As a venture capitalist, I spend my time thinking about talent. Who are the best people in the world to invest in? How do I help them attract the best people in the world to team with them to build their companies into massive successes from scratch?
That is why I have been so frustrated with our country's backward immigration system. For me, as the son of an immigrant entrepreneur, it is a combination of a social justice issue and an economic pragmatism that has led me to be so passionate and engaged in reforming our broken system.
In the last few months, as I watched Washington DC fumble around with a comprehensive immigration reform bill (passed in the Senate, floudering in the House), I began to wonder if something might be done on a local, state level to address this issue. Massachusetts has a pro-business Governor and Legislature, an Innovation-heavy economy, and a history of successful public-private partnerships. Surely we could figure something out while we wait for the Washington politicians to go through their machinations?
Thanks to the help of a few talented immigration lawyers - Jeff Goldman and Susan Cohen - and a dedicated group of public servants - led by Greg Bialecki and Pamela Goldberg - an idea emerged to address this issue head on in an innovative way that is consistent with the federal rules and regulations, but allows the state to attract and retain international entrepreneurs.
The idea is a simple one: create a private-public partnership to allow international entrepreneurs to come to Boston and be exempt from the restrictive H-1B visa cap. How is it possible to do this? The US Citizenship and Immigration Services Department (USCIS) has a provision that allows universities to have an exemption to the H-1B visa cap. Governor Deval Patrick announced today that the Commonwealth of Massachusetts will work in partnership with UMass to sponsor international entrepreneurs to be exempt from that cap, funding the program with state money to kick start what we anticipate will be a wave of private sector support.
This innovative program has tremendous potential. For Massachusetts, it means we are sending a message to entrepreneurs around the globe that we want them to come here to start and scale companies. For other states, it is a model that can be replicated if local leaders from the private and public sector can come together and cooperate to work out the details to launch and operate this program, as we have done over the last few months.
This year will be a pilot year (with a nod to the Lean Start Up!) and I'm sure we will learn a lot along the way, but I am super excited about the potential that this program presents for the state and the country as a whole.
For the last few years, many leaders in the Massachusetts innovation community have been arguing that non-compete agreements should be eliminated. Article after article has been written in support of putting this policy forward to increase the dynamism of our ecosystem and send a message to the broader innovation community that Massachusetts is a great place to start and develop your career.
Many studies have shown that non-compete agreements reduce R&D investment and stifle innovation. MIT Professor Matt Marx conducted a seminal study in Michigan that showed that the enforcement of non-competes caused a sharp drop in mobility for inventors, thereby slowing innovation and economic dynamism. Professor Mark Garmaise of UCLA published a study which had similar findings and, further, assessed the state by state use of non-competes, concluding that Massachusetts had one of the strictest in the nation (see chart below from Highland's Paul Maeder, putting states on a 0-9 enforceability index scale).
Today, Governor Deval Patrick is officially proposing to change all that by putting forward legislation that will eliminate non-competes outright. If passed, this has the potential to eliminate a huge barrier to the free flow of talent to the best opportunities, thereby creating a more dynamic entrepreneurial environment in the state.
I give tremendous credit to Spark Capital's Bijan Sabet, who first raised this issue seven years ago. Many legislators and leaders got behind the effort, but no one has been able to galivinize enough support to convince the governor to lead here. Greg Bialecki and Jennifer Lawrence have made that happen and the tech community will be forever grateful if the legislature will embrace this effort, even if in the face of big company opposition.
House Speaker Robert DeLeo has been a champion for the innovation economy for years, kicked off by his (somewhat cheeky) open letter to Mark Zuckerburg to urge him to open a Facebook office in Massachusetts. Let's hope he's willing to support legislation that makes it easier for the next Mark Zuckerburg to leave his or her job to start the next Facebook...without the fear of old-school shackles and reprisals.
When the Cold War ended, President Bush (senior) used to talk about the peace dividend, the downstream economic benefit of reductions in defense spending. Echoing these words, one of my CEOs declared to me the other day that last week's activity in the cloud may have been one of the most important weeks in technology history, but we won't realize it for many years to come.
At Flybridge, we have long believed that the advent of cloud computing is the most important force in technology in decades. The entire Lean Start-Up movement and the recent proliferation of start-ups has been enabled by cheap computing power and storage. When I was an entrepreneur starting my company, Upromise, we had to buy big Sun servers for millions of dollars to launch our fledging website. Today, that same compute power is available to start-ups for a mere handful of dollars per hours.
Historically, Amazon's cloud offering (Amazon Web Services, or AWS) had little competition and, as a result, some have observed that as amazing as the cloud has been for start-ups, cloud pricing has not dropped as aggressively as Moore's Law would have suggested it might.
But Google finally appears to be catching up in the ever-important cloud services area. Last week, at its Cloud Platform Live conference, Google slashed pricing on their cloud platforms over 50%.
Then, a day later, at its AWS Summit, Amazon countered with its own radical price cuts from 36-65%. Despite those price cuts, Google is still cheaper than AWS in many categories. See the chart below, which GigaOm published, to show the comparison of the two offerings.
So why did my portfolio company CEO think this last week of price cuts was so historical? Because cloud infrastructure is like fuel for startups. As startup fuel prices go down, the downstream effect is powerful: starting and scaling companies has gotten yet even cheaper. With Google and Amazon battling it out, and IBM and Microsoft and others not far behind, this trend is only going to continue.
We have made a number of direct investments on companies circling around cloud infrastructure, startups like MongoDB, Stackdriver, Firebase and Apiary, to name a few. But what last week's price wars demonstrate is that the entire technology ecosystem will reap indirect benefits as well. The cloud is becoming a commodity, prices are going to zero, and technology companies around the world are celebrating.
When this 10s decade is over, we will look back and be amazed that a mere ten years prior, a few, absolutely massive financial institutions controlled the global banking industry. Software is eating the world, as Marc Andreessen famously observed, and an industry like financial services -- whose service offering is essentially all information-based -- is particularly susceptible to the disruptive force of technology. That disruptive force is particularly acute in the credit markets.
Consumer credit has long been a pretty sleepy industry. For years, the same 5-10 or so banks have been the main issuers of credit cards and the same 4 associations have been the main brands and platforms. But when the credit crisis hit, everything changed. Due to market forces and government regulations, banks abandoned the lower end of the consumer market. 20% of US households are now considered underbanked, representing a massive market opportunity. A further window of opportunity is the fact that credit cards are still charging 20% APR, yet interest rates are effectively zero.
Stepping into the vaccuum are new providers of consumer credit and broader banking services that are 100% virtual. ZestFinance (a Flybridge portfolio company) and Wonga are among those providing consumer credit in the form of installment loans, with ZestFinance leveraging the magic of big data to do more sophisticated underwriting. Lending Club and Prosper are showing the promise of peer-to-peer lending, issuing $2.4 billion in credit last year, a 3x increase over 2012. Institutions are taking notice - one investor that I spoke to in a peer to peer lender shared with me that hedge funds are now flocking to the platform in search of higher rates. ING - soon to be renamed Voya Financial - demonstrated that a bank could be constructed that serviced consumers over the Internet without traditional branches.
At the same time, the proliferation of smart phones is allowing consumers to access money and conduct financial transactions with extraordinary convenience. Why would those services and capabilities be only provided by traditional banks? China's Alipay reports that they processed $150 billion in mobile transactions in 2013 - nearly 6x the $27 billion PayPal reported (not including the Venmo acquisition, which is bound to accelerate growth in 2014). This intersection of mobile, convenience and new lending brands is going to substantially erode existing banking franchises in the years to come.
The business lending market is no different. In fact, innovation in business credit may be outpacing consumer credit. Startups such as OnDeck Capital, Kabbage and Capital Access Network have each raised tens of millions of capital and are building large brands and franchises in servicing small businesses. With their bloated bureaucracies and overhead, banks are not architected to service this market effectively - particularly as more and more small businesses are reachable over the Internet. OnDeck recently reported a $77 million growth round and that it has acheived nearly $1 billion in loan volume. Kabbage is rumored to be on the verge of reporting a similar monster round. And Credit Karma, a credit management service for consumers, just announced an $85 million growth round.
A few weeks ago, Brand Finance released their annual survey of the 20 most valuable banking brands in the US. Atop the list were the usual suspects: Wells Fargo, Bank of America, Citi and Chase. The market capitalization of these four banks is currently around $800 billion. Will these same brand franchises be unassailable by 2020, or will a new cohort of brands emerge from this soup of startups and innovators? I know what venture capitalists and entrepreneurs are betting on.
Every year for the last four years, Fred Wilson has been kind enough to come up from NYC and join my Harvard Business School class. It is always entertaining, enlightening and fun. As always, I asked the 80 students in the class to live tweet during the class in order to capture the interesting nuggets and take-aways (and exercise their social media muscles). Below is a Storify of the tweet stream.
If you want to see how this year differed from previous years, go to:
And the defining project of our generation is to restore that promise."
- President Obama, 2014 State of the Union
In a past blog post last summer, I fretted that the latest wave of innovation - as amazing as it is - was not showing up in US worker productivity. At the time of my writing, the US Bureau of Labor Statistics had provided some pretty depressing data, with very modest productivity gains in 2011, 2012 and Q1 2013.
Fortunately, in the last year, the productivity numbers have shown a major uptick. It appears that our society and our businesses are getting more adept at absorbing all the new technology of the Internet Revolution. Unfortunately, the beneficiaries of the greater productivity - presumably driven by the boom in cloud computing, precision manufacturing, wireless broadband and other major infrastructure improvements - are America's elite.
A recent analysis by one of my favorite economic pundits, John Mauldin (who tends to be pretty conservative in his political views), provides some good data that drives this conclusion home. The chart below shows that full-time, full-year wages for male workers (presumably the female statistics would be clouded by a narrowing of the gender wage gap over this period) have grown strongly for the more educated workers over the last few decades and dropped dramatically for the less educated workers.
Further, if you take a close look at the jobs that are likely to be further impacted by our massive, secular shift towards automation, they are the very jobs that middle and lower educated workers hold. The chart below characterizes how disruptive technology will be to certain job categories.
Politicians are spending a lot of time talking about the inequality problem in America. If you consider how much automation and software disruption that is ahead of us, it is clear that the problem is about to get much, much worse.
What role will the technology industry play in dealing with the societal implications? I hope a large and positive one. The industry can not allow itself to be represented by the Tom Perkins of the world. Leaders in the technology industry need to step up and own the inequality problem.
That's not to say technology leaders should be slowing down our march towards disruption. As economist Joseph Schumpter pointed out, creative destruction is a powerful, positive force. But tech leaders need to work hard to improve the underpinnings of our education system (see Khan Academy), broken immigration system (see FWD.us) and other aspects of our society such that creative destruction does not equate to opportunity destruction. I love it when I read about tech leaders getting more engaged in policy and civic activities. Let's see more of it.
I love dressing informally, maybe too much. My wife frequently reprimands me for dressing down. I recently met with a US Senator in slacks and a collar shirt (which I thought was being respectfully dressy!) and he wryly cracked that I looked awfully comfortable. I sometime teach my HBS class in jeans (please don't tell the dean).
But lately, I have been wondering if entrepreneurs have taken informality too far. I don't mean dress code. I don't care how they dress. I mean their thinking and approach.
You probably see it all the time - hipster entrepreneurs with the cool affect walking into meetings carrying nothing but their smart phone. When asked to present their story, they ramble informally without a cogent direction. When a substantive discussion ensues, and good ideas and follow-up items are generated, they take no notes. And when the meeting wraps up, there are no action items that are reviewed, no closure regarding next steps.
My observation is that some entrepreneurs are confusing informal dress with informal thinking. I like dressing informally because I find it reduces barriers and allows for more direct, open dialog. I have noticed that people are more comfortable getting right to the point and being candid in their conversations when there are no hierarchies or barriers communicated through dress code. Studies reinforce this view.
But I can't stand sloppy, informal thinking. Crisp, logical discussions, well-organized meetings, good note-taking and dogged follow-up are all ingredients of successul, well-run companies. When a startup entrepreneur conveys the opposite in their approach and style - whether in a pitch meeting or in a board meeting - I question whether (to coin a phrase I learned at my first starup) they can operate their way out of a paper bag.
I sat on a panel this morning at an executive retreat for a Fortune 100 company focused on innovation and the impact of next generation technologies on their business. The company's president wore jeans for the first time in a business meeting and was getting some good-natured teasing from his staff. I loved it because it showed he was willing to knock down some walls. But you can bet the meeting started on time, ended on time and had a very clear agenda.
I was excited to see Care.com's successful IPO yesterday for multiple reasons.
First, it augurs well for 2014 as another strong IPO year in genearl and for technology companies in particular. A University of Florida professor has a nice analysis of the 2013 IPO market and shows that there were 146 IPOs in 2013 (51 VC-backed, although NVCA claims 82 VC-backed), up from 94 in 2012 (48 VC-backed) which had been in turn up from 81 in 2011 (44 VC-backed). Another excellent IPO analysis from Fortune showed that the real winners of 2013 were the class of 2012 IPOs, which have traded up 64% by year end 2013.
Second, it is another nice win for Boston. Despite a flurry of biotech and enterprise tech IPOs and big M&A events in the last few years, there have not been many consumer wins in Boston and Care.com is a nice one for the region (see my post: "Boston Unicorns").
But what really makes me happy about the Care.com is the people behind the company. The five founders (Sheila and Ron Marcelo, Dave Krupinski, Donna Levin, Zenobia Moochala and Diane Musi) worked with me at Upromise and I think the world of each of them. They started the company with a mission-driven vision and have stayed together as a tight-knit founding team from the onset.
One of the things that makes a startup region successful is when a successful exit happens and an alumni network forms that creates additional successful startups (i.e., the "PayPal mafia" effect). This happened in my first company, Open Market (IPO'96), which spawned a dozen CEOs/founders in the area (e.g., Gail Goodman/Constant Contact, Jon Guerster/Digital Lumens, Eswar Priyadarshan/Quattro Wireless and m-Qube, Ted Morgan/Skyhook Wireless). BostInno did a nice piece on the "Open Market Mafia" and has a whole series they call "Tech Mafia Mondays"). I am so happy to see it happening with the Upromise alumni network as well, which includes CEOs/founders like:
A year ago, I felt 2013 would be the Year of Grit - a year characterized by toughing things out in uncertain times. Well, we certainly did that, and 2013 has ended up looking a heck of a lot better than it began.
2014 is shaping up to be the Year of Results. We begin 2014 with a lot of optimism in the air. In a recent survey conducted by the NVCA, portfolio company CEOs and VCs are feeling as good about the future as they ever have, with a stunning 86% of CEOs who plan to raise capital saying it will be the same or easier to do so as compared to last year. Half of CEOs and VCs are optimistic about next year's exit environment.
A rising stock market makes everyone feel good. The NASDAQ is up 30% this year and achieved its highest level since September 2000. The S&P has closed at a record high 44 times in 2013 and the Dow Jones has achieved 50 record highs this year - both indexes are up more than 20%.
When the stock market is down, we VCs like to say that our little tech companies are not affected and simply keep their heads down and build valuable companies. But when the stock market is up, sentiment swings quickly. We rush to take companies public or sell them to take advantage of "the exit window". It is natural, therefore, that a robust stock market has led to a robust IPO market. More and more companies are eyeing 2014 and research conducted by analyst firm 451 suggests it will be a record year for tech IPOs and also suggests M&A will see a strong increase in 2014 as compared to an already solid 2013.
Now it is time to deliver on all that promise. Aileen Lee's now-famous unicorn analysis listed 39 companies founded in the last 10 years who had achieved $1 billion plus valuations. 12 are private companies (Palantir, Dropbox, Pinterest, Uber, Square, Airbnb, Hulu, Evernote, Lending Club, Box, Gilt, Fab.com). At least another dozen with very lofty private valuations wait in the wings (including Spotify, MongDB, Snapchat, Etsy, Actifio, Automattic, OPOWER, Hubspot, Flipboard, Hootsuite, Appnexus and many others). Not all of these companies will go public or sell out in 2014, but a good number need to in order to deliver on the promise that has been built up in this post-bubble, post-recession era.
And if you are worried about bubbles right now, don't. I wrote a blog post two and a half years ago in response to cries of a bubble that it felt a lot more like 1996 than 1999 right now. In other words, when analyzing unemployment rates and other macroeconomic fundamentals as well as positive structural elements of the tech economy, the rebound was just beginning and had a good 4-5 year run in front of it. Sitting here at the end of 2013, I still feel that to be the case. The fundamentals of a rebounding US economy in combination with the disruptive forces of the cloud, mobile, big data and software eating everything remain strong. The start up economy will overheat at some point, it always does, but that point is not now.
So, buckle up for 2014 - a year where many of those lofty promises of better times over these last few years begin to convert into tangible results.
Last week, I used Aileen Lee's excellent TechCrunch article on Unicorns as a jumping off point to analyze the role of the MBA in creating these unusually valuable companies. This week, I want to take a local lens and analyze these special companies that have been created in Boston. As was the case last week, I was ably assisted by HBS 2nd year MBA student Juan Leung Li.
In order to have a reasonable population of companies to assess, we tweaked Aileen's definition. We looked at the companies in New England (call them "Boston and surrounding") that had exited in the last 10 years (2003-2013) with greater than $500 million in market valuation. Some of these companies had been around for a few years, but we felt this slice would allow us to assess companies that had recently created extraordinary value in a relatively short period of time. In the case of M&A situations, we value the company at the time of the M&A. In the case of public companies, we valued the companies at the market close of 11/15/13.
We found 50 such companies (updated from 43 originally). That is, 50 companies in the Boston and surrounding area that had achieved > $500 million in value during the last ten years. 19 of these had achieved > $1 billion in value (Aileen's cut off, although she had constrained the founding date to the last ten years rather than the exit date, which obviously yields a broader population). A chart showing these 20 companies can be seen here:
Lack of Massive Winners. The perception that Boston has not recently generated massive wins appears to be only somewhat accurate, depending on which sector you focus on. Of the 19 companies that were > $1 billion in value, seven were greater than $2 billion (TripAdvisor, athenahealth, IPG Photonics, Alnylam Pharma, Starent, Boston Biomedical, Acme Packet). That said, only three of these companies are software technology companies - TripAdvisor ($12.5B), athenahealth ($5.0B) and Starent ($2.8B) - and they were founded in 2000, 1997 and 2000, respectively. In other words, there have been no multi-billion dollar valued tech companies founded in Boston in the last 13 years. There are three companies that have achieved >$1 billion in value in the tech sector founded in the last 10 years: Demandware ($1.9B/2004), Kayak ($1.8B/2004) and Fleetmatics ($1.4B/2004), although the latter was founded in Dublin.
Essential Role of Immigrants. Here was a statistic that blew me away: over half of these companies (51%) had an immigrant founder. In my research related to my Senate testimony on immigration reform, I noted that 40% of Fortune 500 companies had an immigrant founder. Apparently, successful Boston-based startups have an even greater concentration of immigrant influence.
Strong Diversity. The breadth of the Unicorns is impressive, reinforcing the view that Boston's startup ecosystem is one of the most diverse in the world. Of the 50 companies that achieved > $500M in value, 23 were life sciences (plus materials science), 22 enterprise technology and 5 consumer technology. To see the companies in their various segments laid out, see the chart below:
Much of this data refutes the belief that all the major startup winners have been created in Silicon Valley. In fact, the vibrant life science sector is now arguably more heavily concentrated in Boston than in any other cluster at any other time in history. That said, Boston has definitely come up short in the race to build massively valuable tech companies. And if you want to build a consumer Internet company, there are few role models.
However, I am quite optimistic about the future. As evidenced by this review of the Boston startup ecosystem, the quality and robustness of the environment has improved greatly in the last few years. As for big winners, the pipeline looks pretty good. Globoforce and Care.com have filed to go public and companies like Acquia, Actifio, DataXu, Dyn, Hubspot and Wayfair and are all reputed to be on a similar path in the next year or two.
If you want to see the entire spreadsheet with the underlying data, you can click here.
I like being a contrarian. As a kid, if a certain TV show was popular amongst my buddies, I’d purposefully ignore that show and search for other shows that were less well known (e.g., Hogan's Heroes was a personal favorite that never hit mainstream). When someone declares something is conventional wisdom, I look to poke holes and challenge the underlying assumptions.
Recently, the conventional wisdom in Startup Land has been that young, technical founders are the prototype for creating valuable companies. The formula, this theory goes, is to find a hacker in a hoodie and bring out the wheelbarrow of cash to back them. Think Mark Zuckerberg/Facebook, Drew Houston/Dropbox, David Karp/Tumblr and – the most recent poster boy darlings of Startup Land – the SnapChat founders.
I have always thought that stereotype was skewed. Don’t get me wrong – I love young founders. At Flybridge, we have invested in many of them (e.g., Eliot Buchanan and Dan Choi at Plastiq) and we plan to continue investing in many others. But in my twenty years living in Startup Land, I have found that there is no single model or archetype for success. Success comes in many flavors and combinations. And, in my last five years on the HBS faculty, I have become more convinced of the value of the MBA entrepreneur.
Thus, I was thrilled to read Aileen Lee’s terrific analysis of unicorns (companies that have been created in the last 10 years worth more than $1 billion) and have it shatter this piece of conventional wisdom. Aileen systematically analyzed the common characteristics behind this cohort of 39 companies and found that “inexperienced, twentysomething founders were an outlier. Companies with well-educated, thirtysomething co-founders who have history together have built the most successes.”
Aileen’s analysis didn’t provide any data on the role of MBAs in the unicorns. So, in partnership with HBS second year Juan Leung Li, we did some of our own digging. Here's what we learned:
33% of the Unicorns had at least one founding member who had an MBA. Examples include Kayak (Steve Hafner/Kellogg), Workday (Aneel Bhusri/Stanford and Dave Duffield/Cornell), Yelp (Jeremy Stoppelman/HBS) and Zynga (Mark Pincus/HBS).
82% of Aileen's Unicorns had at least one founding member or current executive team member with an MBA. Examples of unicorns where MBAs were hired to help build the company include Evernote (COO Ken Gullicksen/Stanford), Facebook (COO Sheryl Sandberg/HBS), Twitter (COO Ali Rowghani/Stanford).
Of those that had MBAs, the leading schools represented were: HBS (21%), Stanford's GSB (17%) and Wharton (10%).
This week, John Byrne of Poets & Quants published a complimentary analysis, ranking the top 100 MBA Start-Ups. In this analysis, he found some terrific companies that have been MBA founded in the last 5 years, such as Okta, Rent the Runway, Warby Parker and Wildfire. Among this MBA founder list, HBS (34%), Stanford (32%) and MIT (11%) came out on top.
Why all the momentum with MBAs and start ups? Simply put, the major schools have radically changed their curriculum. These schools and others have become super-focused on training their MBAs to be effective executives across a range of company sizes, from start-ups to large enterprises. For example, HBS now teaches two courses to help train students to be effective start-up executives: Launching Technology Ventures (which I teach) and Product Management 101. MIT is considering offering their own version of these classes in the spring or next year and Stanford has a plethora of strong course offerings for future start-up executives.
So the next time someone tells you that you need a hoodie to be a great start up entrepreneur, don't be afraid to flash your MBA diploma with pride.
To see the detailed spreadsheet that Juan Leung Li did, click here.
The art of Product Management continues to evolve. I've enjoyed spending time with many VPs of product in the last year since I co-authored an HBS note on the role of the Product Manager to develop more insights, materials and case studies on that revolution.
Earlier this week I taught a seminar on product management to MIT Sloan students as part of their "Sloan Innovation Period (SIP)" curriculum. Although it's not exactly the EdX experience, in the spirit of open courseware, I thought others interested in the topic might enjoy the materials I used for the class, which are here:
I spent last week visiting Israel with a group of fellow venture capitalists touring Start Up Nation - a trip sponsored and organized by CJP. We had a terrific time - despite being in the midst of a pretty tough neighborhood, the country's innovation economy is absolutely booming. A recent report named Tel Aviv the second most vibrant start up ecosystem in the world, behind only Silicon Valley.
A few take aways from the trip provided us with some insight into why such a tiny country (population of only 8 million) is doing so well:
Big Winners are Emerging. There used to be a perception that Israeli start-ups had great technology, but were weak at growing sales and marketing and so had to sell out to bigger companies early in their lifecycle, precluding the opportunity to build very valuable companies. The success of Waze ($1B sale to Google), Wix (IPO filed), Outbrain (IPO rumored to be quietly filed or in process) have entrepreneurs on the ground thinking big. The Times of Israel reports these success stories are inspiring Israeli start-ups to focus on the IPO path rather than M&A as a potential path to greatness. I see this through the lens of our portfolio company, tracx, whose ambitions to build a great SaaS social intelligence company seem to rise with the country's ambitions.
Start Up Heroes. A culture is defined by its heroes. The American entrepreneurial narrative has been shaped and amplified by the oft-celebrated heroic journeys of Bill Gates, Steve Jobs and Mark Zuckerberg, among others. The Israeli narrative has gone from celebrating its war heroes (think Moshe Dayan, Ariel Sharon, the Mossad) to celebrating its entrepreneurs. I think we were told no less than a dozen times that Warren Buffet's largest international investment was in an Israeli company ($6B for Iscar) and yesterday it was reported that he is acquiring his third Israeli company. The country is bursting with pride at its latest Nobel Prize winner in Chemistry (now numbering 11 Nobel laureates in its 65 year history). Everywhere you go, Israelis want to tell you how smart and entrepreneurial they are! Unlike any culture I have ever seen, this country gets the value of raw intelligence.
Partnerships Matter. Knowing their position as such a small country, Israeli businesses are always looking to partner outside of Israel. Native Israeli venture capital represents only 25% of the VC capital invested in the market - most of the money is coming from global firms like Battery, Greylock, Lightspeed, Sequoia and others. The two recent partnerships from Israel's elite technical university, Technion, are manifestations of this open approach. First, the ambitious partnership with Cornell to build a new engineering school in New York City - called Cornell Tech - which appears to be off to a strong start, helped in part by a $133M gift from Qualcomm founder Irwin Jacobs. More recently and announced while we were on campus, Technion announced a joint venture with a Chinese university to build a new campus in Guangdong thanks to a $130M gift from Chinese billionare Li Ka Shing, a large investor in Waze, matched by the Chinese government.
I make a lot of lists. It’s an old habit that started when I
was in grade school. Lists of to dos,
lists of goals, lists of workouts. Lists, lists, lists. I’m also a nostalgic person and so I tend to
save a lot of these lists and use them as touch points for storing memories and
keeping track of the passing of time.
Every now and then I’ll come across an old list and re-read it. Some of them make me think deeply and others
make me laugh at my younger self’s absurdity.
Recently, I came across a list in my desk labeled simply
“Mentors”. I’ve had a lot of mentors in
my life – many who may not even know they played this role for me. I’ve always kept an eye on them and noticed
the choices they’ve made and how they’ve carried themselves personally and
professionally. A number of years ago, I
drew up a list of my mentors as it helped crystallize for me who I admire, why
I admire them and what I can learn from them.
It was fun to stumble upon that list again and reflect on my choices.
Reverse mentors are people younger than you who you admire
and learn from. Everyone on my mentors
list is older than me. That was my
traditional definition of mentor – someone ahead of you in life that inspires
you, helps guide you and show the way to live.
But when I read Barb’s reason for seeking out reverse
mentors – younger folks who she learns from in this rapidly changing, digital
world – it really resonated with me.
Entrepreneurship, technology and innovation are profoundly influenced by
the young. If you’re not tapping into their knowledge base and seeking their
insight on trends and opportunities, you’re missing out on a valuable
resource. Upon reflection, it’s one of
the reasons I so much enjoy the teaching I do at Harvard Business School. I learn a tremendous amount from the students
and they are always helping me think about the latest disruptive ideas,
technologies and companies that are emerging or challenging how to best go
about building start-ups to tackle these opportunities.
So now I’ve got my reverse mentor list. I’m tucking it away in my desk for another
few years and look forward to tracking the careers and choices of those on it.
Every year, I give an open talk to the returning students at Harvard Business School on what makes the Boston start-up scene special. I do it for two reasons: 1) as an advocate for the local innovation ecosystem, I want to make sure all these smart, talented folks from around the world can access and plug in to the amazing local resources available to them; 2) Boston is a microcosm of the ingredients for a successful start up community, a topic of great interest to policy makers and leaders all over the world (for more on this topic, see Brad Feld's excellent book, StartUp Communities). The city of Boston is a relatively small one (the 21st largest city in the US with a population of 600k and a combined metro area that ranks it 10th), yet it is consistently ranked as one of the most innovative clusters in the world.
I have written in the past that in the IT sector, Boston suffers from not having more "platform companies", such as Facebook, Google, Twitter, LinkedIn. As the above presentation shows, only a few companies in Boston are of the scale where they are platforms for other startups to plug in to and large enough to create their own industrial clusters. Hopefully, that will change in the coming years.
I’ve been thinking a lot lately about the unsung hero of
many start-ups: the other founder. A lot has been written about the founder/CEO
and her growth and evolution as a company grows. But little is written about the (nearly
omnipresent in my experience) co-founder – the #2, behind-the-scenes partner
who teams with the founder/CEO from the very beginning to build the company. In the image above, most everyone knows the name and image of Larry Page - cofounder and now CEO of Google. But how many folks know Sergey Brin (on the right) and the role he has played in building Google to its massive success and a market capitalization of nearly $300 billion? Sergey Brin is the other founder.
I’ve probably been thinking about this topic a lot lately because
I’ve been recently meeting with the other founder at a few of my portfolio
companies. The conversations we’ve been
having have a consistent set of themes.
The other founder usually begins with a particular range of
responsibilities that compliment the founder. They may run a
function, such as product or engineering, or they may have a broader
operational role and carry a COO title.
Typically, a 5 person company doesn’t need a COO, but it’s a useful catch all
title for the other founder because it sounds better than “vice president of
miscellaneous” or “SVP of whatever falls through the cracks,” which are more
accurate descriptions of their role.
The challenge for the other founder is that as a startup
evolves from “the jungle” (super early stages, chaotic organization, prior to
achieving product-market fit) to the “dirt road” (developing some
organizational maturity and initial product market fit), senior functional
executives often get hired from the outside to take over departments. These executives naturally encroach on the other founder's responsibilities.
For example, at one of my portfolio companies,
the other founder looked after administration, finance, operations, product
and engineering. Basically, everything but sales and
marketing. But then the company hired a VP of
operations. And then a VP of
finance. And finally a VP of
engineering. And suddenly, after
transitioning each function successfully to an outside senior executive one at
a time, the other founder had successively worked himself out of a job.
The board and investors are super focused on making the founder/CEO successful – building an executive team
around them, perhaps even a COO/president to compliment their skillset and help
the company scale. Or, as in the case of Google's hiring of Eric Schmidt, an outside CEO who can guide growth and scale. In these situations, everyone is focused on the impact on the founder - what his role will be, how he handles the transition. Very little board
attention is typically focused on the role, evolution and growth of the other
I would submit that ignoring the other founder is short-sighted. I recommend boards and CEOs spend more time
worrying about the role of the other founder and helping her successfully
evolve over time. Typically they are
intensely loyal to the company and the founder/CEO, valuable sounding boards
for the executive team and the founder/CEO and champions of the company culture
Here are a few approaches or archetypes that I typically see
as the role of the other founder evolves over the life of a startup:
Become a functional owner. The other founder may be “VP of miscellaneous” in the beginning
days of the startup, but be explicit about which functional area she should
expect to own over time. That way, she can develop the skills in that area in a focused fashion and slot in
appropriately when the time is right.
Product management is a popular functional area for the other founder as
the other founder is typically close to the customer and business problem being
solved. Further, the role doesn’t
involve managing tens or hundreds of employees, a skill that is typically
better suited for experienced functional operators. Another one is business development for
similar reasons and because it involves selling the company into an ecosystem
of partnerships, requiring a blend of product knowledge and marketing skills.
Grow into the COO role. One successful portfolio company of mine had
two young, MBA founders. One played the
CEO/cofounder, Mr. Outside role and the other played the COO/cofounder, Mr. Inside
role. Even as the company scaled, the
young COO rapidly learned how to be a successful operator at scale. I have had other companies hire coaches to help the young other founder grow into the COO role. For the right profile, this can be a great role for the other founder.
Drive the next strategic
initiative. As startups evolve into
functional startups, they get very focused on the here and now: shipping the next product release, successfully
closing the next quarter, closing an important partnership. Yet, startups need to always worry about
what’s around the corner and have resources dedicated to strategic initiatives
that can provide non-linear growth. This
is an area where the other founder can be very valuable. Because of the respect he has within the
company and their ability to cut across functions, he is well positioned to
drive strategic initiatives and providing the “startup within a startup”
culture necessary to innovate.
This set of themes is one that I’m personally very familiar with
because I played this role at one of my startups, Upromise.
My title at the start was president and COO – thus I initially played the
Mr. Inside role and rapidly grew into running a large organization. Then, as we hired a skilled operational CEO,
I transitioned to driving strategic initiatives.
I guess that’s why I’m always a sympathetic ear for the
I've been thinking a lot lately about scaling sales.
In every start-up, finding initial product-market fit is a magical moment. Before this occurs, the sales process is a craft or an art - custom-made by the founder or evangelist sales VP. You dive deep into a customer development process, working closely with a few customers who feed you requirements and are willing to trial an imperfect product that is evolving quickly.
But once you achieve initial product-market fit and are down the Sales Learning Curve, suddenly you are faced with a new challenge: how do I scale up the sales efforts? How do I build a repeatable, scalable sales process that is like an industrial machine - not a crafts project?
Across our portfolio and in my own entrepreneurial experience, I have seen three main sales models work successfully in scaling B2B sales: 1) Enterprise; 2) Telephone; and 3) Developer-driven. B2C sales and customer acquisition efforts are a different matter (and one I'll perhaps address in a future blog), but for B2B, those three models are the most common pattern. I'll discuss each one below.
1) Enterprise Sales
The enterprise sales model is a pretty simple one and was the predominant model ten to twenty years ago in the IT industry. If you want to scale sales, you hire more sales reps. Find a new sales rep with industry experience, a rolodex and a strong track record. You assign an annual quota to each rep, train them, feed them some sales tools and assign them a sales engineer (particularly for more technically complex products) and coach them along the way. After 3-6 months, they work their way down the learning curve, close their first deal and are off to the races.
The typical quota for a sales rep varies by type of business model (SaaS vs. perpetual), product gross margin (e.g., 80-90% software products vs. 40-50% advertising products) and company maturity (e.g., a "jungle" stage company would have a lower quota than a "highway" company). Typically you want to see a 3x ratio between the contribution margin per rep (factoring in the lifetime value of the customer, or LTV) and the cost per rep to acquire that customer, fully loaded (i.e., customer acquisition cost or CAC).
For example if you have a 90% gross margin SaaS software product and assign a $1.1M in quota for a rep (i.e., $1m in contribution margin) that makes $250K at target and assume another $50k in benefits and travel costs and $30k in marketing and support costs for a total of $330K, then you have a 3x LTV:CAC ratio in year 1. Another rule of thumb for SaaS companies, some focus on "the Magic Number", which is the ratio of new sales to sales and marketing expenses.
If the customer is a recurring customer, then they are more valuable and a lower quota might be tolerated, although a separate group of account reps are often accountable and paid commissions for the renewal revenue. If the marketing support is greater and the product is more mature, than a higher quota might be assigned. In my former company, Open Market, we had rising quotas each year as we got more mature, from (if memory serves me) $1.1M to $1.3M to $1.5M to $1.7M to, finally, $2M in annual quota. Advertising sales reps, with a 40-50% gross margin, might have $3-5M in annual quota.
Although it is an excellent fit for complex enterprise-class solution selling, many people think classic enterprise sales, as a standalone go to market model, is broken. When you analyze it carefully, unless you can support large quotas due to very large deal sizes, it can simply be too expensive to hire senior sales representatives, distribute them around the country, set up offices and support them. Many are therefore proponents of a sales model that relies more on telephone-based selling, as described below.
2. Telephone Sales
The telephone sales model is based on a group of lower-paid, typically younger sales representatives that sit in cubicles next to each other and grind out call after call. To implement this sales model effectively, there needs to be a tight coordination between sales and marketing to generate qualified leads and to feed these leads to the sales organization. There also needs to be a large target universe of potential customers to justify the volume of calls - the model simply doesn't work if your target market pool is in the hundreds or even thousands.
Sales reps in this model may be closers or simply openers who qualify leads carefully and then hand them off to the closers (in this scenario, the telephone-based representatives are often called business or sales development representatives -- BDRs or SDRs). Many organizations will have two separate groups - a group of SDRs that are nurturing leads and conducting product demonstrations and a group of telesales reps who are closers. It is not uncommon for the SDRs to be right out of college or, at most, have only 2-4 years of experience and be earning base salaries as low as $30-40K. Their quotas may be as low as $400-500K, but their salary at target might be only $80-100K. With no travel budget and no field offices, the numbers pencil out nicely. The telesales team can also be a nice training ground for enterprise sales reps - a path that can be cheaper and less risky than hiring someone externally.
Generating a high volume of leads for the telephone sales rep is the key to making this model work. It is all about (highly qualified) leads, leads, leads. Leads may be through inbound marketing techniques (such as webinars, blogging, white papers or other forms of content marketing) or outbound marketing techniques ("smile and dial" against a list of prospects). The Hubspot folks (who are terrific in this area) estimate that each SDR in their mid-market group needs 150 leads per month to be productive and busy while for the small business team, they target feeding 2000 leads per sales rep per month. This is an appropriate number to figure out and model to help guide whether you need to ramp up marketing (demand generation) or sales (closing) as you scale.
To that point, a well-run telesales operation will be super metrics-driven. You can measure EVERYTHING - how many calls per day per rep, how many connects per call, how many positive conversations that lead to follow-up, how many demonstrations, how many proposals, etc. These measurements help with the "machine-building" process as you can more predictably assess how you are doing at any given time and where you need to focus your resources - more leads, more SDRs, more closers, etc. The best sales VPs of telesales operations are more like accountants than charismatic salespeople. If you hire a charismatic leader as your head of sales, make sure you hire a director of sales operations to support them. I never fully appreciated the value of this role until I saw it in action myself at Open Market where the director of sales operations managed all the numbers and operational details, freeing up the charismatic sales VP to hire, lead and close the big deals.
Alignment between sales and marketing is critical in any sales model, but under the telesales model it is even more critical. Organizationally, SDRs may even work under the marketing organization while the closers work for sales. Whatever the organizational configuration, the definition of a lead, clarity on the quantity of leads being targeted, and alignment on the quality of a lead required before handing off from marketing to sales are all key elements to work through. Marketing automation platforms are particularly helpful here so that you can track someone from website visit all the way down the funnel through close.
Again, there are many who believe even the telesales model is flawed and outdated. Hiring armies of young, inexperienced professionals and training them to become sales reps and operate in a "boiler room" style environment can be expensive. To achieve friction-free revenue (and who doesn't want friction-free revenue?), a third sales model has emerged which I'll call "Developer Driven".
3) Developer Driven Sales
My partner, Chip Hazard, wrote a terrific blog post on the power of developer-driven adoption, something we have seen play out very successfully at a few of our portfolio companies, but most notably 10gen (maker of MongoDB). As Chip points out, if you can architect your product as a platform (build APIs that are accessible to 3rd party developers) and get bottoms-up adoption from the development community, you can drive adoption without investing heavily in sales. Chip's examples are mainly from technical products (his main area of expertise), but this approach can be employed for any product where customers can trial, see value quickly and begin adoption without taxing your sales resources.
To do this effectively, you often need to employ a freemium business model - making it easy for a developer or customer to try your product for free, get set up and quickly self provision (ideally within 5 minutes) without ever speaking to anyone at the company. This provides the ultimate inbound marketing model - customers contact you when they have tried your product and are convinced it provides them with value. Once value is established and the product usage ramps up, you can hear the cash register ringing.
Instead of hiring telesales people, you hire "Community Managers" who arrange hackathons and meetups, actively engage the community on the forums, and shares relevant content through various social channels. When things are really working well in a developer driven model, developers are embedding your platform in their products and each developer becomes a marketing agent for the company. In effect, your developer support team becomes your marketing team.
The magic in developing a go to market strategy is that there is no "one size fits all" approach. Many companies will design their sales and marketing machine as a blend of each of these approaches. Use a developer-driven model to drive trial and inbound activity. Telesales to close high-volume, smaller deals. And then enterprise sales for the select strategic deals with average sales price (ASP) > $100K.
Different phases of your business will see more emphasis on one area than another. For example, many companies embark on a freemium model initially, then depend on inbound upsell, later hire a telesales team to ramp up the upsell process by adding outbound activities, then hire an enterprise team to close the big deals. Dropbox is an example of a company that has followed this path with tremendous results.
The main point is that you need to be as strategic and thoughtful in designing your go to market model as you are in your product or company strategy. Only then can you evolve from a crafts model to a machine.
I include a chart below from a recent board presentaiton from my portfolio company, tracx (a SaaS social intelligence platform) that frames the multi-stage process in a particularly clear manner.
To read more on this topic, here are a few books / blogs I recommend:
Today's IPO by Tremor Video is seen by many as a harbinger for the adtech community (full disclosure: Tremor Video is a Flybridge portfolio company). Rightly so. Tremor is the first public offering of an adtech company since Millenial Media's IPO in April 2012. One can argue how successful the Tremor IPO was, and the broader industry implications, based on the first day's opening price and trading, but the real test of these offerings is what happens next - how companies perform and execute over the next few quarters.
One thing that is clear, though, is that the advertising community would be wise to keep an eye on the "tech" portion of "adtech". I have argued in the past that software is eating marketing. Simply put, technology is radically transforming the marketing function and the role of the marketing professional. The flow of advertising dollars into digital, addressable media is well-documented and well-understood. It is estimated that in 2013, $100 billion will be spent on digital forms of advertising, representing more than 20% of the total advertising market and continuing to grow rapidly in share (see chart above).
Less understood is that managing digital advertising is far more complex than its analog counterpart. Advertising agencies have retained their industry wide hegemony as a result of this complexity. With so many new technology vendors popping up and so many immature point solutions being deployed, the core competence of agencies has gone from being great at relationship managemnent to being great at technology platform management. As DataXu's Mike Baker likes to say, Mad Men have become Math Men.
But, in every industry, software improves and gets simpler and simpler. Technology platforms gain in scale, become more mainstream and training programs become more mature. As all this happens, agency services are required less and less.
So, the lesson that may get loss in the Tremor IPO hoopla? Agencies are being transformed. Technology companies are sweeping into the advertising industry, much like they did in marketing (see Salesforce.com, Eloqua/Oracle, Exact Target/SalesForce, Neolane/Adobe). And the days of getting the job done with thin technology in combination with armies of bodies are over. To be a valued, strategic player in the market, you had better have a thick, differentiated technology stack.
Think about all of the amazing technology innovation that has impacted businesses over the last three years. Since 2011, we have seen an explosion in cloud computing, in mobile, in technology-enabled business services and in globalization. All of us feel more productive as professionals and our businesses feel more productive instutionally. As a nation, the US must be cranking in productivity. Killing it -- particularly after rebounding from a recession, right?
In other words, despite three years of amazing innovation and growth, we don't seem to be gaining in productivity. What's going on?
In 1986, observing a similar phenomenon on the heels of the PC revolution, MIT Economist Robert Solow quipped: "You can see the computer age everywhere but in the productivity statistics."
Those of us that are immersed in the innovation economy may find this hard to believe, but we are not, as a whole, actually more productive when we are in the midst of an innovation cycle boom. New technologies take time to absorb, refine and make mainstream. Computer software can be reprogrammed quickly. Humans can't.
Forrester captured this phenomenon nicely in a chart they produced a number of years ago predicting "the next big thing" in computing:
We can't imagine a world without broadband wireless, iPhone 5s, iPads and the cloud. But we've got a lot of work to do to absorb these amazing technologies and make us all more productive as a whole.
Today is Demo Day for Techstars Boston. I love Techstars Demo Days for many reasons, not the least of which is the amazing community that gathers to hear the brief, well-rehearsed pitches from the various start-ups who have spent months planning for this big event.
As accelerators like Techstars gain in popularity, many entrepreneurs wonder whether they should be applying and, if admitted, joining an accelerator and when they shouldn't. I get this question a lot from my students, particularly as they're graduating and scrambling to figure out where they should start their company, how to raise capital and whether an accelerator is right for them. Here are a few guidelines that I would think about if I were an entrepreneur making such a decisions.
First, broadly speaking, accelerators serve a very valuable role in the entrepreneurial ecosystem. In many ways, as Eugene Chung of Techstars NY points out, they are like finishing schools for entrpreneurs. Like a college, there is a rigorous admissions process. And once admitted, the participant receives an extraordinarily rich education, in this case in the field of entrepreneurship. Also like college, the best accelerators represent valuable networks, where your "classmates" and even other alumni as well as boosters all become a part of your professional support system. Finally, the brand of the network will always be associated with your brand. Dropbox and Airbnb will always be known as "Y Combinator companies", which initially helped buttress their brand, and more in more is helping enhance the Y Combinator brand.
So with that in mind, here are a few reasons when I think an accelerator is a great choice for the entrepreneur:
Outsiders to the Entrepreneurial Community. You are early in your entrepreneurial career and want to super-charge your entrepreneurial network. To be clear, this is not a comment about age - you might be in your 50s and new to entrepreneurship. But, as Launchpad LA's Sam Teller observes, "Across the board, accelerators provide one key value: dramatically expanding your network."
Outsiders to the Particular Community. Every major innovation hub in the world now has an accelerator and most have numerous (Boston alone has over a dozen). If you are from outside that particular community, the accelerator is an amazing way to build a network in that particular city. As Brad Feld points out in his book on innovation ecosystems, there is tremendous power in being connected to a hyper-local, dense entrepreneurial ecosystem. Accelerators are magnets for the leaders in a given community - at Techstars Demo Days, it's always a "who's who" of that particular community. The quality of the mentors at the many events and one-on-one sessions over the are course of the program is outstanding - typically, you can't get access to these people any other way.
New to Fundraising. Accelerators pride themselves, and often measure themselves, on their ability to help their graduates raise capital. For example, across nineteen Techstars classes in its four year history, over 70% of all Techstars graduates have raised capital (Techstars publishes an amazing chart that lists every company in every class and their fundraising status as well as employee count). If you don't have existing relationships with investors, accelerators are great ways to establish instant credibility and an instant network.
That said, not all accelerators are created equal. Just like with a college, your personal and professional brand will always be associated with that particular accelerator, so choose wisely. Some accelerators specialize in certain domains (e.g., Rock Health for healthcare or Learn Launch for edtech). Others have stronger reputations for fundraising vs. product development.
If you want to get a sense of the quality of the particular accelerator you are considering, you should ask around about them - graduates, senior entrepreneurs, VCs, start-up lawyers, bankers and accounting firms will all have their opinions. One tech reporter, Frank Gruber, publishes an annual ranking of accelerators that is pretty good, although it leaves out hybrid organizations that aren't technically accelerators, like Boston's Mass Challenge (which is a contest) and NYC's First Growth Venture Network (which doesn't take any equity).
Accelerators are thus not for everyone. If you are already well-connected to a particular entrepreneurial community, have a entrepreneurial track record and network, and are comfortable with your fundraising skills and relationships, then an accelerator probably isn't worth it for you. But if those attributes don't describe you as an entrepreneur, an accelerator may be an excellent choice.
The immigration reform debate is near and dear to my heart and has whipped up the passions of many in the Innovation Economy, including Mayor Bloomberg, Mark Zuckerberg, and countless others. It feels like, finally, we may get some positive movement on this and I'm honored to have the opportunity to help in any small way I can.
I was born and have lived in the Boston area almost all my
life. I went to school here, met my wife
and married her here, built a family and pursued my career here. I am a rabid fan of all the sports teams and
love exploring and connecting with every nook and corner of this community. Never have I been more proud of the
resilience of my home town. Never have I felt more meaning in the statement: "I am a Bostonian."
In the Flybridge partners meeting this morning -- which was
held at one of our homes as our office is a part of the crime scene and in "lock down" mode -- we discussed
where we were when we learned of the horrible events, how we felt, who we know who was touched by it all. We checked in with loved ones throughout the
meeting and fielded kind notes from friends and colleagues.
For those of you who have written, texted, tweeted and
called with words of solidarity and support, thank you. The sensitivity and tenderness that my kids' schools have shown
is another reflection of what an amazing community we live in. We are all more bonded together by this sad experience.
The talk in the town is that next year's Boston Marathon
will be the greatest in history. Many of
my friends who have never ran before are thinking seriously about running in
it. Many vow they will be at the finish
line cheering the runners on. Many more still
vow that the fundraising efforts next year will dwarf years past. The theme throughout the city today is "we will perservere, we will thrive, this will not
slow this great community down."
The world is watching us and we intend to step up.
I gave a talk at Harvard Law School this week to a VC and Entrepreneurship class on raising your first round of financing. It was good fun and forced me to rethink my usual presentation and add some practical elements. You can view the presentation here:
My first time jumping into the start-up world was as a freshly minted Harvard MBA in 1995. As my classmates were rushing off to high-paying, high-powered jobs on Wall Street, I joined a Series A start-up with 30 employees as a product manager, making $65,000 per year - lower than my pre-MBA salary at management consultancy The Boston Consulting Group. Since then I've had a terrific ride, but I often think of that fateful decision when I get asked, repeatedly, by other freshly minted MBAs: "How do I get a job in a start-up?" Or, more generally, "How do I even begin to find and assess start-up job opportunities - I don't even know where to start?"
The start-up universe is a large one and can seem overwhelming and impenetrable to the uninitiated. In order to narrow things down, I recommend following a simple, four-step heuristic. Here's the advice I give:
Pick a Domain. First, figure out your passion in terms of domain. Are you more of a B2C type or a B2B type? What blogs are you reading? What articles in Techcrunch or the Wall Street Journal capture your attention? What companies are your dream companies to work for? Answering these questions will help narrow down a set of domains that you are excited about. It can be more than one, but it shouldn't be more than, say, three.
Pick a City. Next, figure out where you want to live. Again, there may be multiple options, but ideally one or two favorites. Each start-up community has its own plusses and minuses, quirks and idiosyncracies. I find that once young people choose a particular start-up community, they stay there. It's a natural phenomenon - they build relationships over time that lead to one opportunity after the next. Your co-workers in one start-up become your co-founders in another. Thus, young professionals should be thoughtful about choosing a city early in their career because of this "settling in" phenomenon.
Pick a Stage. Next, determine what stage company you prefer to work in. Do you want a company that is still in the jungle phase (hacking through and trying to establish a path to success), the dirt road phase (established initial product-market fit and now trying to execute and scale in a relatively clear direction) or the highway phase (optimizing and scaling along a well-trod path)? This decision should be made somewhat based on risk appetite and somewhat on personal makeup and preferences. If you are a risk-taker and enjoy the challenges and roller-coaster ride, then the jungle phase is for you and you should bias towards seed funded or recently Series A funded companies that are pre-revenue. If you are more conservative, want a good salary and prefer to pick a "safe" winner, then a highway phase company that is pre-IPO or recently IPO'ed is the right choice.
Pick a Winner. Now that you have your target domain, geography and stage, focus on picking out a few winners - the hot companies that everyone thinks has great momentum and potential. After all, why would you want to work for anyone other than the absolute hottest company in a given category? How does an outsider figure out who the winners are in a given domain, market and stage? Ask a handful of insiders. Find the top 3 VCs, angels, tech lawyers and headhunters in your target geographical market and ask them for the two or three hottest companies that match the domain and stage you are interested in. Compile this list, pressure test it, and see what patterns you find. The firms who get the most mentions with the most compelling underlying evidence will naturally rise to the top.
Below is a sample chart that I put together answering the question for someone interested in either e-commerce, mobile or SaaS companies in SF/SV, NYC or Boston. The first company listed is an earlier stage company (either jungle or dirt road) and the second company is a later stage company (either dirt road or highway). This list is illustrative - just to make the point - not in any way attempting to be comprehensive.
(full disclosure: tracx, 10gen and Savingstar are Flybridge portfolio companies)
Once this heuristic is complete, you now have your target list. The next step is to get warm introductions to the target. This is easier than you would think. LinkedIn is an incredibly powerful tool, as are the various alumni databases. VCs are often happy to pass along your resume and background to their portfolio companies - after all, they are doing them a favor by sending them highly qualified talent.
In general, the start-up community is so incredibly generous with its time and has such a strong "pay it forward" culture, that with tenacity and time, you can get to almost anyone. In fact, I recommended you aim high. Use this heuristic to narrow down your search and then list out the 10 people that would be your absolute top choices to sit down for 30 minutes with face to face. Then, go after those 10 people in any way you can (without stalking them or being a nudge!). These networking meetings will help you establish valuable relationships, even if the job fit isn't there.
In short, be organized, focused and tenacious. Aim high, seek out the incremental networking meetings and pick yourself out a winner. Things may not work out, but at least you're putting yourself in a position for a little positive serendipity.
In classic economics, deflation - a downward trend in prices - is a dangerous force that leads to recessions (see: Japan, economic disaster - a case study). In the world of the Internet, deflation viewed as a positive force, leading to massive consumer gains. How can we reconcile these two competing beliefs? And what impact will this deflationary pressure have on the production of high quality content?
I've been thinking a lot about deflation and its impact on the Internet economy since reading two articles in two different newspapers this last week. The first was this article in The Economist about the music business. The article contained a chart showing music industry revenues peaking in 1999 at $27 billion and dropping consistently as a result of the disruptive power of digital music and iPods/iPhones. Industry revenue may have finally flattened out at $16.5 billion, but the bigger story is that over $10 billion of value has been taken out of the music business thanks to over a dozen years of digital disruption. Artists are still producing a ton of music (I would guess music proliferation has grown during this period, although I haven't seen the data), yet the Internet has produced massive deflationary pressure.
The second article that I was struck by was in the Wall Street Journal, depicting the explosion of online video. Titled, "Web Video: Bigger and Less Profitable", the article reports on the rapid growth in online video views (39 billion in December), yet the fact that prices are dropping rapidly due to the oversupply of video inventory. The CPM (cost per thousand views) that advertisers are paying has dropped from $17-25 in 2011 to $15-20 in 2012. Advertisers and content producers are used to this trend. Whenever a new advertising medium emerges, prices are high at first, and then steadily drop as inventory swells (I wrote about this in a post that provided a bearish analysis of Groupon back in 2010). Every content business today faces this rapid drop in CPMs across every category, resulting in severe cost pressures.
So if the producers of music, video and other content are getting hammered on deflation, who is benefiting? Consumers. Consumers are getting access to music, video and other sources of content for less. They're also getting subsidized by business advertisers through social networks and search. McKinsey did a study a few years ago that sized the consumer surplus from the Internet at over 100 billion euros. Interestingly, they concluded that in measuring this surplus, consumers have benefited 85% of the gains from the Internet as compared to 15% for producers.
Thus, while the business press is full of stories of disruptive gains in business transformation, the real story of the Web is the power of the consumer and the massive gain consumers are receiving.
Although I am thrilled with the consumer surplus, I struggle with where this logical chain is eventually leading us. I worry that if there is too much deflation in content, that this consumer surplus will hit a natural limit. That natural limit will be that content producers will stop investing to produce high quality content. After all the inefficiencies have been wrung out of the system, eventually fewer producers of content will be willing to produce great content because the rewards just are no longer there. If this were to happen, consumers would be all the poorer for it.
My conclusion: although deflation has produced awesome consumer gains in the last decade, it is emerging as a real threat to content producers. But at some point, perhaps soon, it will tip to being a negative force that will cause high quality content produers to turn away and pursue other methods of financial gain. If that were to happen, we might regret allowing deflation to run rampant on the Web.
All the focus on the Pope's departure from the Vatican has got me thinking about the meaning of religion. Those ruminations have led me to a surprising conclusion: one of the reasons the force of entrepreneurship has become so powerful in recent years around the world is that entrepreneurship has evolved into a global religious movement.
Similarly, the start-up world has evolved into a set of shared beliefs and values. For example, the notion of Pay it Forward has become a core part of the entrepreneurial ethos. In religious communities, when someone is in need, the community rallies around them. People do kind things to other people just because it is the right thing to do. The start-up world has a similar share value - investors, CEOs and service providers throughout the entrepreneurial ecosystem are always willing to lend a hand, donate time and provide guidance and counsel. When I talk to entrepreneurs I've never met before, I always have a sense that we are kindred spirits on a shared journey. There is an immediate connection and mutual respect, just as I feel when I meet a member of my religion (Judaism).
The canonical texts of the entrepreneurial world are firmly established and widely read. Although they haven't sold as well as the Bible, there are a set of books that nearly every member of the entrepreneurial ecosystem has read, including: Crossing the Chasm, The Lean Start-Up and Four Steps to the Epiphany. Even those who have not studied these books and their derivative works are familiar with the concepts.
The cultural force of entrepreneurship is a powerful one. This force and the cultural norms they impose can vary from the profound (it is no longer ok to look down on the "little guy/gal" in business, young people are now listened to more carefully and given more opportunities to have an impact) to the mundane (it is now ok to wear jeans to a serious professional meeting, it is no longer ok to pull out a Blackberry in a meeting as opposed to the iPhone). The binds that tie the community together are strong. I can walk into a start-up event in Sao Paolo, Jakarta or Little Rock and have the same dialog about the same concepts - just as I can when I walk into a synagogue on Friday night anywhere in the world and feel at home.
The prophets of entrepreneurship have been firmly established. Paul Graham, Steve Blank, Eric Ries and a few others have risen to a status such that anything they say or write is followed closely by hundreds of thousands of followers. The entrepreneurial community reads all the same blogs and debates the same issues around the world. Certain corporate leaders, such as Steve Jobs (who, arguably, was practically deified in the wake of his tragic death) are also viewed with such reverence that they can command massive followings and sway opinion.
I could go on, but you get the point. I'm not sure what to do with this observation, but I think it represents a profound undercurrent that drives the start-up system in a very positive way. I'd be curious if others see it similarly.
Despite being a Wharton and MIT guy, my friend Fred Wilson has been kind enough to attend my class at HBS for the last few years. Yesterday was another terrific one.
Instead of a final exam, I assign my students the task of blogging. You can see the the class blog here, where the students wrestle with the limitations of the lean methodology, challenges in seeking product-market fit, premature scaling and other important startup topics.
I encouraged the students to live tweet the class and it was a huge success. You can see the Twitter stream from the class here. A few highlights/quotes that I thought were particularly salient:
Living the startup life is a hard roller coaster. One day you think you're on the verge of building a billion-dollar company, the next you wake up in a cold sweat, paranoid that you are about to run out of cash and have to shut the whole thing down.
My friend, Brad Feld, has written precisely that book with his wife Amy Batchelor, called Startup Life. The couple tackle how to manage your relationship with your significant other while trying to live in the mad, crazy, demanding world of startups. Nothing is off limits for this book - Brad shares how he screwed up his first marriage, how they manage their highs and lows together and even addresses the topic of how to find time for sex while running startup.
Brad asked me to share a few thoughts on my perspective on the topic and whether I had any additional tips. I have been happilly married for 19 years and have known my wife, Lynda, over 25 years (we met our first day freshman year in college while moving in to the same dormitory entryway). Like Amy, Lynda is not in the startup world at all, but rather has a completely different work and personal profile than I do (she is a former professional Broadway-style performer and is now a pioneer in the world of aging and multi-generational programming). Additional context: we have three kids (now ages 16, 13 and 10). Brad and Amy don't have kids, so they were light on addressing this additional challenge - a topic I struggled with when I was an entrepreneur and still struggle with today as a multi-tasking, over-scheduled venture capitalist trying to be an accessible, loving Dad for my three high-energy children.
Be Predictable, Even If It's Bad News.
One of the hardest thing about being an entrepreneur is the unpredictable schedule you face. A customer calls with a bug and there's a crisis. A new product needs to get pushed out the door and it's a crisis. Or you're trying to raise money and you need to prepare all night for tomorrow's investor meeting. It would drive my wife absolutely nuts when I would say I would be home by a certain time, and then not show up until one or two hours later. Dinner would be cold, kids would be mad and all hell would break loose.
I finally swore I'd
get better at is keeping track of time and setting expectations better with my
wife about when I come home. So we developed a system together: at the beginning of each month, I email her
when to expect me home at night that month (or not at all if travelling) with a 15 minute range. Many nights the range is "945-1000pm" if I'm in NYC that day or have an evening event. But it is what it is and I don't try to sugercoat it. Then, I work very hard to stick to that hour, treating that deadline as if it were a meeting with an entrepreneur or a portfolio company board meeting. If I know I am going to miss the deadline for being home (sure, stuff comes up), I always give her the heads up. This creates a
sense of predictability for her and the kids.
If I see my kids in the morning (which is rare, although I'm working on that), I will tell them verbally what time to expect me rather than try to hide from the fact that I'm travelling or working late that day. This avoids my family getting more frustrated with my
unpredictable schedule than my actual schedule!
You're Just Not That Interesting.
In my early startup days, and the early days of the Internet, we used to refer to the crazy pace that we were living as "Internet Time". There was this feeling that everyone else was living a slower pace than we were. Indeed, to me, my 12-14 hour work day was chock full of a week's worth of stories, characters and drama. Subconsciously, I thought my day-to-day was more exciting than my wife's and would come home eager to share all the drama. After a few years, I began to realize that as interesting and dramatic as my work life is to me, it's really not that interesting to Lynda. She cares about the big things, of course, and she cares about how I'm feeling about it, but the ups and downs about new product releases and who's missing the quarter and what competitors are doing are all just noise to her.
So my mantra now is, my work life just isn't that interesting to my family. I share with them the top-line highs and lows, but I don't think my wife could name each of my portfolio companies. Instead, when I come home, I focus on them: the ups and downs of my kids social and academic lives; the ups and downs of my wife's work and social life. In my head, I try to keep it to "80% them, 20% me" sharing time. I'm sure it ends up more balanced, but if I aim for 20%, I know I'll come home focused on them rather than on me. To be clear, I love my work and love being consumed in it. It's just not that interesting to the four other members of my household. And I'm ok with that.
Find Together Projects.
My wife and I operate in different professional worlds, but we have found that we love collaborating together on projects beyond the raising of our three kids. Raising our kids takes an enormous amount of thought and energy. The topic of our children often dominates our private time together. We have discussions and make decisions each week about their activities, their school work, who to have a sleepover, who is picking them up when (during the weekend, we often switch to "taxi driver" mode) and what they should do for the summer. But, we have found that having "adult projects" that we collaborate on is also very rewarding. We have pored energy into various non-profits, our synagogue and our kids' schools as a way of making a difference, yes, but also spending our outside work time together. Thus, although our professional communities are very separate, our personal and social communities are totally integrated.
In addition to those few tips and reading Amy and Brad's books, I recommend a few other books:
Raising Cain by Daniel Kindon and Michael Thompson. I have two boys. I have read this book twice - once when they were recently born and again recently as they move into the world of teenagers and found both sessions incredibly helpful and informative.
Nurture Shock: New Thinking About Children by Po Bronson and Ashley Merryman. David Kidder of Clickale suggested this one to me and I have enjoyed it as a book that cuts against conventional wisdom in many areas of raising children.
I was in synagogue last weekend for a cousin's bat mitzvah and was struck by the entrepreneurial lessons from the weekly Torah portion. The portion was Exodus 18, where Jethro, Moses' father-in-law, sits down with him and gives him some mentorship:
What is this thing that you are doing for the people? Why do you alone sit, and all the people stand before you from morning until evening...The thing that you do is not good. Both you and these people who are with you will surely wear yourselves out. For this thing is too much for you; you are not able to perform it by yourself.
Moses is the ultimate entrepereneur, trying to do it all himself. He leads the Israelites out of slavery from Egypt (nice vision!) and then is forced to execute on creating a new society and way of life for his people. It's too much for one person to bear.
So like any good mentor, Jethro gives it to him straight - you are going to burn out. You need to delegate. Find some good people you trust and let them deal with the minor issues. Focus your energy on finding the right people, put them in a position to succeed and then save yourself for the really big decisions.
The day after President Obama was inaugurated for a second
term, I was invited to speak at the (MUCH smaller) inaugural meeting of the
newly formed Congressional Caucus on Innovation and Entrepreneurship. The caucus is a bi-partisan group, created by
Rep. Jared Polis (D-CO), Darrell Issa (R-CA), Vern Buchanan (R-FL) and Gary Peters
(D-MI), to focus federal policy efforts on supporting startups and innovation.
I have to admit my expectations were pretty low. After my euphoria over the passing of the
JOBS Act last year, the latest fiasco over the fiscal cliff have me pretty down
on Washington’s ability to get anything done that will help create a more
robust business environment. I have been
to DC a few times with the policy business group I helped co-found, The
Alliance for Business Leadership, and every time I’m there, I’m struck by the
contrast with the more thrilling, action-oriented world of startups and venture
That said, the House Members and staffers seemed genuinely
interested in the components of a vibrant start-up ecosystem. I gave them a briefing of why Boston and NYC
have such vibrant start-up environments, with the former being in the midst of
a renaissance and the latter emerging from nowhere over the last 5-10 years to
legitimately become one of the world’s major start-up centers.
There are four important ingredients for a start-up
ecosystem to thrive:
capital – Universities, young people, creative (whacky) people,
expertise in multiple disciplines
Advisors and Accelerators – that first capital and good advice to transition
from idea to reality and provide mentorship
capital – the necessary capital to scale, advice, mentorship, guidance
from those who have “seen the movie”
companies – to inspire, partner with, poach from and/or sell to
I also observed the important cultural
characteristics of successful start-up ecosystems. They are open, diverse, inclusive, welcoming
of outsiders/immigrants and creative types, and rich in information exchange.
Today, Boston and NYC are shining examples of these
elements. Boston has always had rich
intellectual capital, but was historically weaker in the cultural
characteristics than it is today. The
angel community has also stepped up in a more meaningful way recently, which
has been very positive.
NYC has historically fallen short on intellectual capital, but
that has changed dramatically in recent years with all the talent streaming out
of Wall Street and Madison Avenue into start-ups. Further, following the interesting
entrepreneurs and ideas, there’s been an explosion in NYC’s angel community. This has led to an environment that has never
been more promising.
With the audience being a policy one, I gave some simple
advice to policy makers: avoid getting
involved in areas where government doesn’t have a role (e.g., picking winners
with targeted tax breaks) and focus instead on fundamentals (e.g., education,
infrastructure) and policy issues that matter to entrepreneurs (e.g.,
immigration reform, reforming community and state colleges to fit the needs the
start-up employers, and capital formation issues like crowdfunding). I gave a nod to local government leaders like
Governor Patrick and Mayor Bloomberg who have been terrific champions in their
respective communities. When you ask local business leaders, they will all tell
you that those two politicians “get it”.
I can’t predict whether this new caucus will have an impact,
but clearly comprehensive immigration reform is on Congress’ short list for
important initiatives in 2013 and Rep. Polis was one of the co-sponsors of the
Start Up Visa Act, so he clearly “gets it”.
If every entrepreneur reached out to their House Representative and
encouraged them to join this Caucus, perhaps it would have a small impact. Meanwhile, I was happy to leave Washington DC and get back to action-oriented Start Up Land!
Today's post is brought to you by my friend, Paul Blumenfeld, a recruiter who is one of the most thoughtful people I know when it comes to hiring processes. Since the topic is so fundamental to the company-building process, I am pleased Paul agreed to share his thoughts.
When my wife and I got engaged, we had barely clinked champagne
glasses when a friend asked when we would be visiting Crate and Barrel to
register for wedding gifts. The idea
sounded appealing enough, but we couldn’t think of anything we actually needed. So we created a wish list of things
we thought we needed, like designer flatware, gold-rimmed china, and a blender
that makes bread dough.
As it turned out, the best gifts we received on our wedding day
were the thoughtful, unique gifts from people who knew us well and understood
our day-to-day needs. We also loved the gifts we simply never expected.
I often compare our gift registry experience to the way many
companies write job specs. What should serve as a helpful set of guidelines to find
the right candidate typically devolves into an inflated “wish list” of qualities
and talents that sound good at the time, but aren’t practical or even possible
to find in one person.
If I looked back at every job I’ve filled during my 15 years of
recruiting and compared the company’s job spec to the person they actually hired,
I suspect I would see a significant gap between their wish list and “the gift”
I see two reasons for this discrepancy:
Static Specs. Many hiring managers write a job spec
that is heavy on wishes and low on real needs. They continue to use the
same or similar spec throughout their search without re-evaluating it. With
each candidate interviewed, the hiring manager learns something new about
what they are looking for and what the real job requirements might be, but
the job spec is rarely updated to reflect what they've learned.
Like Pornography? Companies
aren’t always clear on what they’re looking for until the right candidate
walks through the door—which brings to mind Supreme Court Justice Potter Stewart’s “I know it when I see it” phenomenon. For many companies, the "best athlete" will
get the job regardless of how closely they match the spec.
is frustrating when I learn that a client has hired a great candidate that I already
knew, but decided not to send over because, judging from the job spec, they
weren’t a great match. Needless to say, I’ve learned my lesson and now take the following five approaches to solve this job spec
ask clients to show me
a bio or LinkedIn profile for a candidate whom
they’ve made an offer to recently, or on someone they consider ideal for
this position. Very often, seeing a real person’s bio is much more
informative than seeing a job spec. Reviewing the details of a real person
can help me better understand what the hiring manager is looking for, and
I get a true feel for the personthat would get the
not the resumethat would get the interview.
Short and Sweet. I recommend that
my clients boil down their job spec “must-haves” to only one or two items.
I have a client who spends a lot of time creating very detailed specs for
all of their engineering openings, and in doing so I find their real needs
get lost. For example, “Candidate
must have deep CS knowledge and know their data structures and algorithms
inside and out” is a clear message and points me in the right direction. Based
on those two imperatives, I can quickly find the best person out there
with these skills and, because "I
know it when I see it", the client likes the candidate and gives them
Be Open-Minded. I also ask
hiring managers to be open-minded about their must-haves. A candidate’s
experience may not match perfectly to what the hiring manager is initially
asking for, but sometimes a candidate will have skills from a previous
position that prove to be extremely valuable in a new position. For
example, I was doing a search for a VP of Engineering for a company that
was building a stock-trading platform. “Experience in financial services
or a trading platform a must!” The VP of Engineering I placed there,
however, had spent his entire career leading real-time software
development at successful data communications startups. His real-time
experience, and the time he spent at successful start-ups, proved to be his
most valuable assets.
think of a company as a cultural community with social needs, not a
machine that needs a specific part plugged in. Finding a candidate who is
not only great at what they do but who also fits well into that company’s
culture is going to have a better shot at getting the job and succeeding
at the company long-term. For example, does the candidate rock climb or
brew beer in her spare time? These qualities may not make her a better CTO
or VP of Product, but they may make her “click” with a like-minded hiring
manager and be more successful in a given company community.
- If a candidate is coming from a winning environment, he or
she is more likely to know how to win.
They will bring this culture with them when they join your
company. I look for candidates
that have worked for companies that have built highly regarded products
and have worked with people who have had previous, profitable
outcomes. The caveat there,
however, is that there are often many people looking to take credit for a
winner’s work. Like the old proverb says, “Success has many fathers,
failure is an orphan.”
So how much do job specs really
matter? They are an objective element to a mostly subjective process. They are
also, however, an important starting point. And the more realistic, concise and
flexible the job specs are, the more successful the hiring process will be.
Just beware of the job spec “wish list.” After all, do you really want a
blender that can make bread dough, or do you actually want a blender that makes
really good frozen margaritas and milk shakes?
Clench (the teeth), esp. in order to keep one's resolve when faced with an unpleasant or painful duty.
2013 is going to be an "interesting" year (evoking the Chinese curse). The macroeconomic environment looks spotty at best, with analysts like Jeremy Grantham predicting 1% growth in the US for decades to come. Europe is still a mess and in a deep recession. Japan is in a decades-long tailspin. And the so-called BRIC countries are forecasting tepid growth (we could rename them "ICK" if we added in Borat's home of Kazakhstan and dropped Brazil and Russia...)
One word: grit. Tough it out, people. This start-up stuff isn't easy. It never has been.
Mark Suster captures this sentiment nicely in this post "Entrepreneurshit". I won't repeat the feeling of dread, despair, humiliation and frustration that he so ably (and painfully) reviews. Unfortunately, 2013 will see plenty of it for start-up executives. So here are a few tips to help you grind through the coming year and come out stronger on the other side:
Maintain Your Foundation. Whatever it is that allows you to find meaning in your life - your spouse, kids, parents, friends, a dog - nurture it and hold it dear. Be maniacal about maintaining your health. Even if you're travelling like crazy, exercise and eat well. I find that entrepreneurs with strong foundations are able to focus much more effectively than those that are distracted with unhappy personal lives.
Keep the End In Mind. This piece of advice borrows from one of the late Steven Covey's 7 Habits of Highly Effective People. Envision the ideal end state that you are striving for in 2013. Write it down. Write down the two or three subgoals that fit beneath this overarching goal, including two or three interim milestones. Have it as a one-pager that you keep with you always. It will help sharpen your focus day to day and prevent you from getting lost in the daily flurry of activity we all face. And speaking of day to day...
Be Great Every Day. The thing that is hard about gritting through a tough year is that you feel that so much of it is out of your control. But you can control what you do each day. Don't allow yourself to sleep walk through each week, trudging through the muck in a daze. Simply put, in the face of adverse conditions, be great every day. End each day feeling that you delivered a great day against your objectives and don't allow yourself to settle for anything less.
Maintain Options. When I first learned how to value options in the stock market, a light bulb went off. Options have value! When slogging through a tough year -- such as a new product that just won't ship cleanly, or a fundraise that just won't get traction -- remember to create options for yourself. In addition to your plan A, develop a credible plan B and C. Don't allow the failure of a single initiative to be a dead end.
Good luck. As Ronald Reagan famously advised his White House successor (and one of my favorite children's animated authors captures in a cute book), Don't let the turkeys get you down.
What are some of your techniques for gritting through a tough year?
A question I often get asked by entrepreneurs is what is
Flybridge’s investment philosophy – do we make our investment decisions based
on people or on themes? The glib answer
is both, but as I’ve thought more about this question I wanted to expand the
answer a bit to help entrepreneurs understand how investors approach this issue
in more detail. I think this question
has become more acute as the much-discussed shortage of Series A capital (the so-called "Series A Crunch") means
that, going forward, too many entrepreneurs are going to be chasing too little
People-based investing is an age-old investment
strategy. Bet on the jockey, not the
horse, as the saying goes. Exceptional
entrepreneurs will always find a way to make money, so the job of the investor
is to spot the exceptional entrepreneur and convince them to take your money as
opposed to worrying about strategic trends and dynamics. People-based investors focus their due diligence
process on spending both structured and unstructured time with the entrepreneur, as opposed to analyzing the
product, business model or interviewing customers. People-based investors can be quite
analytical, although often times it is more insinctual. When they are analytical, people-based investors conduct deep management team due diligence, psychological
profiles and a broad set of team interviews. When they are
not, they simply listen to their intuition as to whether the entrepreneur is a
“money maker” and trustworthy.
Personally, I think this is a flawed investment
strategy. Building a successful startup
requires more than exceptional people, because even exceptional people can find
themselves the victims of market forces, competitive pressures and faulty
business models. I have seen many
exceptional people execute beautifully, hire well, achieve operational excellence,
but still fail to build a massive business.
These entrepreneurs are like the well-trained surfers who sit,
frustrated, on their surfboards on a calm day because they can’t catch the
right wave to propel them to shore.
A theme-based investment strategy requires the investor to
have market knowledge and a strategic point of view. Theme-based investors go deep in a particular
sector, develop a hypothesis, and then meet entrepreneurs to test this
hypothesis. They build market maps,
attend conferences, hire EIRs and cluster their investments and networking
around a particular sector. By building
expertise in a sector, theme-based investors develop insights about where the
markets are moving and where the opportunities are for disruption. They like to “see everything” in a space
before investing in something so that they are assured that they have picked
the absolute best way to play the theme they have identified.
And here’s where the magic happens – referring back to my
glib answer regarding Flybridge’s “both” investment strategy – when a
theme-based investor collides with an exception entrepreneur who shares the
investor’s vision for a particular disruptive opportunity. I have heard many entrepreneurs gush when
describing these meetings. “It was like
he was giving my pitch for me!” effused one entrepreneur after a VC she was
pitching took over the meeting with their own passionate observations about the
We experienced just such an opportunity as part of a new deal we are leading in New York City that my partner, David Aronoff, recently alluded to. We have a thematic focus on cloud computing and the consumerization of the enterprise. It is an extension of our developer-driven investment theme, that led to portfolio companies such as 10gen and Crashlytics. When we intersected with an entrepreneur who had a similar theme and had developed an emerging leader in a space we liked, we jumped at the chance to lead the Series A, following on with some great angel investors.
As an entrepreneur, those are the situations you want to
find. Seek out “Investor-Entrepreneur”
Fit. Find that investor who believes in
you as well as the market opportunity and has already been thinking proactively
about it. Watch what they blog about,
what their investment history looks like, and what conferences they are attending. If you can find this intersection of
compelling themes and people, you won’t sweat the coming Series A crunch.
I continue to be fascinated with the changing art of product management. This week, I taught a class at Intelligent.ly on the topic. Intelligent.ly is a new start-up led by Sarah Hodges, who used to be an executive at Run Keeper and Carbonite (full disclosure: Sarah recently joined Flybridge Capital as a part-time advisor). The company is part of a new wave of companies, such as Skillshare, Boston StartUp School and others, to provide "over the top" professional education to help chip away at the skills gap and enhance professional development.
The class was a blast. After running through a series of slides reviewing modern product management techniques and the search for product-market fit (drawing from leading thinkers and a class I teach at Harvard B-School), I had the students break up into teams of 8 to create scrums to address a strategic question: if you led product management at Blackberry, what features would you prioritize in the new Blackberry 10? I had never tried a spontaneous scrum like this before and it was great fun. The readouts afterwards were insightful and creative and it reinforced for me something I've seen work successfully at the Unconference - that creative energy can be released and improved learning can be achieved with a dynamic format rather than lecture-style.
Below are the slides. Did I leave anything out?
For more on this topic, you can follow the HBS class blog (we do not have a final exam - just blogging!): Launching Technology Ventures. We kick off the new class in late January.
"I can't wait to get back to work. This fundraising is a real drag on my day job."
- Startup CEO raising capital
We have a number of portfolio companies that are raising money. When I talk to my CEOs that in the midst of this process, almost all of them complain about the same thing. They dislike the fundraising process and can't wait until it's over. They view it as a distraction from their day job and a non value-added chore.
I love the CEOs I work with. But when I hear these complaints, which echo those of other entrepereneurs I know, I can't help but think how dead wrong they are.
Raising capital is a core part of building a valuable business. Whether you are raising a $250K seed round or navigating a $100M IPO, the capital markets - in all of its various forms - are a fundamental constituent in the business-building journey.
Developing expertise in raising capital is more than a necessary evil, it's a competitive weapon. If you have a stronger balance sheet than your competition, you can push off monetization decisions and focus on product-market fit. You can take more risks on partner deals, focusing on long-term value creation, not short-term gain. If you have a larger cash horde than your competition, you can make aggressive hires, attract better talent, perhaps even make acquisitions. Adding some debt onto your balance sheet will lower your cost of capital and your dilution, which is better for existing investors and the management team. In other words, being able to efficiently access the capital markets is as core to business-building as product management, go to market and your profit formula.
I admit that fundraising can be painful - and certainly I felt the pain when I was an entrepreneur and had to explain the same story over and over again to prospective investors of varying intelligence and sophistication - so, all joking aside, I am sympathetic to the complaints. But in the process of fundraising, I always gathered valuable feedback from savvy investors who understood the market and had a broad perspective. Seeing my firm through their eyes gave me valuable insight and often caused me to make adjustments along the way - in many cases, critical adjustments to our business model or approach based on the feedback.
A cynic might suggest that I'm supposed to have this perspective because, as a venture capitalist, I'm bound to think that my role in the start-up ecosystem is an important one. But that's not entirely true. For example, I have huge respect and passion for product development and the role of the product manager. I spend alot of time with my portfolio companies on their go-to-market strategy, partnerships and scaling sales.
But I do think the cultural pendulum in the startup world has swung too far away from requiring entrepreneurs to be financially savvy. The best entrepreneurs develop acumen across a range of business-building disciplines, including general management and finance. They view fundraising as one of the multiple dimensions that are a core part of their job, not an ancillary distraction or necessary nuisance.
Being an entrepreneur is a really hard and lonely journey. Entrepreneurs need to "major" in some disciplines and "minor" in others. They can't be so focused on, say, product development that they can ignore a major discipline like fundraising. Whining about fundraising, particularly to investors in the midst of the financing process, isn't a winning approach.
My first job after business school was serving as a product manager for an Internet commerce software company (Open Market, IPO'96). Back then, we learned the "HP way" - methodical, waterfall, process-driven. The art and science of product management has changed radically in the years since, with agile and lean methodologies replacing the more centralized, older methods. One constant, though, is the centrality of the role - sitting in between the market and the engineering team, the product manager (or VP of Products or any other derivative title) is a critical component to a start-up's success.
Thus, when my friend and colleague, HBS Professor Tom Eisenmann, suggested we write a short piece summarizing the modern role of the Product Manager, I jumped at the opportunity. We collaborated with NextView's Rob Go and drew on some of the work of author/consultant Marty Cagan as well as numerous others. We interviewed dozens of product managers from the Valley, NY and Boston and debated the different ways product managers impact the business and drive operations. We tried to capture the issues the role faces in business to consumer as well as business to business companies, very early stage to more mature, agile to waterfall and everything in between. That research culminated in this note, which I'd welcome folks reading and providing me with feedback:
I participated in a WBZ radio breakfast panel yesterday on the Boston start-up community and recently delivered the presentation below at the Harvard Innovation Lab as part of an HBS Entrepreneurship Club Event. It reflects a survey of the local start-up ecosystem that dissects what it takes to build a great ecosystem.
My friend Brad Feld talks about this topic in his new book on Startup Communities, as summarized in his fun Kauffman video "Sketchbook":
When I was a kid, "The Graduate" was a generation-defining hit movie, with Dustin Hoffman playing an aimless college graduate. In the middle of a graduation party, an older businessman takes the wayward Hoffman aside and delivers some wise advice: “plastics.” That should be the field his generation should focus on, the field that would shape the future.
Today’s advice for aspiring graduates is also a single word: “software.”
In a sweeping Wall Street Journal article last summer, Netscape founder Marc Andreessen identifies the 21stcentury phenomenon of software eating the world. Software is disrupting industry after industry and transforming large swathes of the economy. When I was an entrepreneur in the 1990s, I would debate with my investors what sliver of the $70 billion U.S. software industry we could carve out.
Today, as a venture capitalist, I meet with entrepreneurs who are trying to figure out what portion of the $70 trillion global economy they can dominate.
Within the $1 trillion marketing industry, the impact of software eating marketing has now reached the board room. With the explosion of digital marketing, it is clear that technology is radically transforming the marketing function and the role of the marketing professional.
The changes rippling through the marketing industry goes far beyond the simple mantra of “follow the eyeballs” to different screens. Gartner analyst Laura McLellan predicts that by 2017, CMOs will spend more on IT than CIOs. The repercussions of social, mobile, video, Big Data, CRM, cloud and other disruptive forces are impacting all aspects of business, but particularly marketing.
As a result, marketing leaders and agencies now carry the burden of understanding technology’s impact on their business, the entire customer experience, and leading innovation within their enterprises, not simply following a course set by their IT department.
“Madison Avenue meets MIT” and “Revenge of the Nerds” are common themes in marketing circles as technologists are becoming the rock stars of customer engagement -- employing algorithms and analytics along with artistic creativity to win market share. In much the way Apple disrupted the music and phone industries with smart industrial design and clever software that shielded users from complexity, technologists are building sophisticated systems with interfaces that are as simple for marketers and designers to manipulate as their iPhones.
MITX, the Massachusetts Interactive Technology Exchange (and an organization I serve on the board of) is putting on a killer conference on this topic called FutureM that kicks off on October 22nd. FutureM will gather marketing and technology leaders to address these challenges head on, exposing marketers to today’s most innovative thought leaders and companies who are transforming marketing.
Hosted in Boston, at the nexus of the technology and advertising industry, FutureM is a weeklong extravaganza that will bring together marketing artists and marketing scientists, left brain and right brain thinkers alike, to debate the most pressing issues facing the industry. FutureM is fast becoming the equivalent of SXSW, the place to get inspired and see what’s next, but focused on digital marketing.
If you think the last few years were disruptive, imagine how much the marketing industry will be transformed in the next three years!
(a version of this post originally appeared in Mediapost)
(Note: this post is an open letter to the approximately 400,000 members of the Massachusetts-based student community. Many of the messages apply to students in other innovation hubs.)
Welcome (back)! Now that you have unpacked the underwear, laid out the futon,
picked your courses and settled in a bit, I wanted to write to you about
Just as you were selected by your school amongst many applicants, we know that you chose to make the greater Boston community your home in selecting your school. For that, we
But more than thanking you, on behalf of the Massachusetts Innovation Economy community, I wanted to make sure you understood something. We want you.
We want you to learn, engage, show up,
contribute and - most important - stay when you graduate. One of our core values in this community is supporting innovation and young people. We have a long history of fostering amazing student entrepreneurs, many of whom you know all about (like Zuckerberg and Facebook, or Houston and Dropbox) to some you may not know about (like the three Babson students who founded IdeaPaint or the two Harvard students who started IP TV pioneer Tivli). And everyone in the community is fired up to support you, from civic leaders to business leaders and fellow entrepreneurs.
At 600,000 people, this city is small. Even with a larger metropolitan area of 4.5 million, there is a strong sense of intimacy and community here. This sense of intimacy contributes to why the innovation community here is so accessible. As you are out and about, you will quickly learn that this is a very open and friendly town, particularly for students who hustle.
So here are a few tips for you as you think about exploring what the innovation community has to offer:
Attend an event. Greenhorn Connect is the definitive listing of all the local events in the entrepreneurial community. My firm, Flybridge Capital, created a scholarship program to support local students who want to attend events called Stay in MA. Take advantage of the free passes on us and law firm Gunderson Dettmer and get out there!
Invite an entrepreneur to speak on campus. I am amazed at how accessible and giving the entrepreneurial community is. "Pay it forward" is the local motto and entrepreneurs are always telling me they love meeting with students and speaking on campus. If you read about someone you think would be interesting, reach out.
There are a few standout examples of students who are making an impact in the local community that are worth highlighting as role models for their peers:
Cory Botolsky. This Northeastern junior decided that not enough students were finding jobs at startups. So, he created StartUp Summer and helped facilitate over 100 summer internships to help students get exposed to the local entrepreneurial community.
Scott Crouch. A Harvard senior, Crouch spent his summer shuttling back and forth between Springfield and Cambridge as he collaborated with the police department and state troopers to use social media and pattern recognition software to combat gang violence. His work was featured in this Boston.com article and the New York Times.
Anna Palmer and Christine Rizk. These two Harvard Law School graduates have launched a new company called Fashion Project that is helping non-profits make more money by providing a marketplace to sell high-end, donated goods more efficiently. They are a part of the Techstars 2012 class.
Zach Ringer. A Babson senior, Ringer has jumped into the entrepreneurial community with two feet. He secured an internship with a hot mobile start-up, Crashlytics, by merely aggressively tweeting and engaging in the community. He is always attending events at Mass Challenge and the Cambridge Innovation Center and is leading a number of entrepreneurial initiatives on the Babson campus.
There are many companies that are competing to be the “operating
system” for small businesses. The
theory is that with the advent of the cloud in the digital age, small businesses
can leverage a suite of services from a technology vendor to manage all aspects
of their work – from payments to record-keeping to marketing to customer
communications. Among those competing
for this vision are PayPal/eBay, Square and Groupon, with each struggling to
pull together pieces of the equation and, importantly, reach the small business
in a cost-efficient manner at scale.
One company in Watertown, Massachusetts has been executing
on this vision for over a decade with a winning approach for one vertical slice of the small business
market: physicians. Although this is not typically how athenahealth is described, it is one way to describe what they are doing that
mainstream members of the technology community might understand. I have found it pretty amazing
that so few people in the tech community know their story or understand the scale and scope of what they have achieved. That is why I’ve chosen athenahealth for the third in my series on scaling (following Akamai and TripAdvisor).
Founding Story: A Pivot
Athenahealth version 1.0 was a complete failure. The company was originally founded in 1997 by Jonathan Bush (1st cousin of George W.) and Todd Park, a pair of Booz Allen consultants, as a physician practice management company for obstetrics. As they tried to execute on their original vision, the pair became incredibly frustrated with the difficulty of turning medical claims into cash. Payers took months to reimburse their practice for patients' medical claims. Park began to write software to try to speed up the process, automating countless manual steps and creating a user interface that would be simple enough for doctors and medical clerks to use.
It turned out, the physician practices loved the software, but didn't love the practice management services. The doctors wanted to run their own practices, but use athena's software to speed up billing. Bush and Park remembered the advice one of their early angel investors had given them:
"Get close enough to your customer to understand what they really want. And once you understand what they really want; once that opportunity comes knocking on the door; for crying out loud, answer the door."
The founding pair realized that they needed to pivot into becoming a software company, and in late 1998, completely shifted their focus to delivering athenaNet, their Web-based medical billing platform, as a cloud-based software service for all doctors. Scaling Lesson #1: get close to customers early, really close, to help inform your pivots. And when you do pivot, pivot hard.
Over time, the functionality athena delivered to doctors expanded, all with the vision of simplying the administrative burden on medical practices. From collections and revenue lifecycle management (called Collector) to clincial documentation and electronic medical records (Clinicals) as well as patient communication (Communicator) - athena now provides a full suite of cloud-based automation software for doctors. In effect, they have become the Salesforce.com of the health care vertical. Scaling lesson #2: Once you find product-market fit with a customer segment, scale up by offering other products that solve other hard problems to that customer segment.
Athena's financial performance has steadily grown alongside their product footprint and physician penetration. In 2012, analysts estimate they will do $425 million in revenue and $85 million in EBITDA. The company's market capitalizaiton is $3.2 billion. See chart below:
The reach the organization has achieved is impressive, but still only a fraction of the market opportunity. Below you can see the number of doctors in the athenahealth network - which is over 25,000. There are nearly 1 million physicians in the US.
For the 15 years since inception, CEO and cofounder Bush has run athenahealth end-to-end. A remarkable entrepreneurial story, similar to TripAdvisor and Akamai, where the founder (or near-founder in the case of Akamai's Paul Sagan) lead the business over many years. Cofounder Todd Park, who is now the Chief Technology Officer for the United States, joked in an interview that medical billing is hardly "sexy", but that by emphasizing the "doing well by doing good" aspects of their vision, athenahealth was able to create a powerful, mission-driven culture. Bush and Park both emphasize culture in all aspects of the business. Scaling Lessong #3: A mission-driven culture (as opposed to green-driven or fear-driven) endures, particularly when the mission connects to a greater social good.
But athenahealth's culture is more than just a bunch of do-gooders. Their performance management system is very sophisticated. One former executive described to me how transparent the organization is with respect to goals and metrics and how well-designed their Balanced Scorecard is for each individual and department. The company shares that Balanced Scorecard on each quarterly earnings call as well. As a result, everyone in the organization has a clear view of what the priorities are. The scorecard includes five major components: stability, operational performance, client satisfaction, financial performance and growth. Scaling Lesson #4: performance management systems and communications systems need to mature and be implemented as the company grows to maintain clarity and transparency.
As anyone who has met him can tell you, Jonathan Bush is a unique founder/CEO. He is open, transparent and (at times painfully) authentic. I love that his candor and humor haven't changed, even as he has matured into the CEO of a multi-billion dollar market cap company. Read the recent Q2 earnings call transcript, and you'll get a clear sense of what I mean. During the Q&A, when he's talking off script, you'll see a few funny quotes:
Well, one of the great lessons that we all learned in The Princess Bride is never get involved in a land war in Cleveland. [in reference to a slow roll-out at a hospital]
Life, Anthony. It's a contract for life. All of our contacts are for life. They can all leave whenever they want, but hopefully, we don't get boring. We keep changing our outfits, and they stay forever. We cut our hair short, we let it grow long. We have contracts for life. [when asked how long the term of a particular large deal was]
Jonathan's humor stands out, but his willingness to put himself "out there" and be so authentic and direct is not unusual for many founders. The athenahealth lesson is about passion, endurance and perserverance. Much like Akamai and TripAdvisor. Those appear to be the consistent attributes for scaling companies.