Musings of a VC in NYC

NY Enterprise Technology Meetup

Next tuesday evening, I am giving at talk at the NY Enterprise Technology Meetup. I will talk about networks in the enteprise. I plan to use USV investments like WorkMarket and Pollenware to discuss how entrepreneurs can use networks to build powerful enterprise oriented businesses.

If you plan to attend that meetup or if you are interested in networks and enterprises, I have created a hackpad where you can introduce suggested topics for me to touch on in my talk. This hackpad is totally open and anyone can contribute to it.

I know that the meetup is almost completely sold out and that many of you who might want to attend will not be able to. I hope the meetup organizers will record the talk so I can post it here for everyone to see after the fact.

Arduino, 3D Printers, Kickstarter, and BitCoin

AVC regular Dan Ramsden posted a thougtful essay on GigaOM yesterday. After I read it, I sent Dan an email and I said "do you think big beats little in this phase we are in?" Dan replied that he did and asked me what I thought.

I think David beats Goliath all day long if you are focused on the right sectors. Clay Christensen has shaped my thinking on this. You just need to look for sectors where the incumbents can't and won't adapt to new emerging models and where the innovators look like and are being derided as "toys".

I told Dan that Arduino, 3D printers, Kickstarter, and Bitcoin are four "toys" that I think will radically reshape some big industries in this decade. Of course it may not be Arduino as we know it. Or it may not be Bitcoin as we know it. I will avoid commenting on Kickstarter since we are investors there.

The leaders in 3D printing today may not be the leaders in 3D printing tomorrow. All you have to do is look at the big guys suing the little guys to know that there is a lot of innovation and change afoot in 3D printing right now.

I have said this before. The more I hear people laughing at, deriding, and dismissing something the more I think it is likely to be a big deal. I remember when the common refrain about Twitter was that nobody wants to know what someone had for lunch. Well maybe they do. And maybe Bitcoin will be accepted in Starbucks someday. And maybe your phone will be made from Arduino components and the cover will be 3D printed. And maybe the movie you are going to see in the theater today will have been funded on Kickstarter.

Maybe is a powerful word. If maybe represents something big and powerful then it is worth chasing that maybe. And it is worth funding it too.

Mary Meeker's 2012 Internet Trends

Mary published this presentation this past week. I love these "state of the internet" presentations Mary does. There is so much useful information and insights in them. I encourage all of you to work your way through it this weekend if you haven't already done that.

2012 KPCB Internet Trends Year-End Update from Kleiner Perkins Caufield & Byers

Rethinking Mobile First

I wrote the Mobile First Web Second blog post a few years ago. In that post, I talked about apps that were designed to be used on mobile primarily with the web as a companion.

There have been a number of startups that have taken that approach and done well with it. Most notably Instagram, and also our portfolio company Foursquare. It has become a bit of a orthodoxy among the consumer social startup crowd to do mobile first and web second.

But is it the right thing to do? Vibhu Norby, co-founder of Everyme and Origami, wrote one of the most thought provoking posts of the past month arguing that mobile first is a recipe for failure for most, if not all, startups.

Vibhu makes some excellent points:

All in all, mobile service apps turn out to be a horrible place to close viral loops and win at the retention game. Only a handful of apps have succeeded mobile-first: Instagram, Tango, Shazam, maybe 2 or 3 others.

and

You have an entirely different onboarding story on the web. You can test easily, cheaply, and fast enough to make a difference on the web. You can fix a critical bug that crashes your app on load 15 minutes after discovery (See Circa). You can show 10 different landing pages and decide in real-time which one is working the best for a particular user. You can also close a viral loop: A user can click an email and immediately be using your app with you. You can’t put parameters on a download link and people don’t download apps from their computer to their phone. Without the barrier of a download + opening the app to try your product, you can prove value to the user immediately upon their first impression, as is with Google. In addition, the experience of signing up for a service is superior in every way. Typing is easier. Sign-up with OAuth is faster. Tab to the next field. Provide marketing alongside sign-up as encouragement. Auto-fill information is a feature in every browser. The open eco-system of the web and 20 years of innovation has solved many of the most difficult parts of onboarding. With mobile, that kind of innovation is lagging significantly behind because we create apps at the leisure of two companies, neither of which have a great incentive to help free app makers succeed.

and

I use my phone more than anything else. I just don’t think that an entrepreneur who wants a real shot at success should start their business there. The Android and iOS platform set us up to fail by attracting us with the veneer of users, but in reality you are going to fight harder for them than is worthwhile to your business. You certainly need a mobile app to serve your customers and compete, but it should only be part of your strategy and not the whole thing.

Vibhu also takes a stance against the ad-supported, privacy challenged, free consumer app world. I respect that stance and every time I upgrade from a free ad supported app to a premium version (advertising free) via the in app upgrade on mobile, I express my solidarity with him on that one. But as a business person, I have and will continue to advocate for a free tier with a premium upgrade (or just entirely free) because as I have written many times on this blog, I think that is the value maximizing approach and it also allows the greatest number of users to access your product or service.

But I don't want to focus on business model in this post. We are at the start of what will be a long MBA Mondays series on business models and will be talking a lot about that.

What I want to focus on is the paradox that mobile is where the growth is right now and that mobile is very very hard to build a large user base on. Everything that Vibhu says in his post is right. Building an audience on mobile is a bitch. I talked about that in my what has changed post:

distribution is much harder on mobile than web and we see a lot of mobile first startups getting stuck in the transition from successful product to large user base. strong product market fit is no longer enough to get to a large user base. you need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master

But just because something is hard doesn't mean you shouldn't try to do it. I am convinced the next set of large and valuable consumer facing services will be built with mobile as the primary user interface. You can see it in the success of Uber and Etsy this holiday season. That's where you users are most of the time. And if you don't design your products and services for what is rapidly becoming the dominant UI, you will not maximize the success of your business in the long run.

So do I disagree with Vibhu? Not at all. I think he makes some great points on why you might not want to go mobile only unless you are in the games business. But I differ in two important areas. First, I think you can't abandon mobile. It is the future like it or not. And second, I think it is critical to design for mobile first and then build a web companion. If you design for the web and then port to mobile, you will find that it is really hard to fit your UI onto the small screen. Better to design for mobile first and then build a web companion. Mobile first, web second. But as Vibhu points out, the web can't and should not be ignored. It is valuable in many many ways.

Related articles

Beware the Mobile-First Strategy

Some things that make mobile user acquisition difficult

Why We're Pivoting from Mobile-first to Web-first

Why Mobile First Is Not The Right Strategy

The Biggest Problem in Mobile: Retention

Consumer Mobile Riches - Come back in 5 years?

FinTech Innovation Lab: December 19th deadline

For the past two springs, a great program has run in NYC called the FinTech Innovation Lab. It's an accelerator program of a different sort. They accept a half dozen innovative financial technology companies into a twelve week program where the companies get direct access to top executives in the leading financial services companies in NYC. This program is all about validating your product or service with top customers. I have talked to entrepreneurs who have been through this program and I have heard universally that the access was incredible and the feedback was invaluable.

You don't have to be two entrepreneurs in a loft to be a good candidate for this program. You can be a two or three year old startup with a large team. What's important is the need for product market validation. If you have started a fintech company and have built a product or service and want direct access to the top customers in the market, this program may be for you.

If you want to apply for next summer, please do it before December 19th, when applications close. More details are here.

Related articles

FinTech Innovation Lab Accepting Applications Through December 19

Nobody Is Crying For You When You Are Worth Billions

I did a talk with Bill Werde at Billboard's FutureSound conference a few weeks ago. The entire talk is online (in two parts) here. If you go to 7:45 minutes in on the first video (embedded below) you will get to a conversation about Pandora and Spotify and the royalty negotiations they have with the record labels.

The specific issue we discussed was how can you expect the music industry to feel like they need to improve the economics of a relationship that allows a company to be worth billions of dollars. It's a great point and one that came back to me when I read the Airbnb article in the New York Times yesterday. It was this comment by Janan New, executive director of the San Francisco Apartment Association, that struck me:

I believe that any company that claims that sort of worth [$2bn] should have the social responsibility to disclose what the laws are in the jurisdiction that they’re in. And if they’re not capable of that, then their worth isn’t that high.

This is the new angle of attack from incumbents who don't want to see upstarts change their game. And it is a powerful one. Nobody is crying for you when you are worth billions. So be careful what you wish for and what you disclose.

We have a few companies that have kept their fundraising valuations private, at great difficulty and effort. They have done it for reasons like this. They believe it is nobody's business, other than their own, how they have raised capital.

And that was part of my point in the Billboard talk. Spotify's $3bn valuation and Airbnb's $2bn valuation aren't real valuations. Nobody bought their company for billions in cash. They are simply financings in which money traded hands on terms that spit out those big numbers.

Please excuse a deep dive on something a bit technical here. But I think it is important. When an investor like Fidelity puts tens of millions of cash into Spotify at a $3bn valuation, they are not buying publicly traded common stock that will go up and down with the value of the company. They are most likely (I don't know the terms of the Spotify deal so I am guessing) buying a Preferred Stock that gives them a liquidation preference (their money back or possibly plus some guaranteed return) in the event the company is sold at or below the valuation of their investment. So they are buying a bond plus an option. They are highly confident they will get their money back and they are taking an out of the money option on the upside. And they are very long term holders so they can wait quite a while for the company to be worth a lot more than they paid. The $3bn valuation is nonsense. That's not what they are betting on. They are betting that the company is worth at least its total liquidation preference, which is likely an order of magnitude less, and that it might be worth more than $3bn some day and possibility a lot more.

But of course the record label executives don't care. And neither does a landlord association executive. They just look at the huge numbers and say "fuck that". And I don't blame them one bit. I would feel the same way if I were them.

Here's my point. We, the tech/startup/VC world, are not doing ourselves any favors by bragging about the big valuations we are raising money at. We are in fact doing ourselves great harm. Because it makes us look like spoiled brats who are being fed with a silver spoon. Those inside these companies (Spotify, Airbnb, Square, Twitter, etc, etc) know that is not what is really going on. We know how hard it is to build something really new and different. It is a struggle and nothing comes easy. But it is important to realize how the broader world sees it. And they just see billions. And then you get the attacks that I mentioned above.

Honestly, there isn't much we can do about it. The securities regulations make it almost impossible to hide the terms of financings. And the media pounces on these big financing valuations like a hyena on red meat. But it is worth taking the time to downplay the numbers around a financing and focus instead on what it means (more jobs, better products, financial stability). And maybe the media can help us out a bit too by being intellectually honest what a $3bn valuation really means. That would be really nice. But I am not counting on it.

usv.com/timeline

We quietly rolled something out on usv.com a few weeks ago and Brian (who led the effort to build it) announced it on usv.com yesterday.

It is a timeline view of all the initial investments we have made at USV since we started investing in the fall of 2004. It looks like this:

I would encourage you to click on this link and check it out because it is a highly interactive experience.

We built this because entrepreneurs really want to know things like "does USV do seed investments?" or "does USV still do ad:tech?". The answers to those questions are yes and no and you can see that live on usv.com/timeline. You can also see what seed investments we have made and what ad:tech investment we have made. And much more.

I would also encourage you to read Brian's post where he explains how he and his colleagues built this:

Zach, our hacker-in-residence and I developed the timeline using an open-source project, TimelineJS. The theme view arranges our portfolio into six investment areas:Advertising technology, Developer tools, Education, Enterprise, Marketplaces, andSocial & Search. The stage view organizes our investments by the stage (Seed, Series A, Series B, or later) of our initial investment. We will continue to improve and update the timeline as we invest in more companies.

 

I am pleased that we have the talent inside of USV that can take open source projects, hack them a bit, and put up valuable tools on our website that make USV easier to understand. We are going to do more of this.

Media Metrix Multi Platform

comScore is announcing something today that I am quite excited about. It is called Media Metrix Multi Platform and comScore describes it this way in their announcement:

Media Metrix Multi Platform offers unduplicated accounting of audience size and demographics that reflects today’s multi-platform digital media environment, which includes websites, apps and video content accessed from multiple devices.

This "multi platform" environment is the reality of most online properties today. We access them on the desktop/web, the mobile web, and on iOS and Android apps (and some other ways as well). But it has been impossible to get an aggregated and, importantly, an unduplicated view of the audience across all of these devices.

Currently, comScore is only releasing US audience data in the Multi Platform report. They are working on getting their global data into the Multi Platform format and I am even more excited to see those global numbers once they get the data cleaned up and QA'd.

This chart, from comScore's release on the Multi Platform service, tells the story well:

There's a bunch of interesting stuff in there. Take Google. They have 189mm users in the US on desktop/web. They also have 109mm users in the US on iOS and Android. But the unduplicated total audience is 211mm, meaning only 22mm of Google's users are mobile only in the US.

Pandora and Twitter stand out as highly mobile user bases. Pandora's mobile user base is >2x their desktop/web user base. Twitter's mobile user base is almost equal to their desktop/web user base.

If you are a Media Metrix user, you will see the option to get Multi Platform data on your key measures reports. I have been using this service in beta this past week and it is very useful in many ways.

comScore uses a combination of panel data and self reporting by websites and mobile apps to produce its data. The panel data is quite good for large mainstream properties. It is not as great for small websites and apps or services whose audiences are less mainstream and more niche. For those services, self reporting is a good idea and comScore allows you to self report for free by including their tags in your websites and apps.

I hope the entire analytics industry (first party and third party) follows comScore's lead and offers a multi-platform view as the standard view. That's the reality of how users access services today and the analytics industry needs to reflect it in their products.

Disclosure: I was a venture investor in comScore from the late 90s to the mid 00s and was on their board for almost a decade. I still own a few shares personally which I have no intention of selling.

What Has Changed

As I read this post in the WSJ about the changing nature of VC funding of consumer web companies, I thought that we may be looking at the symptoms and not the disease. As the WSJ notes, VC funding of consumer web and mobile companies is down 42% in this first nine months of 2012 (vs the first nine months of 2011). And the big falloff is not in seed rounds, which are still getting done, but in follow-on rounds, which are not.

So what has changed in the past couple years? A lot, actually.

1) the consumer web has matured. we are almost 20 years into the consumer web and we have large platforms that are starting to suck up a lot of the oxygen. google, facebook/instagram, amazon, microsoft, apple, twitter, ebay, yahoo, AOL, craigslist, wordpress, linkedin together make up a huge amount of the time spent online, particularly in the english speaking world. there are still occasional new entrants into this list and departures too. tumblr and pinterest have risen a lot in the past couple years while myspace has declined. but consumer behaviors are starting to ossify on the web and it is harder than ever to build a large audience from a standing start.

2) the consumer is moving from desktop/web to mobile/app. we've talked about this transition ad nauseam on this blog. it is the single biggest megatrend in the consumer internet space right now. most new consumer internet startups need to build for iOS, Android, and web at the same time. it is making the startup more expensive and time consuming. distribution is much harder on mobile than web and we see a lot of mobile first startups getting stuck in the transition from successful product to large user base. strong product market fit is no longer enough to get to a large user base. you need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master.

3) the momentum/late stage investors have moved from consumer to enterprise. there is a large pool of money in the venture capital asset class that is opportunistic, momentum driven, and thesis agnostic. this pool is driven largely by the public markets. this pool of capital was "all in" on consumer web/social web in the 2009-2011 time frame. it drove a lot of activity throughout the venture capital markets because each layer of the VC stack (angel, seed, Srs A, Srs B, Srs C, etc) needs to be aware of what the next layer up wants to fund. when the momentum/late stage wanted web/social, the layers below gave them web/social. now that the momentum/late stage wants enterprise, we should expect the layers below to give them enterprise.

The combination of these three factors is making it harder for consumer internet companies (web and mobile) to get funding. But the first two factors are also making it harder for consumer internet companies (web and mobile) to breakout which is more and more a prerequisite for funding. As venture portfolios fill up with promising companies with solid products that are struggling to breakout, the VCs will naturally be drawn ever more to the companies that are in fact breaking out. It is a pernicious cycle and we see it playing out very clearly in the consumer internet space these days.

What does that mean for USV? Well not that much actually. We are thesis driven to the core. We believe in what we believe in, for good or bad. And that is large networks of engaged users that have the power to disrupt big markets. We are investing at the fastest rate right now in the history of our firm. We are doing a lot of Srs A and Srs B rounds right now because that is where we see the biggest vaccum in the market. We have not done a real seed or angel round in quite a while. But that doesn't mean we wouldn't and our next investment could well be a seed or angel round.

But we are a small firm. We put out maybe $40mm to $50mm per year across all of our core funds, across initial investments and follow-ons. That is a tiny fraction of the venture capital market. We are small on purpose. We don't want to be the market. We want to invest in a tiny slice of the early stage ecosystem where our thesis collides with great teams and unique and differentiated products.

All that said, these three trends are impacting our portfolio. We have fifty portfolio companies, with the vast majority in the consumer internet space. We encouraged our portfolio companies to raise a lot of capital in 2011 and many did. But even so, we are seeing fundraising challenges everywhere, even in our very best portfolio companies. We are also seeing many of the youngest companies in the portoflio, those started after the summer of 2010, struggling with the breakout challeneges I mentioned earlier in this post. We are patient investors and believe in our portfolio companies and the teams we have funded. We are seeing patience being rewarded, particularly in the mobile market. But it is a tougher time for early stage consumer internet companies than I have seen since the 2001-2004 time frame. And I think we are still in the early innings of this more challenging environment.

So things have changed. As they always do in tech. Those who adapt to the changing dynamics, who see the openings that were not there before and slice through them, will succeed. But the wind that has been at our back for 7-8 years in consumer internet is no longer there. It's tougher sledding and will likely continue so for some time to come.

How Well Do You Take A Punch?

I was talking to a friend who has been displaced because of Sandy. They are struggling to get back to their daily routine and it is hard living out of a suitcase without access to the things they rely on from day to day.

I was talking to the CEO of a company whose business was negatively impacted by Sandy. They are struggling to get the business back to where it was before the hurricane.

One is a personal thing. The other is a work thing. But they are the same thing. Life punches you in the face and you might get knocked out. The question is can you get back up and keep going.

The best entrepreneurs do this well. They can take a hit and keep moving forward. And they can rally their teams to do the same thing. That latter point is so important. If the leader is down for the count, the team doesn't have a chance. But if the leader is up and moving forward, with passion and committment to the goal, then the team will follow.

Sometimes a crisis is a good thing for a company. Recovering from a knockout punch often requires heroic efforts from the team. I have seen engineers get things built in a week that might take a quarter under normal circumstances. I have seen sales teams bring in business that kept the company afloat at the last minute. These heroic efforts can energize an organization and give it new life.

Normal operating conditions can lead to an organization getting fat and happy. A crisis can shake things loose that need to be shaken loose. I would not suggest an entrepreneur manufacture a crisis when one does not exist. But when one comes along, I would suggest seeing it as an opportunity not a problem. Because the best entrepreneurs and the best companies can take a punch and keep going. It is a defining trait of winning teams.