With the end-of-quarter groupwork frenzy I am behind on posting the academic lecture notes – hope to get to that this weekend. But meanwhile, as the flow of new thoughts from extracurricular guest visitors in just last seven days has been mind-blowing I’ll post them for your enjoyment.
See further for tips, startup plugs, book recommendations and videos from:
- Jonathan Abrams (founder of Friendster, Socializr, Nuzzel, Founders Den)
- Peter Halacsy, Peter Arvai (co-founders of Prezi, Hungary)
- Peter Vesterbacka (Mighty Eagle, Rovio)
- Andy Dunn (CEO and co-founder, Bonobos)
- Tim O’Reilly (O’Reilly Media, O’Reilly Alphatech Ventures)
- John Doerr (Kleiner Perkins Caufield & Buyers)
GSB Entrepreneurship Club
TEDxSF – Jonathan Abrams – 4/27/10, Confession from the Entrepreneurial Roller Coaster:
At the Friendster era, it was still called a “community” – the “social” word hadn’t settled in yet.
The notion of a founder retaining control for long is a big cultural shift in last 10 years – due to rise of seed & angel financing, etc
All preferred stock setups are set up to supposedly protect minority shareholders, but things get out of balance if the folks “protected” are actually also majority, for either equity of voting rights
All my angel investments outside of my expertise (vodka, juice, boutique) have gone out of business. Reason is mainly the pipeline – if a friend asks you to invest in a brewery, that’s the only brewery you look at it in a year. If you’re in software and invest in a software firm, it is probably one of 100 you saw that year and you found it still worthy.
SlideShare was 20X for angels in 4 years. And that’s not an IPO, but a $120M acquisition exit – and worth making one’s angel portfolio net positive.
Focusing on investment time valuations is a risky angel strategy. Maybe the $10M+ cap on the first convertible note that some serious people have agreed to could be a signal that this company has higher chances of breaking through?
The other extreme, focusing on the dreamy long term outcome is very speculative. The real action is in the middle – for example, if you’re an angel in a firm that has higher chance to get to success without many additional VC rounds, you’re better off because of the lower dilution on the way to exit. Important to not get ahead of yourself and not overcapitalise.
Watch out for cram down (aka wash-out) rounds for maximum dilution of common stock. Also, if a company is going sideways, the last CEO might get a large carve-out ($2M of $40M exit?) just for getting the deal done, by that time probably more than highly diluted founders & angels.
Being too early is always bad, being late (as in not first) not necessarily. But when you go against the player synonymous with a category (Google = search, Evite = events organising,…) you have to be sure you can be 10X better to break their inertia.
To rise above the noise is the make-or-break for any company. Ironically, for your end users the other budding startups in the space are not the noise – they don’t even know about them! – but they can be friction for you when fundraising, because insiders follow even traction-less startups.
VCs are much more reactionary than most people think. If you take a step back, how does the current situation on Nasdaq really influence the long-term outlook of your investment thesis?
Sand Hill Road is still very homogenous industry of Stanford and Harvard grads.
- What would you do in a world without money? If you see a person doing that, back them.
- Have raised $8M from 100 angels in the beginning – no institutional belief
- If no-one believes in your business (even after talking to many innovative open-minded people) it is probably a bad idea. If everyone likes it, probably also bad idea. Right answer is in between.
- Mickey Drexler is the greatest retailer of our time (GAP, Banana Republic) – vertical retailing is now 1/3 of that economy
- Stores won’t go away, but are shrinking and becoming experiences. No take-home inventory, you leave the store with nothing and get the shipment the next day. A $1.5M/year sales clerk!!! A $1,000/sq foot revenue only beat by by Apple ($5k/sqf), Tiffany’s and Lululemon
- Social graph is about telling your brand story much faster.
- Clothing business is changing towards similar models than others have seen on the internet (Record Stores -> iTunes -> Spotify), but slower. People don’t want digital clothing yet, but you can imagine a world of digital printing, etc.
- Starting a company is not risky. In reality, in the first world you are not going to starve, be homeless, etc – your friends will get you through it. Think of the third world problems to set perspective – and not ask your parents, because they have a fundamentally different risk profile.
- Entrepreneurship is not FUN. It can be at times, but most of the time is like starting a family, measurable happiness of parents drops. But it is MEANINGFUL. And that’s why it seems all fun looking back.
- Founding CEO is a keeper of souls. Hiring and firing people, throwing your ego and self esteem out and replacing them with your company’s needs.
- Empathy is the only way out of your own head.
- Give the credit, take the blame.
- If you want really good feedback on your business, turn to Private Equity or Hedge Fund investors. They are much better at taking a realistic look at your fundamental business than Valley & VCs, who sometimes live in self-reinforcing bubble.
- Low gross margins in retailing means that it is very hard to get external innovators into this space as independent players. Have seen 80+ startups with fit & customisation solutions who have a fundamental issue getting in the door with anyone, because their only monetization takes another slice from the low profits. Its like selling software to airline industry.
- Take free shipping (especially both ways). It is very uncomfortable for someone who has architected their product and pricing before, and now is just facing a situation where they have to give 6-8 points away for something that has become commodity.
ME421: European Entrepreneurship & Innovation Thought Leaders (Lee)
- 20M users, less than half in US
- Budapest & San Francisco offices very independent to avoid constant comms over timezones. CEO 70% in US, another co-founder moved back to Budapest after 2 years (all product decisions and dev there)
- Budapest: cool city, easier to hire, passion for the origins (only company sponsor of Budapest Pride protesting against the right-wing xenophobes; company event to renovate houses in Roma villages)
- First office in Asia will be Seoul, because of the product pick-up there
- Role models are important: Sweden builds on a long history of export brands: Volvo, Saab, H&M, ABB, …
- Rovio is not a gaming company, we are positioned to compete against a) Disney and b) all television.
- We are doing animations, games, parks – just like Disney… but of course they are spending more on a single park in Shanghai than we make in a year.
- Audience-wise we’re bigger than any specific TV-show, like Super Bowl every day (but as a non-American I don’t know what that really means)
- Golden rule of venture capital: too early, too early, too late.
- 50M downloads in year 1, 550M in year 2 and then hit 1 Billion. People are telling me that first billion was supposed to be the hardest, so the next one should come faster.
- 260M monthly actives – more than Twitter’s userbase.
- 2011 was $100M at 65% profit margin – no 2012 numbers public yet
- Want to exceed customer expectations on support: replying every email, tweet, etc – people are surprised if “you’re a 99c app, but actually reply to me!?”
- Launching Angry Birds Toons next week
- On potential of truly integrated advertising: Rio movie made $.5B in box office for Fox, estimating that the Angry Birds Rio contributed as much as $200M
- Picking the right partners: Hello Kitty and Star Wars been popular since the 1970s; our plush toys partner is in business for 100 years — all these people must know what they are doing
- Fake goods in China: #1 Angry Birds, #2 Viagra, #4 Disney (6x less). Shows the love for the brand and potential for the future. 94% brand recognition.
- World is full of one-hit wonders who after initial success have the illusion that now they know what they are doing and move on to the next thing. We’re only getting started with Angry Birds, fully focussed on building what has already worked.
- Disney has a few English schools in China. We will have more. Angry Birds video project with NASA, an astronaut explaining microgravity, took schools by a storm – teachers sending thank you notes “for making space fun again”
- First indication of future success: developers are actually playing the game. Second: Niklas’ mother played the early version over entire christmas – and she doesn’t play games normally.
**MS&E 472 – **Entrepreneurial Thought Leaders
Topic: Some Lessons for Startups
- “My reputation exceeds me”
- “Quotation is a serviceable substitute for wit”
- Your phone is so much smarter than the apps make it look like. Why do you really need to “check in” in Foursquare? Why do you need to tell Runkeeper that you started running? (Investor in both). You have to come to grips with all this implicit context when designing apps.
- Brad Feld: I’m interested in investing in software when it is wrapped in plastic. (Not packaging, but a clever hardware component)
- Build software “above the level of a single device”. How many people use Linux? How many use Google? Using latter means you’re using Linux too – just different levels of software.
- Network effects in data: not just # of user endpoints, but the more of their data you keep
- Apple retail has dissected the cash register and distributed it to every single employee in the store. Everyone has the “superpower” to check you out.
- Autonomous cars – a competition winner 6 years ago moved 7 miles in 7 hours – and Google Cars now do 100s of thousands of miles. Google Car was not created because of better algorithms, but on more data… from all these Google Streetview images!! It is hard AI problem to find a street light from a live video feed. It is much easier to detect if it is red or green once you’ve found it.
- To what extent can reputation systems replace or augment regulation? If every Uber driver gets ratings from every passenger (and vice versa!!), why would there be a municipal agency deciding if to licence some driver to be a cab driver for next year?!
- Chris Sacca: only invest in things that close the loop. Too many startups are open-ended…
- Create more value than you capture (Airbnb, Etsy, Kickstarter…). Many internet billionaires have said they started with an O’Reilly tech book in hand – and we got whole $30 from them for it!
- Idealism is the best marketing. After dot com bust in 2003, we had a strategic goal in O’Reilly to “re-ignate enthusiasm in the computer business” – yes, it will eventually mean more demand for our books, but we really meant it as we said it in itself.
- Makani Power – autonomous drones producing high altitude energy. A person joined from a hedge fund because “the math is harder”. Big problems are more exciting and personally rewarding.
- Moneyballing Criminal Justice – Smart statistics have changed baseball, health care, and many other industries. But why haven’t they changed crime and punishment?
- Open source business models are like sharia-compliant banking models in Middle East (“you rent this house from us for 30 years and in the end we’ll give it to you as a gift” as opposed to a mortgage loan). Once compared Borland and Red Hat P&L-s and they were identical ratios-wise, but one line was called “licences” and the same for other “subscriptions”
- To bootstrap “Code for America“-like programs in locally in places with little visible tech/hacker culture, find interesting problems with local relevance and solve them publicly. Keep doing that and people will gather and follow.
- “O’Reilly Media was a lifestyle business that got out of hand”. First a tech writing consultancy, then increasingly writing reusable manuals retaining the rights, then licensing the content to corporations ($25000 for a Fortran manual) and only then printing and selling individual books (so Sun who turned down the $25k offer, bought $1M worth of books the next year). Later, seeking what ties all the activities together came to “changing the world by sharing the knowledge of innovators”, which is still true.
- BOOK: Who Do You Want Your Customers to Become?
- Digital media and advertising… not so much a marriage than an ongoing affair. Subscriptions, pay-per-view are raising as content monetization and we will see others as well.
GSB View From The Top
- Andy Grove was personally running a course at Intel on the company, philosophy, economics
- BOOK: High Output Management – his great management book that came out of it
- People sometimes think I run KPCB, I don’t. I have one vote around the partners table.
- KPCB: 700 investments, 192 IPOs… but most of all I care that we’ve created >375k jobs through these companies
- 3000 business plans/year -> read them all -> 500 1st meetings (where the “team” page counts most to get to) -> 100 2nd meetings -> 30 investments
- BT-ET-IT areas (bio/energy/information tech), 6 partners per area
- Generally we try to keep a 3-5 year outlook on trends, but some partners like Bill Joy look way further
- Web used to be about “documents and sites”, now “people and places”
- BloomEnergy: converts natural gas into electricity without burning it
- In energy investing, storage is currently the holy grail. If the batteries were 3X more effective, EV-s would be immediately cheaper than normal cars.
- Nest: reimagine something old and ugly as the thermostat… so well that you can sell it for $300
- For max personal development, “get in on the ground floor of high growth”
- You’d want to be at Intel in 1974, Google in 2001…
- At the same time, make timing right personally for yourself – demand for experienced leaders does not go anywhere
- BOOK: The Monk and the Riddle: The Art of Creating a Life While Making a Living by KPCB partner Randy Komisar spread the mercenary VS missionary framework of entrepreneurial motivations.
Video: Doerr speaking about this in 2005:
- “I find entitlement unappealing”
- “If a [for profit] entrepreneur says he is not interested in money – I don’t believe him. I should be a balanced interest of meaning and money”
- Sometimes an investor betting on a single person can go to extremes. Investing into Twitter around the “fail whale” era we were betting on a CTO to hire 300 engineers in 18 months, in the most competitive Valley market, and organise them to fix scaling while the service was massively growing.
- Example of how broken public education is: they are planning prisons in parts of US based on the geographic distribution data of schools with worst grades. These kids have no hope from the start.
- Online is just getting momentum: Khan Academy’s 5M users/day, Coursera’s 3M in 11 months since launch… first fix is for community colleges and public schools, not top universities.
- Mobile payments: Steve Jobs didn’t believe in money-only mobile wallets, that’s why iPhone doesn’t have NFC. He wanted to wait until you can truly put everything in your wallet (drivers licence, social security) on it.
- It still takes $25M in losses (aka “crashing an F16”) to train a good VC. Long feedback cycles are frustrating, but you have to measure the progress. We have a routing of quarterly ops reviews, even if there isn’t much happening that quickly in, say, a battery company.
- Admire Jeff Bezos’ consistency in communications: the ONLY thing in his speeches and press releases are customer benefits. If it is not a customer benefit, don’t say it.
- It is impressive that President Obama comes to the Valley to learn about technology and ask for advice. Sometimes doesn’t even fundraise at all at these trips.
- 90% of energy that goes into a screen is wasted (backlighting, heat, whatnot). Massive tech disruption opportunity.
- “What am I not interested in? Maybe an inconsequential anonymous social dating site that helps one to get laid before reaching the other end of Palm Drive?”
- Deal: send me your 3 book recommendations and I will send you the slides from today. My book recommendations:
- The Future: Six Drivers of Global Change by Al Gore
- The Defining Decade: Why Your Twenties Matter–And How to Make the Most of Them Now by Meg Jay
- Lean In: Women, Work, and the Will to Lead by Sheryl Sandberg (launched today)
For more posts on the Stanford GSB Sloan life – see the table of contents here.