Archive for the ‘Strategy’ Category

I’m done with Uber – The moral cost is too high

November 29, 2014

I was one one of Uber’s best fans – I must have recruited a dozen friends and colleagues to the service, because it fundamentally is just so much better than taxis or car services. Wonderfully inspired idea, and at the street level, brilliantly executed. I loved it.

And I use the past tense because I did love it. But not anymore. The trickle of moral lapses by Uber’s CEO, Travis Kalanick, have become a roaring torrent. Uber has an ethics problem, but most importantly it has an ethical leadership problem.

Peter Thiel summed it up succinctly: “Uber is the most ethically challenged company in Silicon Valley.”

Which is why the details of the plan to smear journalists who create unflattering views of the service pushed me to the point of being all done with the service.  So, on November 25 I sent my request to Uber to cancel my account, as “the moral cost to me of doing business with your firm is more than I can afford, and I have happily created my first accounts at Lyft and Curb.”

And in efficient Uber fashion, I received this confirmation of my account cancellation, which is sad. The service and drivers are great. But that’s not enough today. You have to believe in and trust the people at the top. And I can do neither with Uber the way it is being run right now. Travis – until you show some leadership and I won’t be back.Uber Cancellation

My User Manual

October 12, 2013

A little over a year ago I started a new job, and a big component of my role was to help the company bring a lot of scale to their marketing, and bring a higher tempo and user focus to the company’s product development. This meant taking three groups of already high performing teams, and leading them into territories unfamiliar to them, while also helping them develop skills and capabilities new to many.

This is the kind of job that comes around in your career rarely. Tremendous, tremendous fun, and the best part is it’s only just beginning. We’re growing like crazy, and are about to enter that phase of the market where we have the right offering at the right time, and are about to see some pretty breathtaking expansion.

transparency

And I found myself explaining how I work, how I manage, and many of my core values as a manager, but also as a person. A lot.

So much of creating the opportunity for the rapid experimentation, fast failure, “iterate to excellence” team performance is based on how you work as a team, not what you work on as a team.

I mentioned this to my wife in a text message while on a train headed to work, and she pointed me to an interview with a CEO about his “user manual” – a one page document that lays out how anyone in the company can easily understand how to work with him. I LOVED it. A combination of approaches, philosophy, and personal values.

By the time I got off the train I had a complete draft of my User Manual. Check it out, I’m on v2.1

By the time I’d plugged in at the office I published it to  everyone on my teams via Chatter, as well as my counterparts on the exec team and a bunch of others I work with frequently.

Folks on my team appreciated the transparency, and it’s made it so much easier to engage with other teams and get to a place of trust and performance that much more quickly.

But the best part was for me. Any time you have to be intentional about something, and write it down, you learn something about yourself.

The Unfamiliar State of Funding a Startup

March 8, 2012

I work with a lot of startup companies, and am currently involved with three that share the same characteristics: pre-product, pre-revenue, and at the very beginning of fundraising. And I’m having the same conversation with all three. It goes like this:

  1. The cost of getting a company to scale and even to profitability has dropped dramatically in the past ten years.
  2. The nature of venture capital has shifted from an early stage focus to late stage or even growth equity investing.
  3. Angels and experienced high net worth folks have stepped in to fill the role VCs served for early stage investing.
  4. A viable fundraising strategy can default to a path that doesn’t assume VCs participate at all, or perhaps only towards the end.

Let me expand on each of these points.

COST OF GETTING TO SCALE – THE RISE OF THE MACHINES

There are a lot of factors at work here, to the benefit of entrepreneurs. The rise in cloud computing means that fixed infrastructure expense has largely been eliminated from the business plan, and this will only get better (Amazon just announced it’s 19th price decrease in six years). Virtual teams + Google Docs drive OPEX down even further unburdening you from lease costs.

The shift to “inbound marketing” – social media, blogs, SEO, viral – can drive large volumes of traffic at significantly lower costs (60% less or more) than traditional “outbound methods – and at higher conversion and retention rates. It takes a lot less of your marketing budget to reach and acquire users. With the shift to freemium and subscription business models you can also let your most active users decide for themselves to pay for your services through in-app messaging and offers – significantly reducing the cost of sales.

I call this the “Rise of the Machines” because metrics and machine-driven resources/methods do much of the heavy lifting at a fraction of the cost of human-intensive alternatives. Josh Kopleman surveyed his portfolio and found “…that companies today are 3 times more likely to get to $250K in revenue during an eighteen month period than they were six years ago. ”

VENTURE CAPITAL IS DEAD – LONG LIVE VENTURE CAPITAL

The money that VCs invest comes from “institutional investors” – pension funds, endowments, insurance companies – and these institutions allocate their investments across a wide range of “asset classes” to manage and diversify risk. They tend to make these allocations based on ten year return performance averages, and beginning in 2009 (as my partners and I found out with unfortunate timing) the ten year return for the VC asset class went negative.

That’s for tough the VC industry overall, but if you look at the top 20-25 firms, the ten year return is quite good. So what institutions did was stop putting money in general into the VC asset class, and only put money into the big, established firms. This caused fund sizes to swell (Accel’s most recent fund was $1.35B+ comprised of $475M “early stage” + $875M “growth equity” funds), which incents those firms to put larger and larger investments to work in each deal (to justify their partners’ time).

So at a macro level, investment into VC funds dried up for all but the top firms (reducing the total number of VC funds) and poured into the top firms, shifting their focus to larger investments in later stage firms.

ANGELS BECOME ANGELS ALMOST LITERALLY

At the same time early stage VCs moved out of the market, a wave of experienced tech executives who had made fortunes building internet companies became very active investors. They brought more than deep pockets, they brought valuable insight and experience and even better – intensive, engaged roles with the companies they funded.

And along the way, incubators emerged as mini-factories where angels could become involved with lots of companies and let the law of large numbers help them there. Overall, angels are investing 40% more than they were even a year ago – now over $700K per round, and there are concerns there’s a bubble happening with incubators. But the headlines are, angels have stepped into early stage investing at a scale and role traditionally reserved for VCs.

STARTUP FUNDRAISING HAS NEVER BEEN BETTER, AND WORSE

What this means for startups is you can get your business to scale with ten times less money that you needed 10-15 years ago. $3M – $5M. If you plan well and are well connected you can do this with individual investors who add a ton of value and will roll up their sleeves to help out. The real benefit is you can also find individuals who share the same expectations you have for the outcome of the business. A 5X return on $3M may be the right outcome for the business and for investors who define success as a financial return coupled with a durable business that solves a problem they care about.

It also means you can liberate yourself from having to map your business and outcome to the trajectory that many of the larger VC firms need their investments to align with – they need billion dollar exits to generate the billion dollar returns they committed to their institutional investors.

Don’t get me wrong here. VCs are an important and valuable catalyst to the technology sector and the economy – and many are out there doing what they’ve always done to identify the next great disruptive business. And for your business, a VC can be the exact right fit either at the beginning or once you’ve gotten to scale.

It’s just that now VCs are playing a different role than they have in the past, and for startups this means it’s a brand new, unfamiliar, day out there.

Back online

February 29, 2012

Well, that was a long hiatus. But for a lot of good reasons I needed the time away from this and feel ready and enthusiastic about resuming the exploration of technology and startups and how failure critically enables their success.

Next post to follow, and will be on the theme of how user acquisition costs and leverage have dramatically reduced the financing required to get a company to break-even (and to a seven figure user base), and how that’s reshaping not just early stage businesses, but mature enterprises.

Stay tuned, and thanks for your patience these past months.

Pete

Preparation for a long offsite

July 23, 2009

I’ll be hiking the John Muir Trail in the Sierra Nevada mountains in California next month, which is something I’ve wanted to do my entire adult life.  The Sierras and backpacking really took root with me in high school, where a core group my friends went every summer, and continued through college and a few years beyond before losing the thread to careers and starting families.

Three years ago we restarted these annual trips, and about then I realized how much I enjoy being up in the mountains, away from all forms of electronic communication, as a way to get some perspective and some balance.

So this year I leave on August 4, and my friends and I will start down the John Muir Trail, five days later they’ll leave the trail at Red’s Meadow, and I’ll resupply there and continue on, on my own.  I’ll finish near Mt. Whitney, two weeks and 170 miles later.

And I’ve been doing a lot of reading to prepare for the trip.  Mostly trail guides, even a book on the geology of the Sierras (ensuring I will be the most boring person at the next cocktail party I go to).  But one that’s proven particularly helpful is a book called High Sierra by Phil Arnot, and it’s been great at providing detail on side trips I can make along the way.

300+ pages of detailed route descriptions, elevation changes, permit locations…in short a bunch of data and information about as “touchy feely” as the phone book.  It even has a section on “Hiking Solo” with a set of very pragmatic preparation guidelines regarding safety.   But then it went in a direction I didn’t expect, with the following passage:

“So, in a way the wilderness experience may be catalytic in bringing us to face, really face, the most important questions we can ever ask ourselves:  Am I really living the life I want to live?  Am I fulfilled in my work?  Are my relationships based on sharing and intimacy or are they primarily obligatory?  What do I really want to do with my life?”

Well, for those of us who love backpacking and being in the mountains, that set of questions told me the author truly knows his subject.  For me, these are the questions my mind gets drawn to when my “job” for the day is to traverse six or eight miles (or more) of trail at 10,000 feet, and what separates you from the beginning and end of the hike is a lot of time to walk and think.

Take the “fulfilled in my work” question.  That one’s easy.  I love my job as a venture capitalist.  I love that it requires that you think hard about strategy and equally hard about operations and execution.  You’re on a constant learning curve looking at new businesses and needing to quickly get to their essence to make a funding decision.  And when you find a business you want to fund, you get to go deep with it, for years, to help it (hopefully) succeed and grow.

But that’s the “work” part of this, and what makes my job truly fulfilling is who I work with.  Through equal parts self-selection and deliberate effort, my partners and I have created the kind of transparent, friction-free, trust-based working relationship that up until this point I had only read about.

The fact that we had all worked together before getting into this business helped, but over the past five years we’ve had to make our way through uncomfortable, difficult conversations that required egos to be set aside, and personalities to be parsed from the logic and data.  Everybody talks about this, it’s the first time I’ve experienced it first-hand.

That’s great, but actually making money in this business is getting incredibly hard.  The whole industry is in a state of transition and transformation.  Fred Wilson has done a good job explaining this, but in short, it’s taking longer to get companies sold, the IPO market is dead, and the median valuations at sale have been declining for years.  In order to generate the returns institutional investors need, you’ve got to as a firm perform well above median.

It’s daunting.  We’re doing well as VCs, but looking at the whole industry it gives you pause.  This business will be getting smaller before it gets larger, and as I’ve written in an earlier post, the old stuff gets broken faster than the new stuff is put in its place in industries who are in a state of transition.  And this is an industry in transition.

But that’s where the exciting part of this job is.  Transitions create no shortage of opportunity, and challenge.  I’m grateful I have the chance to put some more thought into this, during my long offsite.

Between now and when I “go off the grid” on the 4th, I’ll be posting on some related topics.

A Blockbuster closing

July 9, 2009

The Blockbuster closed in our town last week, in the “out of business” sense.  I heard a lot of folks attribute this to the popularity of Netflix.

About a year ago our post office (looks like the one in Mayberry RFD) put a sign above their “Out of town” mail slot, saying “Please put Netflix envelopes in the “Packages” drop box.”  Apparently Netflix has gotten so popular that the post office has had to make an adaptation just to handle the volume, and the reflection of the shift in consumer behavior couldn’t have been written more plainly.

But the more I think about it, Netflix didn’t single-handedly kill our Blockbuster.

About six months ago our (only) supermarket got one of those “Redbox” DVD rental kiosks, and slowly it’s taken over the activity at the front of the store.

People are lined up at it all the time, and when I thought it was just a stand-alone machine, I didn’t consider it all that novel until I realized that you can reserve movies, at an individual machine, over the internet. That’s when I thought “this is really cool.”  No wonder folks are jammed there, they’re going to the store anyway, and they can get their movie too, and reserve what they want.  Wow.

So, I did a quick Google search on “Redbox Netflix” and this was the third citation, the headline says it all: Blockbuster CEO: Redbox, Netflix “Not On Radar Screen” as Competition.  The article was from December.  And this is a publicly traded company.  How in the world does someone say this?  What detachment from the customer (and reality) does that broadcast?  It certainly provides a more grounded understanding of why our local Blockbuster went down the drain.

But while Netflix may have pushed Blockbuster to the brink, Redbox may have sent them over the edge.  Not because Redbox was targeting Blockbuster: they were collateral damage.  It’s Netflix who’s in the cross-hairs of Redbox.  And the best part?  Netflix paved the way for Redbox to hollow them out.

How?  Netflix fundamentally changed consumer behavior.  Until they arrived you were at the mercy of your local video store: you had to actually make a separate trip there, choose from their inventory,  and had to remember what you came in there for.

Netflix created a whole new behavioral model of how you rent and experience movies and tv shows.  Infinite inventory to choose from, your own queue on a website, and they mail your movie to you.  How simple, how convenient.  And as I wrote earlier, a change in behavior like this takes time – like a decade.

Convenience is nice, but where Netflix really grabbed hold of people was by also embracing people’s existing behavior: they don’t return movies on time.  Eliminating late fees was the rallying cry that created incredible word of mouth.  And started that hollowing effect for Blockbuster.

So how does this apply to Redbox?  Well, they just applied Netflix’s playbook:  focus on consumer behavior and where the economic leverage is.  They recognized most people rent the current releases, and thanks to Netflix, they also expect to be able to use the web to choose as well as know they’ll get what they want.  Critically, they also realized that having the movie mailed to you meant for many consumers just not having to make a separate trip to get  it.

So Redbox embraced this existing behavior in a clever way.  They just  rent the top movies from a vending machine located in a supermarket.  You can reserve your movie over the web.  So you get what you want, with no special trip.

And the fact it’s a kiosk also means expectations are automatically set that the selection is limited.  This reflects a nuanced understanding of consumer psyches, while dramatically reducing the complexity of inventory management.

And while convenience is nice, where Redbox really gets its leverage is with the economics, just like Netflix did with Blockbuster.  $1 per movie.  Sure there are late fees, but at this price it makes Netflix seem expensive and really tough for digitally delivered movies to pencil out from a margin perspective.  Ouch.

So, against this backdrop, it’s hard to fathom the statement from the Blockbuster CEO.  He’s right, Netflix and Redbox really weren’t on his radar screen.  He wasn’t even in the same business, wasn’t even in the fight.

And if I were Netflix, I’d be working my bankers, hard, to figure out how to acquire Redbox.

The vulnerability of a big idea

June 15, 2009

As Twitter approaches mainstream relevance, it’s also entering a period of strategic and operational vulnerability that startup companies with big ideas run into. 

By going mainstream it’s exposing the structural opportunity its founders saw years ago, but back then, only the founders and the investors were in on the secret.  There had to be a slide in the Series A deck that said  “Here’s the opportunity” and it wasn’t about building a small, derivative business.  It was about building a disruptive, billion dollar kind of company.

In Twitter’s case it’s the opportunity to redefine how people communicate, and shaping how the economics flow in and around this new communication.  It involves getting to scale, developing a third party “ecosystem” of other companies integrating with and depending on Twitter for their own success, and then monetizing all this in a compelling, huge way.  This is really hard, and the folks at Twitter are still struggling a bit with the exact business model that will do all this.

Eighteen months ago, only people in the echo chamber were exposed to the nature of the opportunity.  But today, with Twitter’s explosive growth and visibility, everyone can begin to comprehend the potential.  When Ashton Kutcher gets petulant about his million followers, when Dell trumpets that they’ve sold $3 million of products to their Twitter followers, the incumbent titans in the internet and advertising sectors, well they notice too, and they notice “threat” ahead of “opportunity.”

You saw this first with the Facebook redesign that provided a real-time status update feed a la Twitter.  A classic “fast follower” approach to someone else’s innovation. Facebook already owns a lot of people’s mindshare and time online, so the fact that they’re tracking Twitter tells you how significant the threat appears to them.  By the way, Facebook is also struggling with business model and opportunity vulnerability too, they just are further along the scale path.

How does Twitter keep eyeballs and session times growing if Facebook is just going to “fast follow” them, treating them like outsourced R&D?  This will be really hard, but let’s assume Twitter wins this round of the battle, gets to scale with a loyal and large audience for their new medium of tweets.  Do they jump out of the frying pan and into the fire?

What’s differentiated about tweets is that they flow in real-time, and finding out what’s interesting and relevant instantly has got to be worth something, and it’s so different from the problem Google solves.  Google crawls the web at a frequency measured at best in minutes, more frequently hours or days, so you could envision Twitter creating a new category Google can’t participate in. 

But what if “instant” isn’t in the end all that important.  The NY Times dug into this a bit, looking into  why Google isn’t Twitter.  And they observed that real-time search is hard and neither Twitter nor Google are currently architected to do this efficiently, or well. 

What became clear is that if you need anything other than instant, real-time search, Google can give you “close enough” search, and get closer and closer over time due to their scale.  We can all figure out who will reap the revenue rewards if all Twitter’s creates is another type of page Google can place ads on.

This kind of battle doesn’t result from incremental thinking, from safe bets.  Twitter’s vulnerabilities are proof of the significance of the idea, and what Twitter’s investors funded.  But it doesn’t mean it will have a happy ending. 

And there’s food for thought here for anyone running a startup.  Expect that you will become vulnerable to the incumbents just when you’re hitting your stride, just when people acknowledge your value and relevance.  The presence of that vulnerability is your ticket to the next round of the fight, validation that you’re headed in a worthy direction.

I dearly hope Twitter pulls this off.  I love to see the status quo up-ended, I love the mental image of apples spilling all through the marketplace as someone with a bold and compelling idea runs through, knocking the carts over along the way.

In defense of the echo chamber

May 28, 2009

I had two interesting conversations this week with super smart technology execs, and found myself uttering the same phrase to them, in different yet related contexts. The phrase was “…and it made me feel a million years old”. The context in both conversations was remarking on how long it takes for real, pervasive technology innovations to take root and how you reconcile that with early stage investing.

And I can’t really explain it to myself. I spent a 15 year phase of my career at companies transforming the entertainment and communications sectors, totally in the thick of the “next big thing”, and felt so urgently and palpably that we were shaping and enabling the next “normal”.

At one of those companies, C-Cube, we were making the foundational video technology that enabled the whole transformation to digital cable, satellite and DVDs. I spent countless hours with executives in these industries while we figured out how this would all work, and around 1994 I heard them tell us all that “500 channel cable” would be here, the coming year, maybe the year after that. Right around the corner.

Except it wasn’t. It only took about another 15 years.

But it never would have happened if we all hadn’t been working away, really hard and for a long time, acting, believing that “right around the corner” was really true.

I felt like I was a little smarter when I was at RealNetworks in 1999, and I heard many of these same executives talk about how by using the internet over cable (or telephone lines) they could deliver movies and 500 channels of TV the next year. Maybe the year after that.

And I remember leaving some of these meetings and telling my colleagues I’d heard this before, and it wasn’t going to work out that way, that they were “breathing their own exhaust fumes”. But I still worked really hard, and for a long time, trying to make that “right around the corner” become true too.

So here we are, in 2009, and I can order a movie from Amazon over the internet and have it delivered to my Tivo. Just ten years later, or 15 depending on whose vision of the future is the reference point.

And it struck me in the conversations I was having with the execs, that perhaps it’s not so much feeling a million years old, it’s realizing that early stage investing and startup companies places you in this strange place, where you straddle two worlds. The world “inside” the vision, where the idea is bold and the future seems right in front of you, and the world “outside” where you can look at these companies and understand it will take a decade, maybe more, for that reality to be commonplace and accepted.

There’s a semi-derogatory name for this inside world, and it’s “the echo chamber”. Most of the time it’s focused at Silicon Valley, but I actually think it’s not geographically constrained. The boundaries are more around the locus of a really big idea and a group of people who can pull it off. They get a bunch of other people to believe them, to buy into the vision – customers, partners, press, analysts – and now there’s a cohort that reinforces the belief system.

You can see this playing out, right now, with all the convulsing about Twitter. It’s been ascribed to being useful just to folks in the valley, just the people whose whole focus in life is in the development and consumption of technology most of “the rest of us” will never need or see the use in.

Kara Swisher of the Wall Street Journal wrote about Twitter in this context a year ago. And I read her column at the time and my reaction was “I’m glad she called this one out, it’s ridiculous how much hyperventilating goes on in the valley about stuff like this – it really is an echo chamber”.

But there’s nothing wrong with this, in fact it’s exactly how we ended up with Tivos at home and can’t imagine life without them, how we watch Susan Boyle shatter our expectations and assumptions about image and substance, and how a billion apps can be downloaded onto iPhones in nine months. And how we will all be tweeting and wonder how we ever communicated without it. In about ten years.

My guest post on TechFlash

May 6, 2009

John Cook was kind enough to let me guest post on TechFlash today, on a theme which turned out to be quite timely given Amazon’s introduction of the new Kindle DX.  The post is about how mobile consumer devices like the Kindle and the iPhone have finally wrested the grip of the mobile phone networks from the device itself.

To me it’s a rare instance where you can witness an industry transformation occur before your eyes.  Or perhaps watch a train wreck occur in slow motion.  The carriers will never be the same, but holy cow, we’re all in for some great new mobile products and experiences as a result.

You can find my post here:  The Kindle, the iPhone and the wireless carrier as commodity

Lots of low cost experiments

April 22, 2009

The really interesting improvements companies make come from takings risks, but in a lot of cases risk-taking can be held hostage by needing data to support every decision.  Being conservative and careful across the board may be safe, but it’s not where breakthrough learning happens.

This is where I see a lot of startups struggle:  confronting the tension that is created between knowing when to apply disciplined fact-based decision making to avoid failure, and when to be disciplined about making decisions where failure is accepted as a likely outcome.

The best companies create a culture that can foster two seemingly conflicting organization abilities: precision and failure.  In fact, you need both to reliably profit from your mistakes.

The key is understanding where in your business you can afford to routinely experience failure, and where failure has more costly significance.  You need internal processes that measure performance, coupled with a culture that has a pretty solid foundation of trust – where anyone and everyone feels comfortable taking a risk, and reporting the results as data.  I wrote on this earlier, it’s a culture where bad news has got to travel faster than good news.

Steve Blank wrote a pithy essay on how to navigate this decision making quandry and I love the quote he referenced from General Patton: “A good plan violently executed now is better than a perfect plan next week.”  This is a variant (or perhaps the inspiration) for another saying “the perfect is the enemy of the good.”

To me they drive home the value of action and experience placed on par with the value of planning and data.  Patton would never go into battle without a well thought through and justified plan, but he speaks to how perfecting the plan is different from winning the battle.

The same is true in startups.  It’s critical that they operate with a well thought through plan supported by data, but it’s equally important that they understand when the plan is no longer as important as what the real world is telling you.  It’s another way of understanding why the numbers in your operating plan are wrong, and is in fact healthy.

Steve talks about a simple heuristic, that decisions have two states: reversible and irreversible.  With the reversible decisions you can liberally experiment, and should.  This is where you can create significant breakthroughs for your company by being highly creative, and surprise yourself by taking risks, and failing, perhaps a lot.  If you’re wrong, re-load and try again.  For me the construct is learning to try “lots of low cost experiments”.

He makes an even more interesting observation about tempo.  It’s not sufficient to be able to take risks with reversible decisions, it’s to do so at a brisk tempo.  Quick, responsive, hungry.

Where this comes in especially handy is with sales and marketing performance and new product development.  In both cases you’re in a race to discover what works, and then what works on a repeatable, scalable basis.  I forwarded Steve Blank’s article to one my CEO’s who is focused on improving her sales and marketing team’s pace and performance.

Jenny Hall also made a similar observation in her post about what she learned as CEO of Trendi.com when it failed.  For her it was “if it won’t matter in three months, don’t spend too much time on it.”

She’s got the necessary ingredients: a culture of trust within the company, data-driven decision making, and performance measurement processes.  When she first arrived, these ingredients weren’t as prevalent, and she worked hard to put them in place, and placed a priority on reducing errors and increasing predictability.  But that was then, this is now, and she’s making the transition to fostering more appropriate risk taking as a way to increase performance.

Lots of low cost experiments combined with a brisk tempo supported by a disciplined acceptance of failure.  That sounds like a lot of fun.  Try it.