume. or else, it's by bloggers/press who can't think for themselves, and like to start interviews off with me in adversarial fashion... that is, before they realize i've gone toe-to-toe with Arrington for years, and 99% of them can't hold a candle to his masterful psychological warfare otherwise known as a "briefing". (once you've been through the trenches with Mike, everyone else seems like a walk in the park. there is a reason he's the best in the business, and most of you are no Mike Arrington).

so anyway, let's consider that most of the folks in the traditional venture business who are criticizing spray and pray HAVE HAD NEGATIVE IRRs OVER THE PAST TEN YEARS, and if you remove the top-performing 10-20 VCs from the #'s, the overall industry as a whole probably hasn't beaten the market for decades aside from a few years in the late 90's when the retail market would buy any bullshit that the investment bankers put on the market. and this from an illiquid asset class with high risk. you better be at least getting 15-20% returns on average, or you shouldn't be opening your piehole.

seriously now, i've been saying this for years -- it's sort of like someone who's had sequential disastrous monogamous marriages criticizing someone else who's single and dating the field. in other words -- you're just jealous because my job is more FUN than yours, and in general you SUCK at yours, whereas i actually have been both a programmer and a marketer for more than 10 years each, and sort of know what the hell i'm doing. or at the very least, i'm new enough to the investing field that we don't know for sure yet whether *I* suck, but we have PLENTY of evidence that *YOU* sure as hell do.

for the last time -- with VERY few exceptions, traditional VC investment practices have resulted in EXTREMELY POOR financial returns, and disparaging & biased remarks against high-volume investing are the height of hypocrisy. i will be happy to listen to criticism from folks like Benchmark, Sequoia, Greylock, Accel, Union Square, and others who have consistently out-performed on low-volume pace of investment for decades.  they at least can speak from authority (and to be fair, Mark Suster's GRP has done quite well in the past decade).  however, if you are ANYONE ELSE then please have a big cup of Shut The Eff Up because you don't have the 1st clue what the hell yer talking about.

to be more specific: if we look at the #'s, on average it's more likely that high-volume, spray & pray investing -- which i will going forward refer to as "a quantitative investment strategy" -- is likely to be successful than a "focused, low-volume" investing strategy.  in fact, it's hilarious that people like to refer to what i do as playing roulette or gambling, when it's exactly the case that the fools playing a low-volume strategy are the ones who are gambling -- they're betting on exactly ONE roulette square, when they know the odds of getting billion-dollar wins are astromonically higher than 40-1.  

whereas i'm basically trying to be the Billy Beane of Silicon Valley, betting on a bunch of short, fat first-basemen who consistently get on base.  I'm going after all the Ichiros, and i'm willing to do an incredible amount of scouting and early investment to figure that out, when most investors are lazy, want to bet on Barry Bonds and souped-up #'s, hoping they can hit a homerun when the fence is actually more like a mile away than just 300 yards.  good luck with that folks.  i'll stick to technical hitting, thank you.

again, it is tantamount to conspiracy that people who are failing miserably at venture capital investment with ridiculously poor IRRs are disparaging anyone else with a quantitative invesment strategy. kettle, black.

#3: Social Networks & Reputation Systems like LinkedIn, Quora, Angel List are Destroying & Marginalizing the Value of "Rolodex" & "Finance/MBA" Investors. Domain-Specific, Expert Investors are the New Black. Get Used To It.

now, let's talk about what VALUE-added investment is REALLY all about.

first: while value-added does include introductions & reputations, if this is all you are currently trading on, then prepare to get disrupted by things like LinkedIn, Quora, Facebook, Twitter, Angel List, etc.  most big name VCs over the years have PRIMARILY been trading on reputation and connections which are now MUCH less necessary due to the advent of social networks and other high-visibility communication platforms which are dramatically more transparent than they were 10 years ago.  this is likely to continue to accelerate rapidly, and in the future i will wager that investors with these backgrounds will be a hell of lot more valuable:

• Engineering & Programming
• Visual Design & Interaction Design
• Back-End Infrastructure & Scalability
• Large DB Systems Integration
• Front-End Scripting & Dynamic Content Integration / Rich Media 
• Analytical Marketing & Metrics
• Behavioral Psychology & Customer Development
• Paid & Organic Search (SEO/SEM)
• Social Networks, Social Media, Mobile Development & Marketing
• Affiliate Marketing & Direct Marketing
• Business Development, w/ Strong Engineering or Product bkgrd
• Enterprise Sales, w/ Strong Engineering or Product bkgrd
• Ad Copy Creation & Consumer Marketing
• Customer Service & Support
• Payments & E-Commerce
• Other forms of Online Marketing (Video, Blogs, Social, Mobile, Etc)

The list goes on, including many other specific skills in building & creating product, and in marketing & distributing to customers.  these are the 2 key areas of expertise: building product & distributing to customers. making or selling. creating or hustling.

On the other hand, skills i bet won't be important as much in the future:

• having (only) a big rolodex or (offline) network
• having a traditional MBA or investment banking background

Both of these are still important, but will become commoditized and marginalized by the availability of such information from online systems for social networks & reputation, and by the relentless advance of access to capital from a variety of channels.

To the extent these areas ARE still relevant, they will be dominated by those who are most visible and most relevant on Facebook, Twitter, LinkedIn, Quora... and Angel List.  most VCs barely blog, and have no idea what it means to engage on any of these systems, much less build them or market them.  (most angels too, but they seem to be a little more savvy).

and while most people think of me & 500 Startups as Crazy Spray-and-Pray, what we are REALLY all about is value-added investing based on domain-specific knowledge from the first group.  

our team includes engineers, marketers, designers who have worked at companies like PayPal & Google & Mint & YouTube, and our mentor network currently does many of the jobs in the first group at companies like Facebook, LinkedIn, Twitter, Groupon, LivingSocial, Zynga, Twilio, SlideShare, Zong, etc.

we also are quite unique in that we run domain-specific conferences on social platforms & marketing (Smash Summit), on design & user experience (Warm Gun), on startup metrics (Lean Startup w/ Eric Ries, another 500 advisor), on messaging & communications (Inbox Love), and we reach a global network of 100+ companies across 3 continents and over 10 countries (and visit them via trips like GeeksOnaPlane).  we webcast our accelerator talks live to anyone in the world who wants to tune in.  and yes, i am bragging, because i'm sick & tired of people thinking we are anything as simple as "spray & pray" investors.  

i challenge ANYONE or ANY firm on the planet to show me the list of "value-added" resources they can bring to the table compared to us, even though we are barely one year old.  we are NOT simply spray-and-pray investors -- we are The Next Generation. we are What's Coming. and we Got Next.

We Are Legion. Expect Us.

 

gotta take the kids to basketball, so i'm leaving it right here for now.

(drops mike on floor, walks off stage, raises 2 fingers to audience... in RubberBandits style).

 

How to Take Down Facebook -- Hint: It Ain't Twitter. (aka: An Open Letter to the Next Big Social Network)

I've held off writing this post for a long time, because I couldn't quite get my head around all the issues.  It wouldn't be accurate to say there's something "wrong" with Facebook, and it's not like I don't spend a shitload of time ego-whoring around on Twitter too. Let's face it: I'm completely & utterly addicted to social networks & tha Interwebs.

but: Something is Still Missing. Something is Wrong on the Internet and it's keeping me awake at night.  however, i think i finally figured out what "IT" is...

Assertion #1: Facebook doesn't get Intimacy.

Facebook is full of my "friends", but it's not a great place to hang with my BEST friends (aka "BFF"). 

Now before you lose your shit, i know many of you are saying:

a) Dave, you're full of crap -- intimacy doesn't come from a computer, or
b) Dave, you're full of crap -- Facebook has *plenty* of intimacy, or
c) Dave, you're full of crap -- the only thing that might kill Facebook is Twitter, which is the exact opposite of intimacy (true)

or last but not least:
d) Dave, hey WTF happened to all the crazy fonts & colors?

None of these are the right response. (altho I do promise my next blog post will once again be replete with wild-ass colors and funky fonts, just u wait).

Let me back up & explain a little bit.

Once upon a time back in 2005 when i first joined Facebook, it was a "small" social network of less than 10 millions users.  But I was still rather late to the party (altho at 39 i was the oldest cool kid on my block).  Since pre-2006 FB was only available to users with a college email address, I had to contact the alumni association at JHU to get a valid email address (ending in ".edu") to register on FB. This resulted in a very odd & lonely initial FB experience where I was ~10-15 years older than almost everyone in my college network (please no PedoBear jokes, kthxbai).  Gradually I found a bunch of folks on Facebook that I knew -- mostly VCs or early employees at FB & PayPal it turns out -- and before I knew it I was hooked on poking like every other undergrad across the country. (wait: that's not what I meant... oh never mind, that's true too).

fast forward 2-3 years: Facebook cracks 100M users, then 200M, then in quick succession 300M, 400M, 500M users.  And we're coming up on 600M users soon.

Holy. Fucking. Wow.

Half a BILLION users? Unbelievable. What the hell happened? Where did all these "friends" come from?!?

Well, they didn't come just from college.  Facebook figured out how to open up the social graph and gather people from all walks of life -- every age, every sex, every color.  FB has college kids.  FB has college grads.  FB has high school kids, FB has parents.  FB has the white-collar workforce, the blue-collar workforce, and even stay-at-home moms. Hell, FB even has GRANDparents!  FB has desktop users, and FB has mobile users. And FB has them in the US, in Europe, in South America, and in SE Asia.  Except for a few places like Brazil & East Asia, FB pretty much has every Internet-connected user on the planet by the short-hairs.

With an always-shiny-and-new combination of pokes, wall posts, photos, videos, apps & social games, tagging, and newsfeed distribution, Facebook has firmly fixed itself into the fundamental fabric of our friends & families. Except for Twitter & Zynga, Faceboook appears to be an unassailable, unstoppable JUGGERNAUT that absolutely DOMINATES our online experience -- and will likely continue to do so for the next decade... right?  Well I'm not one to bet against 500M+ fanatic users & The Unsinkable Mark Zuckerberg... but there's this one little problem:

I've got too many goddamn friends on Facebook.

yeah, that's right: i've got over 2,000 "friends" on FB, and it's fucking KILLING me.  Now admittedly most normal folks don't have *that* many Facebook friends -- true: i'm tremendously insecure, an only child, & a pathetic people pleaser -- but regardless a lot of "normal" people have the same problem with only a few hundred friends. and i'm guessing neither they nor i want to share our most jealously-guarded deep dark secrets with *everyone* on Facebook.  but they might just share it with a smaller subset.

ASSERTION #2: The stuff that's really valuable in my social graph tends to the extremes -- very public (ex: Twitter) or very private (ex: email).

look, it's either Gaga, Shaq, & Glee (extremely public, better on Twitter than Facebook) or else it's only my closest buddies (u know, the evil VCs I collude with at Bin38 to fuck over YC startups).

The stuff that's meaningful -- NOTE TO STARTUPS: MEANINGFUL=MONETIZABLE -- that stuff is either better on Twitter, or better with a much more private & select subset of my friends on Facebook.

the very public: well here it's pretty obvious Twitter has an advantage over Facebook. the asymmetric follow model and constrained, lightweight communication make it MUCH easier to engage aspirationally with celebrities & famous people on Twitter than on Facebook.  Now FB does realize this and is fighting back with Like buttons and a revved Group structure, but they may be at a disadvantage if Twitter starts to catch up with them in users/usage. Currently Facebook is a more familiar experience for larger audiences, but that may change over time. while I don't think Facebook is threatened by Twitter that much, neither is Twitter at much risk of Facebook stealing away the famous people. so Twitter probably wins on celebrities & other beautiful / rich / famous people.

the very private: now, here you'd think Facebook has the upper hand -- and they do, but they're at risk of being upstaged by a more private & meaningful social network (or perhaps via some subset or abstraction layer on top of FB, if they can move quickly).  this could come from Facebook modifying their existing environment to support closer subgroups, or algorithms that preference newsfeed items only to close, strong, specific connections.  Or maybe it just works better with email groups & selective filtering.  Or maybe it works better on an entirely different social graph that emphasizes family, close friends, and small workgroups (Yammer? LinkedIn? maybe, but i don't think so). but somewhere, there's going to be a smaller more Intimate conversation that enable a different type of sharing... lots of it.

let me explain.

maybe I only want to tell a few close buddies about that episode with the VERY BAD bean burrito. maybe your girlfriend only wants a FEW honest opinions from her CLOSE friends on whether that new dress makes her ass look fat. and maybe your frat brother only wants to tell a few buddies about the AWESOME house party he's throwing next weekend, when he's planning to invite the smoking hot new freshman sensation over with 3 of her equally sizzling BFFs. and finally, maybe I only want to share that airfare deal on a Final Four Vegas roadtrip (& the pictures!) with my set of close friends. what happens in Vegas stays in a very tight and private social graph... you hope, anyway.

now what's going on here?  in each case above, there's a specific tight circle of connections I'd like to draw on, but they aren't always the same.  some of them pull from long-time, frequent & familiar associations.  others are based on a select, NEW set of acquaintances that meet a high bar of interest.  still others are based on some shared trait or interest or activity, where I've spent time with someone before around a specific context or depth of experience... or perhaps also, a specific [social] commerce context. like something I bought, but would only share info with a small group.

which brings me to my 3rd and final point.

ASSERTION #3: Intimacy depends on Context, Connection, & Continuity...  which determine Closeness... and ultimately, drive Commerce.

One might suggest that Intimacy is determined by:

1. Shared Context (ex: basketball, school we went to, fans of Glee)
2. [strength of] Connection (how much we like each other, how strong)
3. Continuity (how long we've known each other, how freq/recently we connect).

For any possible social interaction, and for any potential subset of friends within your social graph, these factors determine a minimum critical level of Intimacy required to initiate & sustain the conversation around that interaction.  Too little Intimacy, and the conversation stops. But with the right amount of Intimacy, the conversation literally explodes with information. 

Our desire to share our experience is explicitly determined by the level of Intimacy available within (and perhaps constrained by) a social network. Ultimately, this level of available Intimacy may indeed determine the overall relevance of the social network to its participants... and perhaps, whether related commercial transactions might be relevant as well. which is something Facebook probably DOES want to make sure it gets right.

...and THAT is why Intimacy should matter so much to Facebook.  it's the ONE place where they have a huge advantage over Twitter, but also the place where they are greatly at risk of someone else coming in and stealing their cheddar. 

Because Facebook has chosen to emphasize growth over monetization these past few years, they have de-prioritized close, meaningful connections over broadly relevant ones with a larger group of friends.  While this will help them get to a billion users faster, and increase their share of brand spend on advertising (where Facebook is really killing it these days), it may create vulnerability to another social network player who focuses on a more tightly-defined social graph with only a few, specific & meaningful Intimate relationships.

Intimate relationships that might just monetize more powerfully with 3 close friends, than they do with 300 acquaintances.

Better be careful, Zuck. maybe there's a reason Facebook should care more about Intimacy & Privacy that has absolutely nothing to do with government regulation, and everything to do with simply making more Meaning... not to mention more Money, as well.  

MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.

My apologies... this is a long piece (~2500 words).  Not for the faint of heart. If you want the short story, read the abstract below & 3 core assertions, then cut to the conclusions at the bottom.

Abstract: VC funds are getting smaller (good), & angel investors are growing (also good), but both need to get smarter & innovate. Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. Meanwhile acquisitions are up, but deal sizes are down as mature companies buy startup companies ever earlier in their development cycle.

What does this mean? What opportunities/pitfalls does it present for investors?

Let's start with 2 intial observations about the current market for investors, and for startups.

Assertion #1: Most consumer internet investors (angels, seed funds, big VCs) have no clue what the fuck they're doing. Except for a few brand names, most large funds >$150-250M will die in the next 3-5 years... and that's a good thing. Still, smaller investors will need to innovate and differentiate in order to attract proprietary, quality dealflow and survive.

Recently some very smart folks have been talking about the relative [upside/downside] of being a [small/big] investor in tech, and specifically the changes & challenges going on in venture capital in the last decade. Due to reductions in CapX rqmts & median exit size, it's tough to be a large fund (say, over $250M?) that invests in consumer internet. However, while i agree there is a Moneyball "small-ball-is-beautiful-baby" story going on in venture, that summary is too concise... and it misses a more significant point re: differentiation in investor domain expertise & services (or lack thereof), and the importance of staging follow-on investment based on product/market maturity (more on that later).

IMHO, whether or not your fund is large or small is not the primary issue in consumer internet investing. While my biased belief is $10M-100M seed funds are a lot easier to manage & more entrepreneur-aligned than "traditional" $250-500M+ funds, there will likely be a few winners and LOTS of losers at both ends of the spectrum. Probably more BIG fund losers than small fund losers, but still there are many other factors than fund size that will predict for success or failure.

No, the primary issue is that investors of all shapes and sizes have become incredibly lazy and complacent over the past two decades, measured by both activity and by IRR.  Meanwhile, the consumer internet has brought a tsunami of technological & behavioral change which has resulted in stunning reductions in time & cost needed to distribute products and services to the over 2-3B connected people on the planet.

Let's examine that more closely:

The INTERNET has changed life DRAMATICALLY for BILLIONS around the globe -- yet most VCs & lawyers still close deals via fax & snail mail.

Fuck. That. Noise.

Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down & put out of their misery... NOW.  Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for the next tee time.

Well ATTENTION K-MART SHOPPERS -- you, Mister VC 1.0, are about to be DECIMATED... and it's a Schumpeterian Fate that is both deserved and overdue.

HURRY UP & DIE ALREADY, U FRIGGIN' PATHETIC DINOSAURS.

indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it's a done deal. The marsupials are taking over and in 2015 there will be a lot more investors that look like Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn't it?).

Now let's take a look at changes that have occurred, & how to adapt as a Lean Investor 2.0:

Assertion #2: There is tremendous opportunity in building revenue-focused consumer internet startups for $1-5M that a) attain some level of commercial viability, b) acquire customers predictably using online distribution channels (Search, Social, Mobile), and c) can later be sold for $25-$250M.

Historically, Venture Capital has been about the use of large, risky, CapX spending to accomplish two primary & typically expensive goals:

1) Build Product.

2) Acquire Customers.

Now in the past, PRODUCT has meant building a variety of expensive things (big iron, disk drives, personal computers, packaged software, computer chips, designer drugs, network routers, browsers, search engines, social networks, etc) with lots of people over periods of years.  We're talking 50-100+ people spending 3-7 years building shit, with no offsetting revenue for quite some time. That's a lot of headcount and expense before you even get to your first customer.

And to make that even worse, many of the VC-funded startup companies target CUSTOMERS have been large, enterprise companies in tech and/or government entities with looooooong sales cycles requiring expensive, direct, dedicated sales force... that also cost shitloads of time & money.  Or large mass-marketing sales & marketing campaigns conducted via expensive print, radio, & television marketing. And the sales cycle was annual, requiring ongoing efforts to hit quarterly or annual sales targets via license revenue and maintenance support and upgrades.

Finally, many of these companies were being built/financed to go public over a series of many years and multiple capital raises where the amount of ownership by the entrepreneur was quite small (usually single-digit %'s) and the target exits were huge, hundred-million if not billion-dollar outcomes.

Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:

• PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers

• MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.

• REVENUE can now be collected easily via a variety of online payment, transactional e-commerce, digital goods, subscription billing, lead generation, CPM/CPC/CPA advertising.  Many people buy things online now, and many companies are even bought for usage & users ahead of revenue.  In other words: Brothers Are Gettin' Paid, Yo. Cash Money, G. It's aaaaalll goooooood, mah nizzle.

So to summarize: PRODUCT development cycles are shorter, required materials & resources are free or low-cost, development teams are smaller, and new services mashup & build on top of old services that already deliver terrific value in the cloud via features, data, network effects, & APIs. MARKETing costs are lower, due to a variety of broadly-available, low-cost, online distribution channels, which can be used in more measurable and predictable ways than ever before. high-bandwidth to the home means video and other data-intensive media are commonly available to anyone with cable or satellite TV. REVENUE can be generated simply & continuously, via direct business models & online payment methods that are becoming mainstream all over the world... such as mobile payments even in the remotest, poorest economies.

Finally, as more tech & internet companies mature and become profitable, they in turn are a larger source of exits & liquidity as they attempt to acquire startups with innovative technology & desirable products & services.  By utilizing their larger customer base as a way to leverage distribution, they can acquire smaller companies who want low-cost ways to access new customers.  However, as more of these companies mature & compete for acquisitions, many startups are getting bought up earlier in their lifecycle at smaller dollar amounts than if they had to grow to IPO-required size.  And as even non-technology companies attempt to acquire innovation & expertise in online services, more but smaller exits is a likely ongoing trend.

Okay, so that's a lot of crystal-ball gazing into the near-future, but now let's take a look at some emerging best practices & fundamentals for investing in Consumer Internet startups.

Assertion #3: Startup investment can be staged in 3 distinct phases with explicit goals & outcomes:

1) PRODUCT = Customer Problem/Solution Discovery (MVP), User Experience / Usability

2) MARKET = Market Sizing, Campaign Testing, Customer Acquisition Cost(s) & Conversion

3) REVENUE = Expand Revenue and/or Market Share, Optimize for *PROFITABLE* Revenue.

Largely, this is about applying techniques in Customer Development (Steve Blank) and The Lean Startup (Eric Ries) to investing, and in particular how to research, improve, & identify Product/Market Fit (Sean Ellis, Marc Andreesen), otherwise known as "TRACTION", before and after you invest.

This is really the key to my investment thesis: Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit.  It's sort of like counting cards at the blackjack table while betting low, then when you're more than halfway thru the deck and you see it's loaded with face cards & tens, then you start increasing your betting & doubling-down.

Let's face it -- most venture investors are sheep.  We like unfair advantages.  We want to know that there is already customers, revenue, and that elusive thing called TRACTION.  Unfortunately, if it's obvious that there is already customers, revenue, and TRACTION then there will likely be a LOT of other investors at the trough, the competition will be fierce, and as a result the price to invest will be high.

So how can you invest at low-cost, then figure out when to follow-on to increase your value?

it's pretty simple, actually.

INVEST EARLY at LOW COST in people you think are smart and have built some promising products. understand if they know how to iterate and use customer feedback to improve their product and/or marketing.  learn how to understand conversion metrics for their business & customer value.

then IF you see the metrics improving & customer / business value increasing... then DOUBLE-DOWN.

however this happens in 3 distinct stages:

1) PRODUCT: Discover a [large enough] customer segment with a meaningful problem / strong desire, and develop a functional solution for them to use (Minimum Viable Product aka MVP).  I also call this when ACTIVATION happens.  You should also make sure the user experience is compelling enough for them to use it more than once (RETENTION).

2) MARKET: Test for scalable distribution channels that allow you to acquire large # of customers at cost less than what you will generate (ideally, at <20-50% of annual revenue so you have some cushion).  You may also find you have to go back to #1 and change some things, or discover entirely different marketing campaigns & concepts to get to scale.  If you're lucky you may even discover a way to get your users to spread the word for you (word-of-mouth and/or viral features).

3) REVENUE: hopefully your MVP is already obviously valuable enough that people will pay something non-zero for it. regardless, the goal is to test & optimize for product/market(ing) combinations that generate cash-flow positive outcomes at scale, over short periods of time (or longer periods if you have financing structure to merit).  i tend to prefer business models with low complexity, such as direct transactional or e-commerce models, subscription billing models, or lead-gen / affiliate models.

Ideally you'd like to be able to invest in a functional product AFTER the entrepreneur has already got it working, but sometimes they aren't there yet, and often they will have to pivot regardless in order to find an interesting segment that scales & is profitable.  Still, i'd like to think most entrepreneurs who understand their customer can build a functional MVP in 3-6 months, for <$100K. Sometimes it takes longer / more capital, but most times it doesn't.  If they look like they figure it out, double-down.

Next, you'd like to be able to improve the user experience and engagement / retention, get them to increase their love for the product.  If you can do this well enough, your customers will become your marketing... at very low cost.  Even if you can't get to strong word-of-mouth or viral marketing, you can still hopefully reduce customer acquisition cost by getting incremental social amplification.  Regardless, your job is to discover SOME kind of scalable distribution channel that seems like it COULD be optimized to a point where it's cash-flow positive at some point in the future.  Hopefully this doesn't take more than $1-2M and 6-12 months to figure out.  But most of this spend should be on MARKETING channels & testing, NOT on adding more features... you can pivot to discover new customer use cases, but DO NOT keep adding features.  in fact, you might want to remove them (see KILL A FEATURE). If it looks like you've got scalable distribution, even if not quite break-even, then double-down.

Finally, now that you have functional product (hopefully AWESOME product with strong activation / retention / referral metrics), and you have some ideas on scalable distribution that converts to non-zero revenue events (or proxy events such as long usage or referral / affiliate / lead-gen behavior, advertising CPM/CPC/CPA), now you need to tune to get to profitability within some finite period of time that you can finance and/or stretch to achieve.  This is where it can sometimes get quite expensive, and it could take years to get to profitability for some businesses, but i'd like to think that my startups can figure this out in $1-5M and 1-2 years. Again, if it looks like you can get there, then double-down.

 In summary, you should be thinking about stages for risk-reduction & company value creation that look like this:

1) Product: $0-100K, 3-6 months to develop basic MVP that's functional & useful for at least a few customers. Get to small product/market fit.

2) Market: $100K-$2M, 6-12 months to test marketing & distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event. Get to large product/market fit.

3) Revenue: $1-5M, 6-24 months to optimize product/market fit and get to cash-flow positive.

I might edit this a little bit, as i'm in a rush to finish publishing and get back to other projects, but i think this has captured most of what i wanted to say for now.

Appreciate feedback & commentary on anything that doesn't make sense, could be improved, or can be streamlined.

 

 

 

 

 

 

 

 

 

Check-Ins are Coupons. Game Mechanics are Bullshit. Show Me The MONEY or Go Home (Loser).

(shameless plug: May 12 SMASHsummit.com social media marketing conference - get a 20% discount at bottom of this worthless & wildly speculative post)

For everyone out there wondering if i'll ever return your phone calls or emails, my apologies... i have a bunch of rather significant not-quite-finished projects on my plate right now, along with the usual deals & events & insanity.  Blogging has taken a back seat as well, but i've been meaning to write this post ever since coming back from Austin after an amazing all-night jam session with GaryVee until around 7am at SXSW.  since my kids are sick & i'm procrastinating doing my taxes until the last minute, now is as good a time as ever to blast out this stupid little piece of navel-gazing. so have at thee...

Assertion #1: Check-Ins are Coupons. Gimme $5 or go home, loser.

(and i don't give a flying FUCK about yr "awesome" LBS game mechanics... it's just  meaningless early-adopter BULLshit unless/until u Show Me The Goddamn Money.)

for all u nosebleed-valuation VCs jockeying to finance the dorky geniusues at FourSquare, GoWalla, MyTown, and every LBS vendor / app developer out there, it's time to face the music. while i admit everyone at SXSW (including me) was tweet-whoring themselves all over Sixth & checking-in like a sex worker at a Fuller Brush convention, let's not delude ourselves -- the current method of check-ins is a classic case of early-adopter lust for shiny objects, & has not a damn thing to do with long-term sustainable mainstream consumer behavior. no way any normal motherfucker is gonna do this check-in shit.

Without financial incentives or discounts, there is absolutely no reason on god's green earth to "check-in" for your stoner cousin, your luddite penny-pinching aunt, and certainly not your clueless grandmother.  they could give a rat's ass about your stupid little iPhone app with the pretty pictures and clever auto-discovery that barely works while draining the hell out of the battery... that is, until you give them $5 off their next beer or 5-dollar foot long.... at which point guess what? 

HELLO, MAINSTREAM CONSUMER MARKET!

while there may be ways to s[t]imulate financial incentives & discounts with virtual goods, frequent flier miles, or other point-based systems & psychological motivations, nothing works better to increase conversion than a cool $5 bucks in yr digital wallet, or 20% off yr next offline purchase.

if you don't believe me, go take a look at the history of PayPal jump-starting initial account signup incentives with $5 discounts for joining, referring friends, and entering profile & bank info.  while arguably the payment friction on the eBay marketplace created enough motivation to use PayPal even without financial discount incentives, the company used this tactic for years to increase user growth and get to such substantial critical mass that it couldn't be displaced even by eBay's own internal payment system.  and PayPal certainly didn't have any fancy game mechanics to get people to use the product (altho i will admit we had some pretty sweet blow-yer-jedi-mind tricks for getting people to enter bank acct info, thereby reducing transaction costs by avoiding credit card processing systems & fees).

So STFU already and gimme the $5, or get your stoopid game mechanics out of my face and go home.

Assertion #2: <1M users in 12 mo's is *pathetic*... can u even spell the word "viral"? Facebook will CRUSH u like a friggin' bug.

srsly dude: u ain't sexy unless yr app has bikini models w/ double-D cups (oops sorry, Apple shitcanned that option)... or unless you show me 10M+ users & high double-digit % month-on-month growth.

I'm surprised everyone is paying through the nose for such anemic LBS growth rates over the past year.  let's compare that with Facebook rocketing to over 400M+ users globally in the past year, and 100M+ users in the US.  if you're a small startup and you're not acquiring users like mad organically / virally, or picking them up off Facebook or Twitter, you're going to get steamrolled by the larger platform players, or else some fast-growing upstart you haven't heard of. anything <1M users seems like a rounding error, and even Yelp's healthy 30-40M+ users is a bit of a blip compared to FB or other large platforms.

in order for any of these big LBS bets to work, u better start acquiring users at scale (let's say 20M+ users + a lot of local search data) or else yr only hope Obi Wan Kan-u-buy-mi is to maintain a decent technology lead and get acquired. oh yeah, i forgot -- your technology lead = doing a GPS lookup (which will be in every chipset in <12 months) + some pretty icons + some bullshit game mechanics that aren't working for anyone who doesn't speak Klingonese.  hurry your ass up or you guys are toast.  and i don't know if FB or even Apple or Google is gonna pay a 5-10x multiple on your $80M post-money round.  Yelp may have the location data in a few key metros to justify walking away from a $650M offer, but you little shits sure as hell don't. if you're lucky enough to get anything >$250M for your house of cards take the money & run, homey.

Assertion #3: the eventual LBS winner needs $100M+ to signup 1-2M local offline businesses & 20M+ users. (or maybe $500M i dunno but we're talkin' Money G)

Get out your VC "checkin"-book & write down a number w/ 10 zeroes:

$100,000,000.00

that's the minimum ante to play this game of poker.

i'm no expert on the sector-specific financials here, but here's my rough math: i'm guessing you need to acquire 20M+ users @ $5-10 each, and at least 1-2M+ offline businesses at $50-100+ each.  let's be generous & suggest it *only* costs you $100M-200M to get to minimum critical mass & basic viability (altho it could easily be $500M or more).

now who the H-E-double-hockey-sticks has that kind of FU$K-IOU money?

well, probably only 3-5 players can make those kinds of #'s work.

• Microsoft ($266B market cap)
• Apple ($219B)
  
• Google ($180B)
• or maybe Facebook...
• ... with lots o' help from a Private Equity group w/ Very Big Balls of Steel

Now certainly Twitter and Yelp could be in this game somewhere, and probably several other providers of local search data / business profile data, and other relevant stuff. But at a minimum, you're gonna need to have or acquire 10-50M users (active/frequent, not just registered) and have or signup 1-2M local businesses (perhaps more?).  this is customer acquisition cost on a scale that only a few big players can fathom, or a few larger venture / private equity players can go after.  And that's with a ton of execution risk.  Even Microsoft who has the money might not have the cojones to think they can buy & integrate all the pieces to make it work, unless it's just one big acquisition.  Google could maybe do it if they buy Yelp or Twitter, but they still need to get the social dynamics to make the user base work.  Same for Apple, altho either might figure it out if they're lucky and buy the right company(-ies).

But the odds-on favorite here by far is Facebook. With 400M+ users, an already very active userbase, and users' growing familiarity with FB Connect on off-platform sites, they are the easy pick front-runner. Maybe they buy somebody, maybe they don't.  Maybe they buy *several* somebodies.  But you can bet yer sweet ass the road to the LBS playoffs sure as hell goes thru 1601 S. California Ave, Palo Alto, CA.

Count on it... or should i say "Check-In" on it.

oh and one last not-so-minor point:

Assertion #4: Payments are a BIG part of the LBS winner-take-all equation

... regardless of whether we're talking about real money or virtual currency, payments matter a LOT.

Again, this plays to Facebook's potential future strengths (they're working on a payments product, and their users are very comfortable with various virtual currencies), and Google / Microsoft historical weakness (Google has only minor payments traction with Google Checkout, and Microsoft none to speak of).  However, Apple also now has substantial payments experience, and could be a player in this area.  And both Amazon and eBay (via PayPal) become very attractive targets for partnerships or acquisition by one of the major players.  But since Amazon is doing quite well thank you, and Bezos shows no signs of giving up the crown, expect either an ever-weakening eBay or still-growing PayPal individually to be in play by Microsoft, Apple, and/or Google within the next 2 years (yeah, i know i've been predicting this annually for the last few years... but just cause Ballmer's a blimey M&A idiot doesn't mean i'm wrong about the reasoning).

alright, got all that?

so here's my odds-on crazy-and-not-really-very-serious predictions:

1:2 - Facebook buys Gowalla, FourSquare, MyTown or Loopt, takes home the gold. this is the default.

2:1 - Apple buys one of the above, and/or Square, gives Facebook a run for the money.  probably still loses, because FB has too much frequent user activity, Connect dominates, & Apple doesn't move fast enough in software.

3:1 - Google buys Twitter for users/social + Yelp for local biz, gives Facebook a run for the money.  maybe also buys PayPal, maybe not.  probably still loses due to no clue on social, unless they let Twitter figure it out.  still not likely. (they likely do buy Twitter & Yelp, but still not enough to win LBS).

10:1 - Microsoft decides to spend a boatload of money buying something or several somethings, and fails miserably... unless it's Facebook.  but Zuck won't sell for less than $75B, and Ballmer doesn't live up to the first half of his last name.  so therefore Microsoft is FAIL. (probably hard & painful FAIL.)

50:1 - Google or Apple figures out a way to buy or merge with Facebook.  This is complete looney tunes, but would be the right move. however, Google can't likely pull it off without antitrust violations stopping them in their tracks.  and even if Jobs buys the farm, don't think he hands Zuck the crown unless some very unusual scenario comes down.

in summary: Facebook wins LBS. unless Jobs has more smarts than hubris than i think, and Apple buys Facebook (NFW.). somewhere along the way PayPal gets bought by somebody (likely MSFT), but prob doesn't matter.  Microsoft flails on mobile & LBS, and becomes irrelevant outside the workplace in less than 10 years.  Google probably swings & misses on LBS, but maintains strength in search and remains relevant in several others (YouTube, Gmail, maybe Android).  Apple keeps killing it in hw, and does well enough with sw & apps to maintain relevance in music, videos, books, other areas.  Amazon is pressured by Apple in media, but does well in e-commerce & infrastructure svcs. AOL stays alive in advertising & content (i think).  Yahoo does a lot of re-orgs, buys something, but nobody really gives a fuck. eBay dies a quick death after they sell off PayPal. Twitter has a shot at LBS, and so likely gets bought by Google or MSFT, but will still have a tough job beating Facebook.

once more for emphasis: Facebook wins LBS. Google, Apple remain strong in search & media respectively. PayPal gets bought (likely by MSFT). Amazon stays strong in commerce & infrastructure. AOL stays afloat in content & advertising (maybe). Microsoft dies in mobile & consumer (very) slowly, acquires lots of stuff along the way. Yahoo dies slowly, and/or likely gets bought (or merged with the new AOL). eBay dies quickly; nobody notices.  Twitter gets bought by Google or MSFT (or maybe Cisco?) within 3 years.

... or not, and i'm a friggin' idiot. 

but if you've read this far, at least i'm an entertaining writer, eh?  ;)

---

for those who made it all the way thru the mindless BS above, check-in to yr own lil' 20% discount off our upcoming May 12 SMASHsummit.com social media marketing conf by clicking here.

yer welcome, mofo.

With Apologies to Kathy Sierra & Paul Graham: Make Something Users Care About... Enough to F**K or KILL.

A brief excerpt from my talk at Twiistup in LA last week (thanks Danielle):

(apologies to Kathy Sierra & Paul Graham for stealing their most excellent content)

 

Subscriptions are the New BLACK. (+ why Facebook, Google, & Apple will own your wallet by 2015)

I'm on a redeye to NYC, supposed to be working on a presentation i'm giving in a few hours... but fuck it, i can't get this outta my head, so here we go.

(note: extremely raw, uneven, long, 1st draft publish & shoot; will revise l8r) 

ASSERTION #1: The default startup business model from 2000-2009 was based on growth (aka acquisition) and CPM- or CPC-advertising 

Over the past 10 years, we have seen a massive shift in advertising from CPM to CPC-based advertising.  This basically started happening when the 2000-2001 dotcom implosion blew the market cap of Yahoo to smithereens, and display advertising went into the shitter.  Altho CPM subsequently recovered, Google's IPO and the gradual emergence of CPC as a higher-quality advertising medium has been the dominant story of the first half of the last decade.  There's still a lot of page views and CPM advertising out there -- and YouTube & Facebook are making sure that doesn't change -- but as we VCs like to say:
    "at the end of the day, Yahoo is now Google's bitch".

Let me say that again with emphasis so you don't miss it. 

Google's ABSOLUTE FRIGGIN' SEARCH DOMINANCE has made CPC advertising the defacto monetization standard for the web.

Google is now making a ridiculous amount of samoleons: $2.5B free cash flow last qtr, or roughly $10B a year (a billion here, a biilion there, pretty soon that's cash-money, G...) -- and appears likely to continue doing so for the foreseeable future.  Although Microsoft, Apple, Ebay, & Amazon are all minting money too there's no question Google is an unassailable Internet JUGGERNAUT, at least in Search.

But what has all this Don't-Be-Evil-AdWords-Click-Happiness done to the internet & startup ecosystem?

It's made us a bunch of lazy, ad-happy, Web-Tards with crappy ROI. 

So crappy in fact, we should be ashamed to call ourselves entrepreneurs & venture "capitalists". Why, Schumpeter is probably rolling over in his grave at how little Creative Destruction we have rained down upon crotchety incumbents.  It's a goddamn travesty that some aspiring startup or greedy hedge fund hasn't pummelled Yahoo and eBay into a hostile takeover by now, and Microsoft has made itself almost irrelevant in the consumer internet space -- helloooo Mr. Ballmer? please tell me how you own hundreds of millions of users and more than half the browser market and you HAVE NO VISIBLE 3rd-party distribution or monetization strategy? -- Srsly, we have monkeys driving some of the biggest trains on the Internet at the moment.  

Lead, Follow, or Get Out of the Fucking Way.

And while there's been something of a Startup Renaissance going on since around 2004, all these little web 2.0 wannabees have spent an inordinate amount of our attention on ad-driven business models resulting in a big steaming 2-Founders-1-Cup of FAIL.  Everyone seems to have assumed that since Yahoo and Google were giants in internet advertising, therefore all internet startups should be using some form of CPM or CPC ad-monetization.

THIS IS A VERY LARGE LEMMING-LIKE ERROR IN LOGIC THAT MUST BE CORRECTED IMMEDIATELY. 

We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models.  There have been a few interesting examples of startups acquired in the 00's for large amounts due to amazing growth (eGroups, MySpace, Skype, YouTube) or advertising potential (aQuantive, DoubleClick, AdMob, RightMedia).  However, mostly the decade has been an uninterrupted string of uninspiring business models and small-time acquisitions of Web 2.0 startups filled with rainbows & unicorns, rather than those based on simple, transactional revenue models.

ATTENTION u ASSHATs on Sand Hill Road & u HIPPY-DIPPY Startups in SOMA -- This Shit Stops NOW.

[fast forward to Twenty-Ten & the Soul of a New Machine: Subscriptions.]

ASSERTION #2: The default startup business model for 2010 & beyond will be subscriptions and transactions (e-commerce, digital goods).

Newsflash folks: The Internet does NOT want to be FREE... It wants to GET PAID on Fucking Friday, just like everybody else on the damn planet.

Yes there is a role for Freemium, but unless you missed the TPS report the FREE part is only a loss-leader for the MEE-YUM part -- it's a test-drive before you buy something. If your users are just kicking the tires then you need to kick them to the curb eventually (unless of course they are your viral bee-yotches, in which case it's ok to have a few invitation whores as freeriders).

Free is not Forever, unless you never want to be in control of your own fate.

Gradually we are discovering that the default revenue model on the internet should probably be the simplest one -- that is: basic transactions for physical or digital goods, and recurring transactions (aka subscriptions) for repeat usage.

Let me say that one more time so you don't miss it.

Get Dem Bitches to *PAY* You, G.

Ok, so there's only one problem with this.  It's called the Penny Gap.

Surprise, surprise... most people don't like to pay you squat unless they have no other choice.  And aside from the user's disinclination to pull out their wallet, there's also the problem of wallet friction itself -- payment conversion is shitty for many reasons other than just price.  Mainly it's because we can't remember our password.  I'll repeat that about a million times in this post so you don't forget.

WE. CAN'T. REMEMBER. PASSWORDS.

This is incredibly important, and i'll explain why in just a little bit... but now, let's talk a brief walk down Memory Lane past my old workplace, PayPal.

Password Friction: Where's the Login K-Y Jelly?

Here's one of the not-so-flattering secrets of the PayPal Mafia you've probably never heard: The far-and-away #1 customer service problem -- and cost -- at PayPal was something called "forgotten password recovery".  That's a nice way to say that people can't remember their fucking password. 

It's the biggest goddamn problem on the Internet, but at PayPal we made it even worse by tying a payment instrument to the process, and then locking out the payment instrument if they couldn't remember their password. What a Brilliant idea!  Let's see.... why don't we fuck over all of our n00b, first-use customers by forcing them to create an account they have no significant motivation to maintain yet, and then hope they don't give us a fake email address or fail to remember that password the next time they drop by... which might be 1, 3 or 6 months later.  Bingo, way to create the biggest HateStorm in Internet History: make it super simple for people to make their payment method unusable by simply forgetting their password.  Oh and i forgot to tell you we occasionally froze their account so they couldn't get access to their money.  That was a real winner too.

PayPal was one of the classic stories of viral growth, however in this instance we also experienced viral growth in customer service: at one point more than 2 in 3 employees worked in customer service.  And i'm guessing somewhere between 10-20% of first-time customers never used the service again, primarily because they forgot their password.

Look, no online service is perfect and there are often good reasons why account recovery shouldn't be too easy -- sometimes it's not YOU who wants to get access.  But Password Friction at PayPal led to an unfortunate series of events which caused some signicant percentage of our users to HATE us with a PASSION that is usually reserved for politicians and lawyers.  Since i was often on the front-lines running our PayPal Developer Network, i got to hear first-hand from Merchants and Developers about how this password friction caused problems with payment, and with user frustration.  I got to know the folks in customer service pretty well, and i used to do my best to resolve some of our users pain.

So why am i bringing up all this bullshit now?

Well because as we transition to a Startup Ecosystem driven by direct payment & subscription business models, i want to make it clear how IMPORTANT it is to make sure users don't forget their passwords.  If they forget their password, and/or can't recover it, then guess what MoFo -- YOU DON'T GET PAID.

Which means you don't get Laid, you don't get Acquired, and you sure as friggin' hell don't get to Go IPO.

So listen up & i'll share a little secret with you -- there is one very simple way to avoid forgotten passwords.  Basically, it's this:

Make a Frequent-Use Product.

That's it, you say? 

Yeah, that's it Sherlock.  Make a brain-dead simple, frequent-use product.  If users login a lot, then they don't forget their password.

Now think about that for a second...what services have users login a lot?
1) Social Networks
2) Email & IM
3) Games, Music, & Entertainment sites

Which leads me to my 3rd & final observation.

ASSERTION #3: In 2015 the default login & payment method(s) on the web will be Facebook Connect, Google Gmail, or Apple iTunes.

Now i'm not suggesting PayPal and Amazon are going to disappear overnight -- both probably have hundreds of millions of users (well, at least double-digit million *active* users anyway).  And in fact, they will likely still have dominant positions in the market.  But i will say this: if they rely *purely* on purchase behavior, they are fighting a losing battle against other services with more frequent usage, whose users will be more likely to remember their passwords.  Like a Darwinian evolutionary experiment, only the fittest passwords survive -- and in this case, the fittest passwords will be the ones used most often.  That is, the ones we use for core services like email, IM, games, music, videos.  And guess what?  Most of those services happen on social networks like Facebook, which currently has over 400M users and is growing like crazy internationally.

Well at this point i hope you've pieced it all together.  The key to success -- one might even say DOMINANCE -- in payment systems is to begin with the foundation of frequent-use products, so that users won't forget their passwords.  Whether intentional or not, Facebook has played this game to perfection.  Not too far behind is Apple with iTunes, iPhone, and other related frequent-use media & entertainment products, and an App Store that people use regularly.  And even Google has a shot here, with both Gmail and YouTube as two very large, frequent-use products, along with the upcoming Android platform.  Twitter is probably a dark-horse here, but if user #'s continue to improve they could also have a shot. And i'd also keep an eye on Skype too, which still has a lot of frequent users and value.

Bringing up the rear pathetically here are Yahoo, Microsoft, and AOL.  All 3 of these services have hundreds of millions of users (via email & IM alone, not to mention other services), and yet they haven't figured it out.  Yahoo had previously developed a payment product called PayDirect, but shut it down in 2004.  FAIL.  Microsoft had the right vision with HailStorm, but their UX was absolutely friggin' terrible (see Password Friction again), and they didn't stick with it.  AOL similarly has been shedding users for a decade, and never realized how valuable their original email user base could be.  It's unbelievable to me none of these Internet Giants has figured out what is going on.  They have neither acquired nor merged in a payment service (Amazon, eBay) nor have they acquired a large social network.  Unless MSFT develops Xbox into a widespread payment system, or acquires eBay (for PayPal), Amazon, or Facebook i just don't see them climbing back into the ring.  All of those deals would be very difficult and unlikely, even for MSFT.

So that's it folks, i'm spent.  This has been a complete ramble and i don't have time to edit this shit, so i'm leaving it as it is.  Sorry for all the swearing and uneven pace, but hopefully some of you will take away something useful.

Startups & VCs: Learn How to Design, Market, & Eat Your Own Consumer Internet Dogfood

Haven't really gotten on a rant in awhile... guess i've been doing a lot of travel lately, but now that i'm back in California for awhile, there's something i've been meaning to bring up that bothers me.  It's kind of a dirty little secret of the startup industry, but there are very few good product, design, and marketing people in tech.  And hardly any of them that are good seem to make it into the venture capital profession.

(case in point: how come there are no graphic designer VCs?)

Now i say this knowing full well that i'm certainly not a genius on any of the items above.  Anyone who has ever read my blog knows what a god-awful mess of turd droppings it is visually, and my font selection and layout are so bad that only a mother could love my pictures & posts. That said, i've spent at least 10-15 years doing coding, database dev & admin, basic front-end visual development (ages 15-30), and another 10-12 doing technology & consumer marketing (age 30-42), mostly using email, blog, search, & social strategies. Throughout both, i spent another 10-15 years managing projects, products, & teams, some of which might be called product management. I don't claim any formal visual design training, but i've done my fair share of mockups and learned the hard way what kind of UX doesn't work.

None of this means anything more than perhaps i'm competent in a few operational areas related to consumer internet startups, or at the very least hopefully i'm aware of & acknowledge my limitations.

However, over the past 5 years i've consulted with and/or invested in about ~50 startups. I've gotten to know a lot of entrepreneurs, and a fair amount of the venture capital and angel investors who are backing these companies, most of which are consumer internet startups.  And guess what? Probably more than half of the startups, and more than 90% of the investors have no goddamn clue what the hell they are doing re: user experience and online marketing. 

Let me say that again.

More than half of all startups, and easily 9 out of 10 investors HAVE NO F**KING CLUE regarding 1) user experience or 2) internet marketing.

Now many of you might say: aw c'mon dave, you're overstating that a bit don't you think? there are a lot of startups out there with a ton of engineering talent... and design & marketing aren't THAT important, are they?  And seriously: investors don't have to be experts in every field, they just have to know how to assess talent & manage money... i mean, you don't expect every football coach to be an ex-football player, right?

Well, actually yes i do.

Or at least, i expect them to be dedicated, lifelong students of their profession.

And to be honest, design and marketing aren't just EQUALLY important as engineering... designers, product managers & [technical, analytical] marketers are usually WAY MORE IMPORTANT than coders. (believe me, i say this with a lot of humility, since my primary area of academic training was software development & applied mathematics & engineering... we just ain't all that.)

What's become appallingly obvious to me, is that in the HEART of Silicon Valley, amongst the ELITE of the elite, we are mind-bottlingly [sic] STUPID about how we build startups... about how we staff startup teams... and about how we structure and select the professionals in the investor community who fund consumer internet startups.

Honestly folks:

we are SHAMANs.

     we are RAIN-dancers.

            we are damn wretched BLOOD-letters.

We are friggin' BF Skinner's pigeons, and we should be ashamed.

... so let's dig into this a bit more, shall we?

---

* Assertion #1:

Addictive User Experience (aka Design) & Scalable Distribution Methods (aka Marketing) are the most critical for success in consumer internet startups, not pure Engineering talent.

This seems counter-intuitive, right? 

We have this image of space-age whiz kids who are the stuff of legend for most technology startups -- The Woz, Bill Gates, Bill Joy, all those programmer types who could disassemble and re-assemble a transistor radio, a toaster oven, or a mainframe computer, and who grew up writing symphonies of code and wondrous applications before they even lost their virginity.  Well i was one of those... or at least i aspired to be. I got paid for writing code when i was only 15, but i was still only a 2nd-class geek compared to the true code jockeys who were writing programs before they even went to grade school.  Gates, Woz, Joy, Levchin, Zuck -- these guys were STUDs.  they were god-like, and for their businesses -- building computers or advanced software / OS -- that kind of horsepower MATTERS. 

And that kind of makes sense when you're building hard drives, or PC motherboards, or consumer electronic devices that require serious engineering talent... big-code cojones. Same perhaps for Google, or PayPal, or Facebook, or Mozilla.  If you're building search engines or web browsers or fraud systems or serious CAD software or the movies that Pixar puts together.

But seriously, do you need that much geek when designing most basic input-output forms for consumer internet software?  How much tech does it take to collect data & present data, when so much of the underlying infrastructure has been built into the OS & browser platform?   We stand on the shoulders of these giants, but do we actually require them in every startup?  well, it certainly doesn't hurt to have code jedis at the helm of your starship, but there are other areas that deserve at least equal attention... if you're building consumer internet sites & services.

Because while it's actually pretty easy to write a web 2.0 friendly front-end app or website these days, it's still MOTHERF**KING difficult to create visually-appealing interfaces, and beyond that to design them in ways that are compelling, engaging, drive calls-to-action, and are MEASURABLY beneficial to getting more customers using your products. figuring out game mechanics and activation, designing reinforcement schedules, visual imagery, copy writing, and landing page tests -- all of this is not trivial, and only recently are there starting to be good resources for learning how to do it well.

And if -- IF! -- you cross that hurtling Engineering chasm of Minimum Viable Product, and get to the promised land of appealing, useful Design, then you still have to chase the scalable, predictable, profitable channels of customer acquisition... otherwise known as MARKETING. and these days, most marketing isn't traditional PR & product placement, it's actually a very technically-intensive discipline filled with SEO, SEM, Social Platforms, email, widgets, social media, viral marketing, blogging, video, user-generated content, etc, etc, etc.  it's a traditional marketing person's worst nightmare... tens if not hundreds of potential marketing channels & campaigns with unknown costs, techniques, and payoff. 

Yet, these days marketing has become very MEASURABLE and very integrated with user experience & product development ... and for folks who know what they are doing, they can build amazing services with awesome native product marketing features that cost little or nothing to drive massive adoption.

In summary: i suggest to you that Engineering for consumer internet startups need only be competent, and that the real challenge is in finding designers & product managers who can build an awesome product experience, and marketers who can figure out effective scalable, integrated distribution strategies (whether organic or paid, whether technical or creative).

---

* Assertion #2:

If investors don't have operational backgrounds in design, development, or marketing from proven consumer internet companies, you probably don't want their money
(or it better be the best damn termsheet on the table)

this one is a bit more controversial than the earlier assertion. and i'm probably pissing off most of the other VCs and angel investors in the valley by saying so, except that i'm not really that worried because most of the folks i do deals with DO have backgrounds in these areas.

now if you already have money from clueless investors, or you know that you've got a good clean termsheet from someone who is just offering you a check to get rolling, maybe this isn't that big a a deal. but honestly, if you're taking money from investors, why not try and get the best experience you can along with the 20-40% equity you're giving up?  why not find people who actually have a shred of intelligence about consumer products and relevant skills, when you're going to be sitting in board meetings with them every month for the next 3-5 years of your godforsaken sleepless, work-like-a-dog excuse for a life listening to their mindless opinionated VC bullshit when they have no real clue? 

do you REALLY want to be taking product and marketing advice from someone who has spent most of their life without ever having designed a web page, coded a simple program, written a blog post or email, or hell even have a f**king facebook or twitter account they know how to use with any amount of intelligence whatsoever?

When you do background research on your investors, see if you can find them online.  Do they have recognizable web presence?  do they blog, do they tweet?  do they have a profile on LinkedIn, Facebook, Flickr, or YouTube?  do they rank first for their own name?  do they appear to have experience in the internet industry, or do they just have an MBA some big-name school, and no relevant operating roles?

Seriously, life is too short.  Your startup too important.  And your chances at the next Google, PayPal, or Mint are already tough enough. 

Hire people smarter than you. Find a decent designer who understands human psychology & sexuality, game mechanics, SEO, and conversion analytics.  Find someone in marketing who understands how to send an email, write a blog post, use search engines, social platforms, social media, and has done landing page A/B tests. Find investors who have a clue about the products and services they invest in, who use the products, and maybe even write/speak about them frequently.  Find people as advisors, mentors, and investors, who have the same operational experience you'd hope to hire into your startup.

If we all take this to heart, we might just build a few more useful consumer internet products.

Gordon Gekko 2.0: Flipping is GOOD. (aka Memo to Jason Fried: Sorry, You're Fucking Wrong.)

[clarification: i was a private angel investor in Mint's A round back in early 2007, when i was also doing some marketing consulting for the company. i was not directly involved in the Founders Fund investment in Mint's C round a few months ago. the comments below are primarily drawn from my personal experience with the company before i joined Founders Fund]

[disclosure: the views expressed below are my own, and do not in any way represent the official position or perspective of either Mint.com or Founders Fund.]

Dear Jason Fried:

Sorry, You're Fucking Wrong.

    Flipping is GOOD.

Let me explain...

In a poorly-researched post titled "The Next Generation Bends Over" (cute) penned a few weeks ago by Jason Fried, founder/CEO of 37 Signals, the author attempts to make the case that:

1) VCs behind Mint.com forced founder/CEO Aaron Patzer into $170M acquisition by Intuit

2) it's a growing trend "indicative of VC-induced cancer that’s infecting our industry and killing off the next generation"

3) young entrepreneurs should be more bold, audacious, go all-in on their vision, in order to "kick the ass" of the collective incumbents / dominant players

In order, these assertions are:

1) Fucking Wrong, and Irresponsible Conjecture & Hyperbole

2) Completely Wrong, and in fact Exactly the Opposite trend is going on, and finally

3) Wrong in most cases & crap advice for young entrepreneurs.

I'll now address each point specifically, and explain why Jason Fried -- although in his own right, an accomplished entrepreneur, whose products i use and respect -- is full of shit in this particular instance.

The VCs behind Mint.com Did NOT Force a Sale. Do Your Damn Homework Before You Speak.

First & foremost, while i respect Jason's opinion and right to post whatever the fuck he feels like, his article was -- by his own admission -- not based on any fact-checking.  At the beginning of his post, Jason states "i don't know the full back story, but i bet this sale was encouraged by a Mint investor."  IMHO, this is just incredibly irresponsible: you're a *very* visible figure ripping other folks on mere conjecture.

Perhaps you might want to contact one of these investors -- who, like me, are all publicly listed in Mint's entry on Crunchbase -- and ASK one of them, before you blow such a wild assertion out of your ass? You probably know several of them, and certainly through your connections it would be fairly easy to reach one of them to confirm or deny your suspicion. While i don't expect folks who aren't breaking-news bloggers to follow basic journalistic principles, making such an accusation without the tiniest shred of evidence is lazy at best, and borderline slanderous at worst.

Or, if you're simply too damn lazy to do some basic research, maybe you could just ask any experienced entrepreneur or venture investor why in the hell would it make any fucking sense for Series B investor Benchmark to encourage a sale that's likely only 4-5x its investment, or Series C investors who just put money in 30 days ago?  or do you somehow think the seed or A round investors were controlling Aaron's actions with a car battery attached to his balls? if you had any knowledge of Aaron whatsoever, you would know that he is one confident sonuvabitch who RARELY lets anyone force him into doing anything.

In short, your logic here is not only faulty, it's piss-poor and reveals your absolute ignorance of what goes on in the venture world.  Sure, you're absolutely correct there are some VCs that might force an entrepreneur's hand -- however, in most cases IT'S IN EXACTLY THE OPPOSITE SCENARIO of what you suggest. They usually want the entrepreneur to stay in the game, NOT sell, and aim for a larger / later win -- typically by FORGOING an acquisition and instead taking a round of capital -- which, in fact, was exactly what Twitter did when you were hypocritically whining about them last week.

Although there may indeed be examples of VCs forcing an entrepreneur to sell to get liquidity to investors, it's not at all typical and usually the opposite of institutional investor motivations.

The "Growing Trend" in Internet deals is towards More & Smaller Acquisitions.  But it's not because of VCs, or the Financial Crisis, or Sarbanes-Oxley.  It's because the Web is Maturing, and Internet Platform Giants are outsourcing / buying Innovation.

The second point that Fried asserts is that this is somehow a growing trend, and that VCs are changing the industry, "killing off the next generation" of entrepreneurs by forcing premature acquisitions. Again, nothing could be further from the truth... and in fact, the EXACT opposite is the notable trend going on in the industry right now.

First it should be noted that M&A have always outnumbered IPOs, but regardless IPOs basically shut down in tech after 2001 due to the dot-com blowup.  Subsequently, many armchair analysts have stated that Sarbanes-Oxley legislation has made it more expensive to go public. Others have noted the financial crisis ending as a reason for more acquisitions.  Still other conspiracy-theorists like Jason think VCs seeking liquidity for investments are at fault.

While any of these may be contributing factors, the more basic trend is this: there are now tens, if not hundreds, of large online platform companies with millions of users and positive cashflow.  In addition to Google, Yahoo, & Microsoft, there are also eBay, Apple, Amazon, News Corp, Facebook, AOL, CBS Interactive, ComCast, IAC, etc, etc, etc. There are tens of companies that can pull the trigger on a <$500M deal, and 100s that can do a <$100M deal.

What's fundamentally different in the last ten years is that most big companies didn't have a need or facility for acquiring web startups.  They didn't understand them, and couldn't figure out how to integrate them into their business.  However, as the Internet has matured, ALMOST EVERY company is now a web company, and the Internet is both a primary and low-cost distribution channel.  It is now very easy to integrate a web-based acquisition [at least from a technical standpoint... might be more challenging re: politics & fiefdoms].  And since most innovation doesn't happen at big companies, it's almost guaranteed that we'll see more acquisitions of small startups to help grow larger company platform strategies. 

In fact, as more platform companies compete for deals, you'll likely see deal size go down as they try and acquire products & talent ever earlier in the startup lifecycle.  There's no need to wait for companies to become $1billion-dollar powerhouses -- it's much more capital efficient to acquire them after they've proven out basic technology & gotten a little elbow in their customer adoption.  Why buy it for $500M a few years later, if you can buy it for $50M now?  I'm sure this was part of Intuit's thinking about Mint... as soon as they saw the Series C deal go down, they realized if they waited another 2-3 years, the pricetag might go up even further.  So they cut a deal now.

This particular trend is what is scaring the shit out of big VCs right now.  Both lower capital costs for startups and lower average exits for acquisitions are screwing up large VC firm strategy.  Fred Wilson and others have written about this, & experienced investors like Alan Patricof have downsized funds to under $100M to make them more manageable in this "small-ball" environment.

While this trend may negatively affect some VCs, it's actually a very positive trend for angel investors and smaller VC funds, and it's an especially GOOD trend for entrepreneurs.  This creates a great market environment for small investment / small exit deals that are exactly what Web 2.0 entrepreneurs are serving up. In other words: the Future is Bright, Time to Buy Sunglasses.

Why Flipping is GOOD, & Why Young Entrepreneurs Should Probably Sell Their Startup Sooner than Later.

Finally, i'll make an intentionally controversial stmt:

 Young Entrepreneurs Should Sell Out Early (and not Late or Never)

Why?  For the same reason Why Dogs Lick Their Balls -- BECAUSE THEY CAN.

Look, i'm not trying to get anyone to sell their grand vision short.  If you've got a great business to build, by all means give it your all and run it forever.  However, for most entrepreneurs it's not going to be the only business they do in their lives.  And for the young entrepreneur -- particularly those under 30 who've never done it before -- the single best thing you can do to ensure your future success is TO GET A DEAL DONE. It's heroic and glamorous to "go all in", but realize that many times that means you may come away with NOTHING.  Playing well sometimes means you take a single or a double instead of getting thrown out trying to steal home.  And sometimes it means just taking 4 balls and getting on base.  However you play the game, swinging for the fences every damn time may work for Babe Ruth and Albert Pujols, but i'm personally more a fan of Ichiro Suzuki and Billy Beane. Small-ball and MoneyBall can be just as beautiful as a homerun.

it almost doesn't matter how large or small it is (altho firesale acquisitions don't count), the ability for an entrepreneur to have future success is typically judged by historical metrics.  and since most startups FAIL, the fact that you can take a startup to ANY size exit proves you can beat the odds, and that you may have the ability to do it again.  Once you have a deal under your belt -- whether it's a $3M deal, a $30M deal, or a $300M deal, you are bankable.  People will bet on you again. Investors, Partners, Employees, Reporters, etc will all believe you can do it (sometimes to their detriment, because again the odds are most startups fail -- even those by previously-successful entrepreneurs).

In addition, contrary to all these haterz who paint acquisitions as a bad deal or a sell-out, i actually think it's a great thing -- imagine being able to take 3-5 years to build a product, develop it to some level of usefulness, grow customers, build revenue, and then sell to a larger organization that decides it could use that innovation to help their business where it sees new opportunities.  Isn't that awesome?  Isn't that a vision fulfilled?  How about the fact that you can perhaps after a few years go back out & do that again?  Why is it that no one seems to think switching jobs every 3-5 years is a bad thing, but somehow think that selling your business to someone who really wants it and will grow it isn't terrific?

More Transactions Grow The Market. Startup Ecosystem Efficiency Raises All Boats.

Lastly, here's the thing i really want to stress, more than peeing all over Jason's post: more transactions of any kind or size help improve overall startup ecosystem health.

Fact is, startups operate in a financial system that is inefficient, illiquid, and challenging to manage.

Venture Capital exists because startups are generally deemed too risky for debt capital, or for traditional financing. This item is often overlooked by entrepreneurs (and investors) who view the VC field as glamorous and confident, when it fact it is mostly ignorant and risk-averse.  VCs like to maintain asymmetric information advantages over their competitors, and sometimes even over entrepreneurs.  Keeping competing VCs, and even sometimes their own LPs & entrepreneurs in the dark about value and pricing is sometimes in their best interest -- it KEEPS PRICES DOWN.  However, infrequent financing round / transactions and lack of objective pricing actually don't serve the interests of entrepreneurs.  As with most markets, liquidity and transparency provide the enabling mechanisms to grow the market larger and to reward market participants more richly.

This is a non-obvious point. 

More & smaller transactions in the market actually improve ecosystem efficiency, and provide better pricing transparency.  In the long-run, it benefits all system participants for small transactions to occur, because it makes the overall market more knowledgeable -- this in turn, reduces risk and encourages greater investment... which also encourages greater [overall] returns.

In summary, the benefits of selling startups early -- or simply when a transaction is available -- may be a smart strategy for both entrepreneurs and VCs to help improve the market, and reward themselves at the same time.  It may not be the best strategy for Bill Gates, Steve Jobs, Mark Zuckerberg, or other titans of industry, but it might be a reasonable strategy for 1st-time entrepreneurs under 30 looking to establish their careers & ensure that future endeavors are more likely.

And Jason: now that i've ripped you a new one, i'd like to apologize for all the harsh commentary and say that altho i disagree with you on this issue, i still think you're an amazing entrepreneur, and i still use your products. Happy to buy you a beer and shoot the shit anytime.

Hit it Gordon:

Your SOLUTION is Not My PROBLEM

QUICK !!!

i'm a VC. you're an entrepreneur. 

we're in an elevator, and you've got 30 seconds.

GO.

ok, if your pitch began with "we're building an X for Y", then guess what 

YOU FAIL.

yeah, i know in an earlier presentation i said "we're X for Y" works well for short-hand notation. 

but the problem is... it's not my problem. it's your solution. 

and the solution isn't your solution, it's my problem.  

more specifically: 

your SOLUTION is to SOLVE MY PROBLEM

or i can say that another way:

IT IS NOT HELPFUL TO YOUR CAUSE TO DO AN ELEVATOR PITCH WHERE YOU SHOVE YOUR SOLUTION DOWN MY GODDAMN THROAT. OVER and OVER and OVER.

got that?

      let me explain...

several months back at Startup Weekend San Francisco, as is my usual wont, i was being a real dick.

we had just finished doing the typical mind-numbing bullshit VC panel on what's trendy / what's hot. (which was of course, incredibly insightful and useful... NOT).  next, the attendees -- all 300 of them -- were asked to get up and do a quick pitch on the startup idea they wanted to do over the weekend. the concept here was that other people might hear the idea & want to join forces. now, not to say there aren't some flaws with listening to 300 people do a quick pitch in a crowded room with terrible acoustics, but beyond that auditory imposition, there was one other big problem:

almost all of those pitches SUCKED ASS.  

big time.

after about the 4th or 5th one, i just couldn't stand it any longer. i was NOT going to sit thru an hour-and-a-half of shitty elevator pitches.

N. F. W.

so i grabbed the mike from the next open-mouthed entrepreneur and said:

"Ok folks... if there's ONE thing i can help you with tonight, it's how to pitch.  it's very simple, and i can teach you in about 5 minutes."

"Here's the secret: PITCH THE PROBLEM, NOT THE SOLUTION."

"That's it. done! that's all there is... just tell me the problem FIRST, not the SOLUTION.  the reason is, i may not be able to understand what your solution does, but if you connect emotionally with me on what the problem is -- and i hopefully i also have the problem, or know someone who does -- then i'll give you PERMISSION to tell me more about how you're going to solve the problem."

after that, i handed the mike back to the entrepreneur... and you can guess what they did.

yoo betcha.  

they pitched their solution.  

and i interrupted them, RUDELY & WITHOUT MERCY.  

i grabbed the mike back and said:

"THAT WAS NOT A PROBLEM.  

THAT WAS YOUR SOLUTION. 

            DO IT *AGAIN*."

and they tried their best, and barely got through the problem statement.  then they handed the mike to the next entrepreneur.  and guess what happened?  yep, AGAIN, they pitched their SOLUTION.

and i again, i rudely stopped them, grabbed the mike back, and said again "Nope. that was another SOLUTION.  tell me what the PROBLEM is that you're solving... i guarantee you, the PROBLEM is NOT that the world doesn't have enough RSS readers out there." again, they barely got thru stating problem.

this happened for another 4-5 entrepreneurs.  they would pitch their SOLUTION.  i would then be a dick, yell for them to stop, have them start over, and state the PROBLEM first.  after about 10-15 minutes of this insanity, i think i scared the shit out of them, and perhaps only to stop me from berating them publicly in front of several hundred people, they FINALLY started pitching the PROBLEM.

slowly, excruciatingly, over the course of the next half-hour, the pitches gradually got better.  they didn't necessarily get good, mind you... but they didn't completely suck balls.  they were at least easier to understand, and by end of evening most pitches were understandable, if perhaps still crappy.

and i made a name for myself as perhaps the biggest asshole VC of the northern california area.

but that aside, i made three hundred people NEVER forget the point i was trying to make, and hopefully at least 5-10% of them will have a slightly better pitch the next time they get stuck in an elevator with a VC.

if so, then it will have been worth me being such a complete dick.

remember folks: pitch the PROBLEM first, connect with your audience emotionally around the problem, and then -- and ONLY then -- offer your solution as the remedy to that problem.

DMC Metamorphosis :)

I feel like i've hit a turning point in my life.  Something has happened in the past 6 months, in the past 3 years since leaving Simply Hired & PayPal.  I'm not sure when it all clicked, but i've been fortunate to have a lot of wonderful things come my way lately.

Those things include but are not limited to:

• working with / investing in great startups like Mint (thx Aaron), SlideShare (thx Rashmi & Jon), TeachStreet (thx Dave), and many others
• running conferences like Startonomics SF (thx Debbie), Graphing Social Patterns (thx Gina & Tim), and Web 2.0 Expo SF (thx Brady & Jen)
• creating the now-infamous Stanford Facebook class (thx BJ, Yee, Jia, many others & our students!)
• coming up with Startup Metrics for Pirates AARRR! (thx Hiten, Andrew, Eric, *SO* many others) 
• getting Startup2Startup rolling last year (thx Leonard, Brian, Kat, Saar, & MANY friends/sponsors)
• joining FoundersFund this year (thx Sean Parker for giving me a shot)
• launching FF Angel LLC and investing in some great startups (thx FF, also Jeff Clavier & many other angels & VCs for great advice)
• retooling fbFund & creating the fbFund REV incubator program (thx Cat & folks at FB, Accel & FF, many others)
• kicking off GeeksOnaPlane Asia trip (thx Christine, George, lots others)
• putting Finance4Founders together & ready to rollout (thx Dan & others)

while this may seem like a laundry list, the one common thread in all of the above projects has been the amazing help of my friends & colleagues.  there is no way i could have accomplished any of these efforts without the patience, tolerance, brilliance, and sheer hard work of my home boys & girls.  you folks really do rock.  (and i know how much of a pain in the butt i am to work with!)

seriously: how lucky am i, to be blessed with so many incredible people in my life, who have given me so much, created such tremendous opportunities... while i remain the lazy, ADD, easily-distracted, crazy sonuvabitch i've always been, who barely manages to make rent each month. i mean, it's nothing short of a miracle that i can find my ass with both hands in the morning, and yet somehow after so many years in the valley i have found a nice little groove. how cool is that.

these days i actually wake up early & excited to do the work i'm doing, happy as a newborn puppy to spend time working on projects with people i like, and i keep pinching myself to make sure this shit doesn't disappear tomorrow.  well even if it did, i would treasure the moments thus far...

lastly, i must acknowledge the folks at home who help me find purpose and reason amidst all this insanity... thank you to my wife and our two beautiful kids.  you are the light of my life, and your smiles & laughter are precious beyond the treasure and measure of mortal men.  

truly, i am a very lucky person.  thank you to everyone :)