Five Years Too Late

May 10, 2010

Spring Office Hours

Filed under: Uncategorized — fiveyearstoolate @ 6:53 am

Eric Wiesen

Folks – it’s that time of year again: spring office hours at RRE are this Thursday (May 13) from 10:00 to 12:00.

Update: Office Hours are full. We will have another one in a couple of months.

Stuart, Jim, Will and I will all be meeting with entrepreneurs, execs or anyone in the community that has something they’d like to talk about.

Looking forward to seeing you all on Thursday.

April 16, 2010

Xobni

Filed under: Uncategorized — Tags: — fiveyearstoolate @ 2:50 pm

I’m excited to announce RRE’s investment in Xobni. We recently led a round along with Khosla Ventures, and are thrilled to be joining the Xobni team as they continue to make email better and more useful.

This is a personally satisfying announcement for me. Those who know me well know that I’ve long admired Xobni and that Will (who joins the board in connection with our investment) and I have been looking for an opportunity to be involved with this company for almost two years. I had reached out to the Xobni folks back in 2008 shortly after I joined RRE. We look for big, unsolved problems at RRE, and I consider email to be one of them. Xobni was in between its Series A and Series B rounds at the time, but I immediately got why the company’s approach to people-centric email tools could be extremely valuable and could make users’ lives far better.

I think people see what’s on the horizon and forget the road they’re actually on. This is the only way I can rationalize the number of people I hear say “email is dead” or “social networks are the only things that matter”. I spend much of my day in email. My wife, whose professional life couldn’t be more different from mine (she’s in education) spends much of her day in email. My brother, a software developer, spends much of his day in email. My mom, a small business owner, spends much of her day in email. People spend more of their time in their email clients than any other single functional area. While there’s no question that social networking volume continues to rise (and yes, it now has more “global users” than email, whatever that means), email itself also continues to rise every year and the curve is steep.

Furthermore, email is the source of great user pain for most of us. We get too much of it. It’s hard to find things. You sent me an attachment two weeks ago but I don’t remember what it was called or to which of the 25 emails in a thread with the same “re:…” title contained it. I need your number but it’s not in your signature. I know you sent to me, but no idea when.

Xobni solves a hundred small problems and a few big ones. I use it every day throughout the day. I find it so useful that despite being a Mac native going back to the 80s, I live in a Windows environment at work. The recent Blackberry product, which goes through all my email and organically assembles a contact manager based on who actually emails me and the contents of their email (as opposed to who I remember to add and what data I include) almost has me willing to carry two phones. I am enthusiastically awaiting new Xobni products for the different mail environments in which I live besides Outlook.

Our belief is that Xobni has a half dozen viable ways to become a large profitable company. Some of the revenue-generating products are already in the market (Xobni Plus was an easy sell for me, and I bought it well before we were investors in this round; the Blackberry and Xobni One products are compelling, and the company is in the market with a well-received enterprise version), others are still on the roadmap. But ultimately our view is that when you alleviate massive user pain, your user base is primarily business users who live that pain every day, and you have a team as extraordinary as the one assembled at Xobni, the result is very significant value creation. I’m delighted to welcome Jeff and the Xobni team to the RRE family, and look forward to continuing to build a great company.

April 12, 2010

Are iPad Apps Overpriced?

Filed under: Uncategorized — fiveyearstoolate @ 6:53 am

In my initial iPad Reactions, I observed that the development community (and the media community) are clearly trying to reset customer expectations with regard to the price of native applications on the iPad. Whereas most apps on the iPhone are either free for very inexpensive ($0.99 and $1.99 are the two most common price points), iPad apps are frequently $4.99, $9.99 and even $14.99, a price point generally unseen on the iPhone. I’m hardly the only person to observe this, of course, but there seems to be widespread disagreement over whether iPad apps are overpriced or merely more expensive than those on the iPhone.

For my purposes, I step back and wonder why we expected these apps to be free (or nearly so) in the first place. Should something like Pages or Keynote be free on the iPad? Why? Consider the market for office software. On the one hand, you have Microsoft Office, longstanding champion on the desktop and the crown jewel of Microsoft’s cash machine. Today, on Amazon, the full version of Microsoft Office is over $300 ($400 if you want Microsoft Access). On the other hand, you have Google Apps – free for consumers and small businesses. $50 per user per year if you want the Premiere Edition. Pages, Numbers and Keynote on the iPad? $9.99 each.

In a way, we’re caught between conflicting paradigms for how both software and media should be priced. On the one hand, there was a period where there was a general expectation (both by consumers and by scholars and academics) that “all content should be free”, which inevitably bleeds into “all software should be free”. Books were published making this exact point and business models were built around this basic premise. And yet I wonder – exactly why do we think that all content, software and media should be free? Because radio was free (supported by ads) or because broadcast TV was free (supported by ads)? Cable isn’t free. Satellite TV isn’t free. HBO or Showtime aren’t free. Neither is Sirius/XM.

Remember that web browsers weren’t even always free. While the university-created Mosaic was free, back when Netscape was a standalone business, one of its revenue lines was charging $50 for the web browser. Their viewpoint was that this was important software and it stood to reason that a business that continued to improve an application as important as the web browser should get paid for it. What changed? Microsoft realized that they wanted to own the browsing experience, released Internet Explorer for free (subsidized, of course, by the massive profits from Windows and Office) and reset expectations that web browsers should be free, and with predictable consequences for Netscape.

As I consider the value of the iWork apps, or MLB’s app (which, for $15, gets me access to every game and allows me to actually watch every game with my mlb.tv subscription), or genuinely good games that cost $5, I struggle to generate empathy for those complaining that these apps are expensive. A latte from Starbucks is $4. A bottled beer at most bars in New York is at least $8. So why wouldn’t I be willing to pay $4.99 for Instapaper Pro, an app that’s useful, well-designed and enables me to take the web with me wherever I go? Why wouldn’t I be willing to pay a few dollars for references of various kinds, the likes of which would have only been found in $100 textbooks fifteen years ago?

I agree that the capital efficiency of software development has led to dramatic increases in the efficiency of its production, but I don’t think that leads to a rational conclusion that all software should be free or ad-supported. I’m actually glad, in the long-term, that the pricing expectation seems to be changing. In the short term yes, I’ll pay a bit more for apps, but in the long term this ensures that the quality of apps continues to be high and that developers have a reason to take the time to create really compelling things for this platform. At $0.99 an app, this motivation isn’t necessarily there, so as a user, the higher price point of iPad apps is good for me.

April 9, 2010

Quirky

Filed under: Uncategorized — fiveyearstoolate @ 8:15 am

Yesterday Quirky, Inc. announced its Series A funding, and I’m delighted to welcome Ben, Mitch and Team Quirky into the RRE family.

Quirky is a social products company, built on the idea that lots of people have great ideas but don’t happen to work inside of a consumer products company. We think that basic observation is correct – the majority of the world’s creative people, including those interested in creating great products, don’t work inside of the design department of the handful of large CPG companies.

But let’s step back and think about why this matters. Much of the last fifteen years of IT innovation has been geared toward using the internet’s capabilities to do things in better, faster and cheaper ways than were possible in the offline world. We communicate with each other, consume and produce media, share content, play games, do work, collaborate, etc… The internet dramatically changed all of these things. Quirky applies the transformative nature of the internet to the creation of consumer products.

I first met Ben Kaufman a couple of years ago when he first launched “Kluster”, a platform that enabled people to collaborate, but also had a system for measuring influence and attributing the final output to those who’d shared in its creation. I liked Ben and thought Kluster was cool, but it wasn’t clear to me what it was actually for. When he came to RRE talking about Quirky a couple of months ago, it was clear that this was the fit he’d been looking for – using a community to collaboratively design actual products. And there could be no more “native” investor for this company than Jim Robinson IV, who is as devoted a hobbyist as I’ve ever met, who builds things all the time, and who I knew would immediately start submitting his OWN ideas to the Quirky community (note: he already has one product in pre-production and I’m sure more are coming).

It made perfect sense to us. Almost everyone you know has that idea they think would just be HUGE if they could actually get it made. Only most people can’t get it made. They can’t do the industrial design, the marketing, the manufacturing or the distribution. And that’s why we think Quirky is so potentially powerful. There are people ranging from pure hobbyists to people using their professional skill on the side who can do ALL of these things. They just don’t all work in the same place. Quirky uses these distributed resources (plus Kluster’s collaboration engine) to crowdsource all the elements of product creation. Then the company uses its own expertise (Ben started and ran a significant company called Mophie that manufactured consumer products when he was 18) to gear up manufacturing and arrange for distribution. The profits are shared not just with the original inventor, but with every person who contributed in a variety of ways to the product’s ultimate outcome.

Quirky’s community will design 50-60 products a year. Some of them won’t ever actually be produced, others will sell a few thousands units, and others will wind up being major sellers. We are excited about the possibilities that emerge when you let regular people exert their influence over real products. We think some really interesting things are going to come out of Quirky’s process and we couldn’t be more excited to work with Ben, Mitch Lowe (who has joined as chairman), the Quirky team and the whole Quirky community to create the next great consumer products company. If you ever had an idea that you thought a lot of people would want, come on by and submit your idea. It’s only $99…

April 4, 2010

iPad Early Review and Reactions

Filed under: Uncategorized — fiveyearstoolate @ 9:27 am

I didn’t preorder an iPad, nor did I line at 6:00 AM at the Apple Store to get one, but as it turns out, Apple knew a lot of people were going to want them and the stores were well-stocked. At 4:00 yesterday afternoon I walked into the Upper West Side Apple Store and picked up a first-generation 16Gb Apple iPad.

When the device was first announced I (like many) had an initially underwhelmed reaction. “It’s a big iPod Touch”, I thought. “I already have a Macbook Pro, an iPhone and a Kindle – why do I need this?”

I woke up about two days later and realized that this was the wrong question. First of all, NEED is rarely the right frame for a new gadget anyway. But aside from that, what I realized is that the iPad would do most of the non-telephone things my iPhone did (web, video, games, ineracting with data via native apps) but better. And now that I have one, that’s my early observation. It is, in fact, basically a giant iPod Touch. And that’s pretty awesome.

A few initial observations and things that seem likely to be either big deals or medium deals to new iPad owners:

  1. Apps are more expensive. I think developers realized that getting trapped in a consumer expectation that apps cost $0.99 is avoidable. Most of the apps are $5. Many are $10 or even $15. And yet the nature of the iPad is such that I suspect people are going to pay, because one’s ability to interact with some of these apps might have felt trivial on a phone but not here. A good example is MLB At Bat, which is $15. As a big fan of a non-local team (SF Giants), this app is like Gamecast on Steroids, plus I can actually watch the games streamed. That’s a big deal to me and easily worth $15. Lots of other apps will engender similar anlyses.
  2. You will need a film and a case for this. It’s a magnet for smudged fingerprints and the form factor is (as originally criticized by early commentators) awkward enough that you might drop it at some point.
  3. Netflix for the iPad (and video in general) is a big deal. As someone who, ahem, rarely tries to open a macbook pro in a coach airline seat, the notion of video on the iPad is highly significant. Netflix on demand is compelling.
  4. I’m still not convinced this is serious tool for work. Apple is trying to push their office productivity apps, but even with a keyboard and a stand color me somewhat skeptical that this emerges as a real use case. As a side note, however, it’s really something to see word, spreadsheet and presentation apps being sold for $10 given what Microsoft continues to charge for desktop versions of Office.
  5. And a question mark – the iPhone-using world is crazy for location-based services right now. I’m fascinated to see how (and if) this translates to the early iPad user community. My instinct is that apps that are more about single-purpose actions (like checking in) will continue to exist more on the mobile devices, whereas apps that encourage more interaction with data or other users (games, conversations) will migrate rapidly to the iPad.

My early conclusion is that this is a really cool device. I’m going to love watching video on it, playing the occasional game, browsing the web and interacting with data in much the same way I do on my iPhone but better. And, having said that, I strongly suspect that a subsequent post 45 or 60 days in will go on to describe all the things I’m doing with this device that I hadn’t thought of the day after I bought it.

April 3, 2010

Customer Service is the New Location

Filed under: Uncategorized — fiveyearstoolate @ 1:26 pm

The old adage about building a retail business was that the three most important considerations were “location, location and location”. This made sense – while offline businesses like restaurants or retail stores rarely thought about “customer acquisition” in the same way that online businesses do today, the dynamics are analogous – you needed to build your operation in a way that enabled you to acquire customers profitably. Put another way, you needed to be able to attract customers without spending too much money and you needed to be able to charge them enough that they were worth that cost. Having a good location was demonstrably critical – you had to be where people either already were in large numbers, be somewhere that was already a destination for the right segment of people to whom your business appealed, or be convenient to complementary businesses for your target demographic. Thus, location location location.

Online businesses don’t have to worry about location (I’m going to sidestep the analogy between location and domain names, not because it’s illegitimate, but because it’s a separate point). Online businesses live on the web, where location is dimensionally irrelevant. So the question becomes, if offline businesses distinguish themselves fundamentally by location, how do online businesses accomplish the same distinctiveness?

Several of my friends have blogged on the topic of customer service over the past few weeks (see Josh Kopelman’s two posts on the subject, as well as Sarah Tavel and Eric Friedman’s related posts on ecommerce and customer service excellence). As I’ve observed my own use patterns over the past few years as a consumer, I’ve concluded that truly amazing customer service has replaced location as the single point of greatest leverage for online commerce (side question – can we retire the term “ecommerce” please?)

Zappos is a great example, and is always everyone’s first comment on this topic because they have done a superb job not only of creating a great customer service culture, but of promoting how superb their customer service culture is. I think the dynamic goes well beyond Zappos. In fact, while enumerating some of the early best practices that have come out of some of the pioneers in next-generation customer service is interesting and illustrative, for my money thinking about the underlying competitive dynamics is more interesting and ultimately more powerful in the long term.

As with most questions of business strategy, this analysis will ultimately hinge on competitive advantage (or lack thereof) amongst competitors within a segment. As always on this topic I refer back to Bruce Greenwald, from whom I learned most of my fundamental understanding of the sources of competitive advantage and the best ways to maintain and expand those. Location location location goes beyond the accurate but ultimately superficial explanations I gave in the first paragraph. Brick and mortar businesses that got location right built competitive advantage in their industries, particularly the larger, multi-location brands that at a core level became as much about having the right real estate as having the right product.

Consider the book business – prior to the internet, you’d talk about Barnes & Noble, WaldenBooks, Borders or B. Dalton. What were the distinguishing characteristics of these companies? You could cite little difference other than the footprint they held – who held the prime spots in the right malls? Alternately, who was building superstores elsewhere that upended the mall model? Either way, you were talking about strategies built on location, distribution and ultimately supply chains to feed the beast. Consider the book business now. Amazon owns it. And why wouldn’t they? They have every title at all times, give free shipping to just about every purchase, take things back easily and have good prices. Some of these elements are more obviously customer service than others, but I’d put all the non-price benefits under the same basic umbrella (particularly free shipping and easy returns).

Now consider Amazon as a builder of competitive advantage. Location is irrelevant, so the hundreds of millions or billions of dollars spent on retail distribution infrastructure and storefronts is sunk. Without location, how does a seller of a true commodity create competitive advantage? I believe the only answer is consumer habit, and the only real generator of that habit is superior customer service. That means considering the sources of habit and stickiness as core drivers. So what do you do if you’re Amazon? This is the genius of Amazon Prime. People love free shipping, so you get them to pay up front for free expedited shipping on everything they buy. Once you’ve spent the $79 on Amazon Prime, that free shipping benefit will draw you to Amazon whenever possible. It’s sort of the commerce equivalent of frequent flyer miles. I’d argue that this analogs of this dynamic can be found across all areas of online commerce where new entrants are using new sources of consumer retention to build lasting relationships with those consumers.

Ultimately, the demise of location as a differentiator amongst businesses seeking to sell to consumers destroys much of the competitive advantage present in these markets. I posit that in this newly-level playing field, customer loyalty can be obtained only by superior customer service. We’re going to see this thesis play out over the next few years, particularly as next-generation approaches to online commerce continue to gain scale (e.g. private flash sales, group buying platforms, subscription commerce, etc…). One possibility that I will allow for, both as an investor and as a consumer, is that the web actually is a true leveler – that there are no real sources of competitive advantage in commerce and that this will be a margin-destroying scrum that will lead to only the leanest of businesses surviving. If this is the case, operational excellence will become the determinant of winners and losers.

My thesis today, however, is that there is an opportunity for online merchants to build a sort of brand relationship with consumers, and that this opportunity hinges on stellar customer service. Those online stores and retailers who engender the trust of consumers should, under this thesis, obtain a measure of loyalty from those consumers. This thesis will be easy to test – if it’s true, the merchants who succeed will be able to charge higher prices than those who fail. If, on the other hand, Zappos and those like them, are exactly price-competitive with the field, then the correct conclusion will be that great customer service is actually a red herring. As a consumer, I certainly hope this isn’t true, and as an investor I hope the same thing, since I continue to look for online commerce businesses that have an opportunity to build something truly defensible over time.

March 29, 2010

Ten Predictions (before the world ends in 2012)

Filed under: Uncategorized — fiveyearstoolate @ 8:52 pm

Guest post from Jim Robinson IV on what you can expect over the next few year prior to the apocalypse predicted precisely by Roland Emerich’s movie. – EDW

James D. Robinson IV

As a species, we almost always over-estimate how fast things will change. But we always underestimate how much things will change. Thus….

My ten predictions before the world might end in Dec. 2012….

·10) Eric Schmidt will no longer be CEO of Google. As giant media foes attempt to absorb excess profits in part derived on the backs of their content, things will get sticky. Eric will grow weary of the countless battles, stock price pressure, and growing discord in the senior ranks. One key factor? Bing. Why? Well, it’s like Pepsi, or Burger King. As Americans we are comfortable with virtual oligopolies, but not monopolies. We require an alternative to Coke and McDonalds. Yahoo by itself has failed at being a viable alternative. On the other hand, if there is one company that can challenge Google’s hegemony with pockets every bit as deep, it is Microsoft. Forget whether you think Bing is ‘better’ or ‘worse’ – irrelevant. It is a viable alternative, and it will be used by major media to try and squeeze Google’s profits. Which leads me to my next prediction….

·9) Paid search and natural search will become…. Search. We have grown comfortable in the knowledge that those slippery marketers are relegated to the internment camps of the paid section of search pages. But users really don’t care – what they want are good results – paid or not. The state-of-the-art today for paid results has them look and feel just like the real thing. Which they often are. In the near future, result hierarchy will be, in part, based on pay – but pay for performance – not just ranking. The gotchas leading to pay-walls and other poor user experiences will sink in the listings no matter the dollars thrown at them, in favor of a single search stream where dollars will play a role (but not the only role) in influencing rank. And this will happen in real-time!

·8) Steve Jobs and Apple will go one of two ways, and neither is great (but one is decidedly better than the other). In scenario 1, Jobs is permanently sidelined due to illness. To my memory, there has never existed a major corporation more personality-dependent than Apple (at least in modern times – I put him up there with Howard Hughes). Thus, within a very short period of time the brilliant, legendary, maniacal focus he possesses will be lost, and decisions that appear to be ‘better’ for the organization and its products will be made. These half-steps will be compromises designed to keep up with the world while preserving Steve’s ‘legacy’. This will not go well.

Scenario two – and in my mind also problematic for Apple — Steve Jobs sticks around but doesn’t ‘think different’. In this case, we run the risk of a 2.0 version of the capitulation that was Apple 1.0 failing to discern the tea leaves and license its software to other platforms. We are beginning to see this play out now. In fact, Android exists because Apple was unwilling to work out a deal with Google. Jobs’ personal demons may not be suited to an alternative path. Android has already begun to eat the world. History may not repeat, but it usually rhymes. Hence, my next prediction…

·7) Android will have 3x the number of applications in its app store than the iPhone / iPad / iTouch triumvirate does. Not too long ago, there existed a thriving packaged-software industry, and a trip to Computerland circa 1984 would have revealed shelf after shelf of Apple-ready software, along with a smaller section of IBM & compatible boxes amidst strange Charlie Chaplin posters. How long did it take the era’s ISV’s to swap over to Wintel? Not long. I know not a single example of a company with an iPhone app today that hasn’t either a) already ported, b) is about to port, or c) is planning on porting their application to Android. With Apple, the hardware is better. The vision is better. The usability is better. And it is a closed (curated is the current term of art, though iTunes is far more than just curated) system in a world that prefers open.

·6) Major media companies will erect pay-walls & windows where they can, attempting to suppress the notion that everything wants to be free on the internet. Actually, we are multi-generation-conditioned to pay for stuff (one way or another) on every medium ever invented. Will the efforts to erect a pay-wall at the NY Times go over well? No. Will it eventually work? Probably. Will the WSJ – under Murdoch – attempt to de-index Google? Probably. Will they be alone? Certainly not in threatening to do so.

A decade ago the world faced a fork in the road…. In one direction was a universe with pay-for-crawl deals where search engines shared their excess profits with the content vendors. Down the other road? Well, that’s where we are now. Those same media giants were too scared, disorganized and ill-prepared for the tectonic shift the free-wheeling internet posed. Thus, they were only too happy to have their wares crawled and displayed somewhere. Free distribution! In fact, that’s how they described it. Suffice it to say, their opinions have changed. In the end, those with (good) content tend to get paid. It certainly will not happen overnight, but by the end of 2012? I would say that fork will have merged.

·5) Google’s hegemony has a half-life about half that of Microsoft. Meaning, it will reach the populist doesn’t get it / is a death star stage in half the time. Some would say it’s already there. These would be the bleeding-edge types. Incumbents always have trouble transitioning to a new era. Despite a smorgasbord of books written on the subject, the issue is rarely the way they react to such situations. It’s in how they perceive them. Which is to say… they don’t. When you’re at the top of the mountain, it’s nearly impossible to overcome the feeling that you can see all.  Until you actually feel it in the pocketbook. Then you panic and seldom make the right choices.

Does this mean Google won’t be meaningful? Does anyone truly believe Microsoft isn’t still meaningful? Of course it is. Both are and will continue to be giants. But as outsized profits are re-distributed back into the ecosystem to the creators and owners of content, quarterly results will go from reduced ‘up-trajectory’ velocity, to flat-ish, and maybe even down-and-to-the-right in some areas. Stocks will dip. In Google’s case, people will speculate about what they will do with with all that cash. My guess… they will buy a big media company :-)

And for a change of pace, I predict…

·4) Lloyd Blankfein will not be CEO at Goldman Sachs. His crime? Being too Googleable. Zero-sum-game hedge funds (like GS) do not do well in the spotlight; they are at their best working within the shadows, extracting profits from inefficient environments (or selling stuff nobody understands – you decide). At any rate, Goldman CEOs have always been notable for their distinct lack of notability outside of Wall Street. Blankfein no longer qualifies, and will ‘retire’ as soon as it’s clear he wasn’t forced to by outsiders.

·3) An accidental release of nano-particles will occur in a major body of water, killing an untold number of fish and other creatures as the tiny objects pass through the blood-brain barrier. This will lead to renewed cries for stricter regulation and temporarily slow down advancement in the technology. In an odd twist, this same core technology will one day dramatically improve the health of our world’s seas by delivering anti-pathogens to vast ocean-dwelling populations. But that will come later, after we kill a bunch of fish.

·2) People will begin to discover relatives they did not know they had – via the intersection of DNA sequencing and the internet. This will bring to the masses what is only experienced at the leading periphery today; that one can meet and then dislike relatives not just based on physical proximity (which for all of history is how it has been done), but via the internet.

·1) Tiger will again win the Masters…. In 2012. Then the world will go boom. Or not. If it does, it will have nothing to do with the Mayans. Solar Cycle 24, however? Maybe.

March 15, 2010

Everyone Deserves a Trophy?

Filed under: Uncategorized — fiveyearstoolate @ 5:13 pm

Stuart Ellman

Jim Robinson IV

As if often the case at RRE, Jim and I tend to be of one mind (some say we share a single brain – which may explain a lot).  I have been thinking quite a bit recently about a phenomena around expectations I am increasingly noticing with some entrepreneurs, while Jim – as usual coming to the same conclusion from a completely different direction than myself – has been kvetching about a trend of political correctness that seems to be creeping into our industry.  We think both the causalities and the symptoms are important, so we decided to address them in a combined fashion for this piece.  Let the chips fall where they may….

EVERYONE DESERVES A TROPHY?

When I grew up, it was hard to get a trophy.   To get one in sports, you had to play in a competition with a large number of teams and come in at least second, if not first.  Even more vividly, I remember the ice cream.  To get an ice cream after the little league baseball games, you had to win the game.  Not tie, not come in close, but win.  I remember clear as day my little league team losing the first 5 games and not getting an ice cream at Friendly’s or Carvel for the whole first month.  But when we did get it, it tasted sweet.  Sometime after my generation, everybody became a winner just for trying.  Everybody got an ice cream.  Everybody who participated got a trophy.  It wasn’t about winning or losing but about trying hard.

It sometimes feels like this attitude has crept into the psyche of some entrepreneurs.  I respect nothing more than someone who quits a safe job and takes a huge risk to start something new.  I did and I know how scary it can be.  But startups are a brutal business, where few make money and many lose.  The following are situations where I find myself having to tread carefully when I know what the right answer is.

1) Don’t tell me my idea won’t work

The right answer: Look, I do not know for certain as I have been wrong before, but I am highly confident your idea will not work or ever get funded.  The key to being a venture capitalist is pattern recognition.  I have seen what you are trying to do many times in many industries, and it has never worked.  There is a small chance that I am wrong, but a much larger chance that you are about to waste years of your life.

What I feel I am supposed to say: It’s an interesting idea but we cannot fund it at the current time.

Why?  Because it would be hurtful to say that I don’t believe the idea won’t work.  But maybe being truthful would save this entrepreneur years of his career or his life savings.  If I tell the truth though, then I am arrogant or dismissive.  I gain a reputation as being a jerk and won’t see the more interesting deals.  So, what is the upside for me to tell the truth?

2) Don’t tell me I am not an entrepreneur

The right answer: Look, if you are telling me that you don’t want to take any risk in your job and need at least the same amount of cash as when you worked for IBM, you are not an entrepreneur.  Startup guys (and gals) take a lower cash salary for the higher upside they get in stock.  They love working without a bureaucracy, contributing concrete results, are okay making do with less and having no staff.

What I feel I am supposed to say: You have a great background; sorry we have no openings right now at our portfolio companies.

Why?  Because it would be hurtful to tell the truth.  But, by not telling the truth, certain people will continue to seek jobs where they will not excel and will likely get fired.  But if I tell people that, again, I will be called an arrogant jerk.  So what is the upside for me to tell the truth?

3) Give me a follow-on as convertible debt

The right answer: Look, you have missed your budget or tried a different business model.  You are not worth as much as the last time I invested but I still want to back you because I believe in you.  Go out to the market and get a term sheet from an outsider.  That will be the right price for the company at this time.  I will do my part once new money has set a price.  But don’t push me to give you convertible debt at a price that both you and I know is too high.

What I am supposed to say: Go to market and get a term sheet.  I don’t know whether you are worth more than the last round or less, but we need to let the market decide it.  If you can’t then I will likely support you anyway.

Why? Nobody wants to admit their pride and joy is not performing while the team tried really hard.  But, get ready to be known as a monster if you try to explain to the CEO what the company is really worth right now.

4) Don’t disagree with me on selling the company

The right answer: When you (the CEO) raised money from me at $25 million post, you showed me how you were going to sell it for $200mm or more.  Now, you have an offer for $30mm to sell the company and you are upset when I am unenthusiastic.  Why? Because you personally own 20% of the company and will make $6mm.  I get back $6mm on my $5mm investment, for a profit of $1mm after x number of years, leading to a poor return, on a company I believe has a huge upside.  It is not a good deal for me as an investor, and you promised you wouldn’t sell it at a cheap price like this.  Now that you can put away $6mm personally, however, you don’t care what you told me.  If I try to block the deal using the terms we both agreed on when I invested, I am an ogre, a financial engineer who doesn’t understand entrepreneurs.  But I am the one holding true to my word, you aren’t.

What I am supposed to say: I really think there is a huge upside to this business and believe we may be selling it prematurely.

Why?  Who wants to be called an ogre.

5) Pay me a bonus whether I hit my plan or not

The right answer: It is a pay-for-performance job and if the company doesn’t perform, then investors and our limited partners make no money.  You have a guaranteed performance bonus and you missed it.  It doesn’t matter if you tried really hard.  You didn’t win, you lost.

What I am supposed to say:  Yes, you tried very hard and we will come up with a bonus that reflects your efforts.

Why?  Perhaps in part because I need to keep the employees that are critical to the business, but increasingly often it has more to do with an expectation that trying hard = winning.

This is a black and white business.  You either make money or you don’t.  Somewhere along the line, being politically correct has entered the fray.  And when that happens, people stop communicating honestly.  Bad things tend to follow.

March 13, 2010

VCs are like Product Managers. Or … Actors?

Filed under: Uncategorized — fiveyearstoolate @ 8:23 pm

Eric Wiesen

There is a conversation going on right now on Twitter between people whose views I respect: Chris Dixon, Eric Paley, Rob Go and Michael Karnjanaprakorn (and yes, I had to look). An analogy has been made, disputed and discussed about how VCs are like product managers, rather than product designers. That is to say, serial makers of bets, easy to do, hard to do well, and generally commodity.

I think some of the confusion in this discussion is that the analogy is directionally fine but ultimately tangential. The analogy I prefer is that being a VC is actually more like being an actor than it is like a lot of other things. Anyone can act, but very few can do it well. And generally speaking you know that Meryl Streep is a great actress and Jessica Alba isn’t, but you can’t necessarily say why or what they do differently in a measurable way. Similarly it’s hard to extract what exactly the good VCs do differently than the mediocre ones (although many have tried and will bend your ear with their theories). VCs get returns, which ultimately determine the good ones from the bad ones, but that’s retrospective scoring with plenty of variability (read: luck). Acting is the same – plenty of cruddy actors get paid a lot of money to do it (Paul Walker still gets paid to do movies).

Ultimately what this is about is technical skill versus non-technical skill. Acting is a non-technical skill (although that’s not to say there isn’t technique, talent or work involved). Because it’s simply doing things that everyone naturally does anyway, anyone can be a bad actor. VC is the same. When you truly boil down the job, it is essentially two things – choosing investments and serving as a Board Director. And both of those are non-technical skills. Anyone could point to companies and say (like the guy in Little Britain), “I want that one”. And anyone can show up to board meetings and render opinions. Because VC is fundamentally a job of judgment. And just like with acting, despite being non-technical, some people are really good at it and most people are not.

Compare this to truly technical professions. Acting is non-technical, but music is highly technical. If you don’t know how to play the trumpet you will not be able to play it badly, you will most likely to unable to produce a sound at all. Software development is technical. There are good software developers and there are bad ones, but lay people cannot write bad code – they wouldn’t know how to begin.

I would argue that both product design and product management are technical skills, and thus easily distinguishable from VC and less distinguishable from each other. Both are rigorous and both require specific knowledge to execute at all, to say nothing of well. And I’d argue that neither are commodity, although I’d agree that one is scarcer than the other.

Seemed easier to blog this than to break it up into 140-character chunks.

March 11, 2010

NYC Startup Career Fair

Filed under: Uncategorized — fiveyearstoolate @ 4:45 pm

Eric Wiesen

Back when I was at Columbia, my friend Mark Davis decided that part of getting involved in the venture/startup ecosystem here in New York meant actively building a community that could support and foster entrepreneurs and their companies. Looking just around Columbia there was a terrific collection of talent without a lot of infrastructure in place to support their efforts.

Being the terrific builder of organizations that he is, Mark decided to start the Columbia Venture Community. I was a minor helper of sorts, but Mark has been the driving force behind this initiative since Day 1. Now, a couple years later, this community has teamed with the similar community at NYU to put together the NYC Startup Job Fair.

Many of us have bemoaned in recent years the observable phenomenon of smart college grads going to Wall Street or big consulting firms instead of joining startups. This job fair is a step in the right direction toward giving upcoming and recent graduates exposure to NYC startups and the potential jobs they might do inside of these companies. I have long believed that most students just do whatever they are tracked to do by their school’s career services apparatus. This is why most law students become lawyers, most MBA students wind up at banks or consulting firms. By creating a “track” for startup employment, groups like CVC and NYUVC are building important foundational pieces to encourage the best and the brightest to join our ecosystem.

If you’re a startup, participate in the fair. If you’re coming out of school or recently graduated and have thought about startups, this is a good way to see a bunch in one place. Nice work, guys.

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