The Sisqokid

VC fund differentiation

Some useful commentary from USV’s @andrewparker on VC differentiation.  In addition to technical investment differentiation outlined below, I’ll add that cultural/stylistic differences are also important for entrepreneurs to consider when thinking about the right investor fit. For example, some firms act like banks and some like startups. Cultural differentiation is critically important as it often permeates everything firms do.

thegongshow:

VCs have a wide variety of styles, and I don’t know if all of them are obvious to entrepreneurs or not, so I’ll enumerate some of the differences in style here.

When a VC firm goes out and raises a fund, one of the docs that is a minimum requirement is a Private Placement Memorandum (PPM). The PPM is what you distributed to potential Limited Partners to explain to them (amongst other things) your flavor of fund. One element of the PPM is always a description of the fund’s focus.  How could this differ?  Well…

1. Geographic: Some VCs only make investments in a specific geography. For example, the DFJ Network of funds are a group of VC Firms, many of which invest specifically within a defined geography.
2. Stage: Some VCs limit their investments to a specific stage. Certain funds will only invest in company with annual revenue greater than $1MM. Other funds, will only invest in seed-early stage opportunities. For example, Accel offers a growth-fund and an early stage fund separately, which differ primarily in stage.
3. Sector: Some funds will invest only in specific industries: such as Information Technology, Biotech, Cleantech, etc… Other funds are sector-agnostic, and use partner specializations to focus on specific sectors within the same fund.
4. Opportunistic: Some funds deliberately market themselves in their PPM as leveraging a proprietary network of deal flow, from which the investment team can be opportunistic. For example, LPs who invested in the Founders Fund likely gave good thought to the appeal of the PayPal Mafia’s network and proprietary deal flow.
5. Quantitative: Some stylistic choices can be very specifically quantified by common financial metrics.  For example, I talked to an investor a few years back that was taking a deep dive into the Ad Network sector, and he said, “we won’t invest in any Ad Networks that can’t reliably produce 40% gross margins.”
6. Thesis-Driven: Some funds will apply a intellectual framework or thesis to all their prospective investments. A thesis is typically used as a filter; a great team generating high-margin revenue in an attractive market might not meet an investor’s investment criteria if the company is not a fit for the investor’s thesis regarding overall market trends. Here’s an example of a thesis we commonly apply at Union Square Ventures.
7. Other LP-related Limitations: Some funds can’t invest in certain industries, such as gambling or alcohol-related revenue because of restrictions in their agreements with their limited partners.  This is most common with Sovereign money limited partners, such as Saudi or Chinese sovereign wealth LPs.

The takeaway here if you’re an entrepreneur is you can use this list as a set of questions to ask a prospective VC to see if they are a good fit with your company.  Sometimes you don’t even need to ask a VC… their current and past portfolio will speak for itself about what they actually do. Their actions define their style.

Twitter vs. Facebook

I often hear friends and colleagues say - ‘I’m already on Facebook, so why do I need to be on Twitter?’  Considering how common this refrain has become, let’s try to set the record straight: Twitter and Facebook are very different each serving unique purposes and providing distinct benefits to its users.

Twitter and Facebook share one important characteristic - whether calling it micro-blogging or status updates, both allow users to share short-form content with friends/followers.  It is this commonality that leads many to mistakingly perceive Twitter and Facebook as interchangeable substitutes.

Although the content format may be similar, the distribution and consumption paradigms are highly distinct and differentiated.

Facebook is all about sharing with friends.  Everything about Facebook is oriented around replicating the real-world social graph.  In fact, it was Facebook’s early focus on creating ‘trust-communities’ of people who know each other (in it’s formative days at the University level) that distinguished Facebook from other early social networks and set it ahead of the pack.  As a result of this focus, when you share and consume content on Facebook you are deliberately doing so with and from a select and contained group of trustworthy friends.

In contrast, Twitter is all about shared interest.  Unlike Facebook, the Twitter social graph is not rooted in real-world relationships but rather in real-world interests.  I follow people and people follow me because we are interested in similar subjects and we share content that is thoughtful, informative and relevant to each others lives.  Case and point, of the ~150 people that follow me and the ~90 people that I follow, I would estimate that only ~25% are real-world friends.

The ‘openness’ of Twitter has powerful implications for both consumption and distribution of short-form content.  With respect to consumption, it is often the case that individuals in my social circle and thought-leaders in areas of personal interest are not one and the same.  Despite this disconnect, Twitter provides on-demand, real-time access to follow the thoughts and musings of people who are interesting and relevant in my life (professional or otherwise) - thus providing a highly personalized channel for information discovery regardless of my relationship with the person projecting the content.

Similarly, on the distribution side, Twitter allows one to share content which is personally interesting and relevant with anyone in the world who cares to listen.  Compounding its distributive power is Twitter’s Retweet feature which exponentially expands the distribution capacity of a given tweet by allowing anyone to instantaneously share content created by others.  In this capacity, Twitter serves as a mechanism through which to form and cultivate ones (increasingly important) digital identify and is a pipeline to plug-in and actively participate in the global online conversation.

I hope it is now clear that the issue is not which company/platform is better and which is worse, it is simply that they are different.  Twitter and Facebook are imperfect substitutes, and in fact, are quite complementary.  I go to Facebook because I care about the lives of my friends.  I go to Twitter because I care about topically-oriented conversations.  These are different use cases and both value-additive in my life.

The MBA and startup entrepreneurship

There is an interesting blogsphere conversation now occurring spearheaded by a few junior VCs on the topic of the value (or lack-there-of) of an MBA education in a startup environment (see O’Donnell, Go and Steinberg).  As a recent MBA grad with previous entrepreneurial (web) and corporate (banking) experience and as current startup operator and investor, I’d like to chime in with my perspective.

First and foremost - this discussion is clearly focused as most relevant to the ‘business’ side of tech entrepreneurship.  In some companies, founding technologists have both the requisite engineering chops and business understanding/intuition to go at it alone.  In others, rock-star founding engineers team up with business-oriented partners.  In all cases, startups require both technological and business savvy to succeed.

That said, the type of business acumen required in an startup environment, particularly of a founder, is far different from that required in a corporate setting.  A banker must develop expertise in finance, a marketer in marketing, a controller in accounting, a salesman in sales, etc.  To develop the requisite expertise, junior business people in large corporations are generally placed in silos and acquire deep sector/subject expertise over many years.

In stark contrast, a startup entrepreneur (on the business side) can’t be just a financier, marketer, accountant or salesman.  The entrepreneur needs to be all of these things and more.  The entrepreneur must be a jack of all trades (or more realistically, a king of some and a jack of everything else) and be ready, willing and able to tackle any and every business challenge - operational, financial, strategic or otherwise.  There are no sales or marketing departments within a startup - all roads lead right back to the entrepreneurs themselves.

And this is why I value my MBA.  B-school provides broad exposure to business issues and subjects as well as fundamental understanding and a basic skill set to tackle challenges across the spectrum of business.   Don’t get me wrong - an MBA gives you a foundation and helps you better understand how the pieces fit together; it makes your an expert in nothing.  There is still absolutely no substitute for real-world experience.  But b-school does provide invaluable holistic perspective and a basic framework through which to execute business objectives.  These are non-trival benefits of business school, directly and immediately relevant to startup entrepreneurship.

Clearly entrepreneurship is for a unique breed of individuals.  But for those who enjoy tackling the broad and holistic business challenges of a startup, an MBA can offer much tangible benefit.

Cash Multiples VS IRRs in VC Funds

Simple and insightful returns analysis contrasting IRR vs. cash multiples.  Instructive for thinking about returns from any long term lock-up asset class (e.g. PE, VC, RE).

thegongshow:

Fred wrote an interesting post today describing how to use IRR to analyze an investment opportunity.  I thought I’d extend on his work to explain why IRR isn’t not a great way to think about VC funds.

Let’s say the Teachers’ Union of Springfield want to invest their pension fund into venture capital. They would be Limited Partners (LPs) in the fund. Springfield Teachers’ Union needs to be willing to tie up their capital for potentially a long period of time. Most funds are a 10 year commitment.  Venture funds ask their LPs for their capital on an as-needed basis, so LPs don’t contribute all their money at the start of the fund.  Instead, the the money goes in periodically over 10 years.  But, LPs need to have enough liquid assets to contribute capital when requested at any given time.

Ok, given this background, lets look at the performance of two hypothetical venture funds: Montgomery Burns Capital (MBC) and Android’s Dungeon Seed Ventures (ADSV).  Both funds are $30MM funds. MBC invests their money during three different years, and quickly returns the capital for a small profit in the subsequent years.  By contrast, ADSV capital invests the entire fund in the first year and doesn’t return the capital until the tenth year of the fund, but the resulting return is a 3x on original investment. Here’s a table to illustrate the cash flows of the funds and resulting returns.

You can play with this spreadsheet here. Obviously these examples are oversimplified to make a point, but they reflect a very real phenomenon in evaluating venture fund performance

Montgomery Burns Capital returns 1.3x of Springfield’s capital at a higher (30%) IRR and Android’s Dungeon Seed Ventures returns 3x of Springfield’s capital at a lower IRR. So, which fund should Springfield Teachers’ Union invest in?  Most people would say ADSV is the superior performing fund.  LPs enter venture funds with the expectation that most of their capital commitment will be tied up for a long period of time.  So, even though MBC cash flows free up the LPs capital for more time, most LPs would not be expecting this capital to be available and would need to invest it in highly liquid (low return) investments during that duration.

So, looking at IRR alone can be misleading when investing in a venture fund. There’s a very simple expression that sums up the lesson in this post, which a good friend of mine on the LP-side of the game told me: “You can’t eat IRR.”

Surprise surprise, Nexus One launch hits some stumbling blocks

From Today’s USA Today…

Google thought it could sell phones in a new way — without retail stores or customer-service reps to hold shoppers’ hands through the experience.

Think again: Just eight days after Google (GOOG) opened its online store to sell the new Nexus One smartphone directly to customers, its support forums have been overloaded with complaints on a variety of issues. They stem from coverage and delivery problems, network compatibility, dropped calls and operation woes.

The wireless industry sells phones several ways: through company-owned stores; via third-party retailers like Best Buy and RadioShack; and online, where customer telephone service is an option. Google historically hasn’t offered telephone support even for its multibillion-dollar online advertising service.

Even though the Nexus One is offered at a discounted $179 with a two-year contract from T-Mobile, T-Mobile isn’t involved in the marketing, delivery or customer service, beyond wireless service issues. Google sells the phone directly to consumers at google.com/phone. The Nexus One, built by Taiwan’s HTC, runs an updated version of Google’s Android operating system.

Issues are posted on a support forum, where Google promises an e-mail response within 48 hours. Based on the volume on Google’s message forums (as of Tuesday evening more than 650 people had written about “spotty” 3G coverage alone), Google has a lot of e-mail to reply to.

“This is an epic failure for Google,” says Rob Enderle, an independent analyst at the Enderle Group. “It tried to create an Apple-like experience, but it’s so far off from the Apple experience, it’s not even on the same planet.”

In a statement, Google said it works “quickly to solve any customer-support issues as they come up.” It said HTC would provide telephone support for “device troubleshooting and warranty, repairs and returns.”

Another issue that popped up this week: the fine-print in the contract. The early-termination fee (standard with wireless carriers) is a double-whammy for consumers, at a whopping $550 for Nexus One. Google charges a $350 fee if you opt out of the contract within the first four months of the contract, and T-Mobile hits you for an additional $200 if you disconnect early.

Charles Golvin, an analyst at Forrester Research, says T-Mobile’s fee is standard, but Google’s additional fee is new.

Golvin says Google “clearly neglected” to realize what was involved in being a retailer. “It needs to make sure the experience gets better going forward.”

Google, says Enderle, has a massive Web presence, and if it doesn’t want to offer phone support as the carriers do, it could have used Web tools and social networking to better communicate with customers. If Google doesn’t solve the issues, fast, “The brand is at risk,” he adds.

Two thoughts - 

1. Not terribly surprising.  Google is a search, media and internet company, not a retailer.  In fact, it would have been incredibly surprising had there actually been no launch issues.
2. Give these guys a chance to learn, adapt and get it right.  As a general rule, I don’t sprint for first generation devices because these things almost always need some time to work out the kinks.  This is a first gen offering from first gen retailing effort.  Also Remember, these guys are of the motto ’release early and often.’  I’m not ready or willing to bet against Google because they didn’t have it all figured out before launch; my money says they’ll get there.

A dream I don't want to wake up from

It has been nearly three and half weeks since my last post.

The past few weeks have been a whirlwind. First, the holidays hit and I enjoyed a few days in southern Florida rejuvenating the battery, relaxing with friends and family, and having a great time with my wife. Work took a backseat to vacay as pretty much our entire office was out of town.

Well, that was then. This is now.

Since returning from holiday, things at work have progressed at lightspeed. Someone turned on the deal spigot (I think it had something to do with two new blog posts from my boss @infoarbitrage - see here and here) and the flood began. On top of that, we are closing a very exciting deal of our own…but more on that coming shorty.

Thankfully, as hectic as things have been over the past two weeks, I am happy to report that I have never enjoyed work more in my life. We are blessed to be involved in an incredibly exciting and transformative industry in which we deal with brilliant and passionate entrepreneurs and partners daily.

Most importantly, the team we have built internally is freakin’ awesome - fun, smart, honest, energetic, etc., etc., etc. - the list of positive adjectives could go on and on. Engaging with such fine people makes going to work each and every day a true pleasure.

I am living a dream that I hope not to wake up from anytime soon.

Stealth startups, get over yourselves

GREAT post on TC by Vivak Wadhwa and must read for entrepreneurs.  In my opinion, success is driven 5% by the idea and 95% by the execution.

A telling snipit below:

The harsh reality is that even if you did build a better mousetrap, no one would find you. To be known, you have to have a great story and tell it to the right people. And to build a great product, you need to get all the feedback you can from potential customers, marketing experts, venture capitalists, lawyers and accountants.

When you’re starting up, you usually have a great idea and think you know what your customers need. But your customers don’t even know what they need—they know what they don’t like and think they know what they want—but they don’t know what they need. Customers will ultimately buy only those things they really need – no matter how good your product or sales pitch.

Learning what a customer needs is an iterative process. You try something, get feedback. Both you and your customer learn more and you try again. You keep doing this until you have something which is so compelling that the customer will pay money to have it—that’s when you know you have a killer product. But you can’t get feedback if you’re in stealth. You only have yourself to talk to.

Most entrepreneurs say they are in stealth because they are worried about competitors stealing their ideas. This can be a risk if you have such a simple idea that just by hearing it, someone can replicate it. If this is the case, then you do have a lot to worry about. But even in this case, what will ultimately make the difference between success and failure isn’t your idea but your ability to execute and dominate your market very fast. You need a superb management team including top notch marketing and sales staff, great industry connections, and deep-pocked investors. You aren’t going to get any of these things by staying locked up in your basement.

Network Evangelism

Much appreciated network opportunity analysis by Union Square Venture’s Andrew Parker.  Achieving that win-win is truly a market/product-fit inflection point.

thegongshow:

There are many characteristics of investing in networks that interest me, but this one I’m about to describe might be my favorite.  In a business where all the customers are organized in a network, in order for your customers to succeed, they naturally pull you along with their success.

Take our investment in Etsy for example.  Once a customer lists a product with Etsy, they then need to try to market their products.  They can do so inside the network, via Etsy Showcase, a ad product that lists featured products in categories.  Or, they can market their products outside the network, by talking about their Etsy store in blogs, forums, or even offline marketing like craft fairs and Meetups.  In either case, either internal or external marketing, Etsy’s benefits from customers’ success.  If customers elect to use Showcase for internal marketing, Etsy sees additional revenue. Or, if the user markets externally, the customer is indirectly marketing on behalf of Etsy in order to market their own products. By successfully marketing their own store, the seller drives more buyers to the Etsy e-commerce network.

This same dynamic is true in nearly all of our network investments. For example, when you watch ESPN these days, there’s at least 1 headline every 10 minutes during SportsCenter that says “Follow Us On Twitter.” Twitter doesn’t pay ESPN for that marketing (and I’m not even sure it would be possible to pay for such prominent and consistent ad placement). ESPN is just trying to market their own product, their Twitter feed, but a by-product of that marketing is a huge boon to Twitter.

This dynamic is also found in Meetup, Tumblr, Covestor, Foursquare, and many other network-based businesses.  It’s certainly not the only reason why USV invests in networks, but it’s one of my favorite reasons, because it’s such a win-win.  When the customer succeeds, the business succeeds and vice versa… and both parties have a real incentive to make each other successful.

Interwebs: staggering page loads as opportunities

A very insightful suggestion by siguy - intelligently staggered page loading used to highlight important content and advertising.  The concept is real good, though it would require specialized coding to execute:

I had a mini-eureka moment today. I went to Google.com , something I almost never do, and noticed something simple and amazing. As the Google start page loaded I noticed that the screen was completely bare save for the Google logo, the search bar and the search and feel lucky buttons. Simple and elegant. A second or two later the rest of the page showed up: advanced search, footers, my Google tabs and account info on the top. In those page loading seconds I thought “Wow, this is really what this page is all about: search. Everything else is secondary to that.” Too obvious, right? Of course Google is about search.

But the experience got me thinking about how publishers can use the rate of page load to their advantage, say as another means of highlighting what is most important on page. What if you could purposefully stagger the loading of different sections of content on a site in a meaningful manner. For example publishers might highlight the text of an article and a single ad unit by structuring a page so they load 10 seconds before all the other secondary noise on the page. That way the user gets the content they want immediately and the publisher and advertiser get more ‘intimate’ time with the user.

There are some other web services that use the technique of loading up part of the page faster so that users don’t have to wait for the entire page to load up albeit for different purposes. The top part of Facebook’s live streams show up first on a page, older content loads as the user scrolls down; Daylife’s SmartGalleries load the first image and ‘frame for the photo gallery’ before the entire javascript gallery loads up (check it out here).

Still both of those examples are ways of coping with a slower page load. The eureka moment for me (that Michael Surtees of Design Notes fame helped tease out) was that the loading of a page can be used as a way of communicating something of value to the user, not just ‘avoiding pain’. Thinking of the page load as a friend instead of an annoyance and foe is powerful, especially as the speed of the web becomes more important.