I just posted a new blog on Product Market fit and it reminded me to remind you that my blog moved a ways back to Seeing Both Sides so if you're still getting email notifications for Boston VC Blog you should shift over and subscribe to Seeing Both Sides and/or my Medium page. Enjoy!
Graduating students hungry to dive into the startup community around the world (aka StartUpLand) often struggle to select the right, specific opportunity where they can productively start their career.
Each spring, I provide a comprehensive list of exciting, growing, hiring startups that are worthy of consideration as places to start or continue a career in StartUpLand. The criteria for being on the list is subjective but is a mix of fundraising (typically > $20m in the most recent round), scale (typically > 100 employees), momentum (typically growing users or revenue > 50%) and hiring (typically growing headcount > 20%, including a number of entry-level positions that would be a fit for recent college or business school graduates).
Before we get into the companies themselves, I suggest checking out two of my posts where I give some more detailed advice on how to select the right company for you and position yourself to secure a job:
Once you have reviewed this framework for deciding what you’re looking for, below you will find a list of over 600 companies to research and approach.
As usual, the list is compiled and organized based on location. Like David Brooks, I believe in selecting a particular community to invest in and contribute to as a member of the ecosystem.
I received fantastic input from angels, entrepreneurs, lawyers and VCs across the world, helping me pressure test and compile this list (note: Flybridge portfolio companies are in blue). This year, I added companies from India and China with the help of a number of friends from those communities — a nod to the growing global importance of those two startup ecosystems. I’d also point folks to Stanford’s Andy Rachleff’s terrific list, which he publishes each fall with a similar theme.
I’m sure I made many mistakes and omissions, which are all my own. Special thanks to my Flybridge teammate and MIT Sloan intern Caroline Constable, who methodically crushed this year’s list and Harvard computer science intern Raymond Wang, who provided awesome analytical, programmatic firepower.
As always, feedback welcome!
In my blockchain investment work (we have invested in six early-stage projects, including bloXroute, Enigma, FalconX, NEX and two stealth projects), I have been struck by the fact that decades of progress on applying the scientific method to entrepreneurship (e.g., experimental design, lean startup, design thinking), as well as decades of established governance modeled, are being effectively blown up by Initial Coin Offerings (ICOs).
Steve Blank and Eric Ries popularized applying the scientific method to startups in an incisive fashion with the publishing of their books, Four Steps to the Epiphany and The Lean Startup, respectively. These became canons for entrepreneurs around the world as they embarked on the journey for product-market fit.
With blockchain startups raising over $5 billion in 2017 and over $12 billion through the first three quarters of 2018, it appears that this discipline of staged experimentation and fundraising is being discarded.
Harvard Business School professor Ramana Nanda and I spent some time on this issue in an article we published last week in Harvard Business Review called "The Hidden Cost of Initial Coin Offerings". In it, we outline 3 defenses of large ICOs, some of the downsides they present and how they constrain the team from executing successfully on their mission. We hope it adds to an important debate on startup staging and experimentation in the context of this exciting, emerging funding mechanism.
p.s. my blog has moved to WordPress: Seeing Both Sides and you can also follow me on Medium.
I published a new version of my "Rocket Ship Startup List" for 2018, highlighting over 500 startups that are promising places to start (or build) your startup career. You can see it here. Enjoy!
When Julisa Salas told me she wanted to join a startup, I was worried. Her background was not exactly typical for StartUpLand and I was concerned her search would end in disappointment.
Julisa had been a liberal arts major (English Language and Literature) who secured her first job out of college at a large investment bank before returning to school for her MBA. Capable, smart and personable, she was also the type of candidate that most startups shy away from — no technical background, zero startup experience, and a young woman of color trying to break into an industry dominated by white men.
A few months later, Julisa emailed me with great news: she had landed a job at one of the hottest startups in the country, a fast-growing restaurant technology platform called Toast that had just raised $30 million in financing and would later go on to raise another $100 million to fuel its rapid growth.
How did she do it?
In my work as a venture capitalist at Flybridge and professor at Harvard Business School, I have advised thousands of professionals, young and old, seeking jobs in StartUpLand. One of my observations is that “joiners” don’t get enough credit or recognition.
Founders receive all the accolades and attention, but it’s employees number 2 through 2000 that turn a great idea into a great business.
The problem is, startups can be hard to figure out. How can you tell whether a company has the potential for success and is the right fit for you? What are the best entry points?
For the last few years, I have been interviewing joiners to determine the patterns as to how they found their way into startups, selected the right startup for them, and figured out what are the jobs to be done. I wrote Entering StartUpLand to help deconstruct startups for joiners, providing them with a playbook to navigate their way in and be effective and successful when they get there.
That’s where Julisa comes in.
Julisa is a textbook case of an outsider finding her way into StartUpLand. The playbook she executed is precisely what I recommend others follow. Here’s what she did:
2. Arrange a warm introduction. Startups are full of people with large, vibrant social networks. Look for mutual connections, or friends of friends, who might put you in touch with the right people. Harness your digital footprint via LinkedIn, Facebook and Twitter as well as your offline network to prompt contacts to endorse you and find an “in” to your desired startups. Warm introductions trump a cold email every time.
The startup community is generally very generous with its time and has a strong “pay it forward” culture.
Julisa was able to use her network of professors, friends, and contacts to get her a foot in the door with a few startups that fit her target criteria. Once she earned that first meeting, though, the real magic was what happened next.
3. Come bearing gifts. When Julisa found out she had a meeting secured with one of the Toast executives, she immediately developed a plan of action to learn more about their business. Since their target customer was restaurants, Julisa grabbed a clipboard and pad of paper and walked up and down the street for a week, interviewing restaurant owners about their experience with point of sales systems. After interviewing owners from 50 restaurants, she distilled her notes into a few key observations and walked into the Toast interview armed with a rich set of feedback.
When the interviewer realized what she had done, her lack of technical skills or startup experience became irrelevant.The whole conversation shifted to her market insights and how Toast should react to them.
By the end of the meeting, the interviewer had invited her back later that afternoon to meet some additional Toast members. In the interim few hours, Julisa quickly put together a slide presentation distilling her research results and used it to frame the conversation. The Toast executive team was blown away and offered her a job a few weeks later. Today, Julisa is Director of Growth at Toast and well on her way to an amazing career in StartUpLand.
Julisa’s story is evidence that you don’t need to be an engineer or a startup veteran to successfully navigate your way into StartUpLand. Choose wisely and find a warm introduction to get in the door.
But most of all, come bearing gifts of insight and intelligence and you are bound to get that dream job regardless of prior experience.
This post appeared originally on ThinkGrowth.org.
To learn more about pursuing your ideal job in StartUpLand, go to www.jeffbussgang.com
Note: my blog has moved to www.seeingbothsides.com. Also, check out www.jeffbussgang.com to see my new book, Entering StartUpLand, which ships on October 10th.
At Flybridge, we are wading into this uncharted territory as a result of one of our portfolio companies, Enigma, staging an ICO in the coming weeks.
Many investors in the ecosystem that we respect have shared their thoughts on the power of the blockchain and cryptocurrencies to disrupt many industries (and we share those views) but few have discussed the downstream ramifications to our business. Hence, the purpose of this post.
I won’t attempt to provide all the contextual background regarding the blockchain, cryptocurrencies and why they represent such a profound innovation in our world.
Others do a good job of that. Instead I will make a few observations about how an investor might think about the impact of ICOs / token launches on the venture capital industry, in particular, and some of the downstream ramifications that need to wrestled with.
A company that can successfully raise money in an ICO may never need venture capital again. Most of those companies will still require seed capital to assemble their team and fund a year or two of initial development and experiments.
Perhaps, when things settle down a bit more, those companies will even raise series A capital from traditional institutional sources to expand the product features, beef up the operations team more fully and make progress in finding initial product-market fit.
Early stage entrepreneurs will also still likely value experienced advice on company-building from seasoned venture capitalists. But once entrepreneurs have their initial team and product in place, a few smart advisors around the table and the social proof required to attract great talent, why would they raise additional dilutive equity capital if they can raise non-dilutive capital through the sale of tokens?
Put aside the frauds and hucksters — time and transparency will cause them to shake out — and obviously not every business model is a fit for an ICO. But many are. Good teams creating something of real value around which they can build a community now can tap another source of scale capital available to them.
I wonder, for example, if our portfolio company, Codecademy, would have avoided its latest financing round and instead created “CodeCoin” in order to incent contributors to software development lesson plans and a marketplace for coding content? In these early times, some startups may be hesitant to pursue this path because of the uncertainty and perceived risk.
But once the regulatory and systems infrastructure for ICOs is in place and the friction is reduced, it will become a more common means of raising growth financing, representing a disruptive force for later stage investors. In short, token sales allow early stage companies to skip the series B round and beyond.
When a company that has raised venture capital creates a token and raises capital in an ICO, there is a real risk that value is being shifted from the equity holders to the token holders.
In fact, that is somewhat the point — a community is created and value begins to accrue to the participants in that community. The hope is that the early stage investors select companies that have a business model that takes advantage of the growth in the community and the ecosystem around it.
The ICO generates excitement and valuable incentives to contribute to the ecosystem which accelerates its growth and, as the ecosystem grows, the company has a cash flow formula that allows value to accrue to the equity holders of the corporation not just the tokens. But that balancing act is a tricky one and not guaranteed, particularly because business models and cash flow formulas are often hazy in the earliest stages.
Further, not only does substantial value accrue to the community but control and governance over the underlying technology and protocol accrues to the community and token holders as well.
As Sarah Tavel pointed out in a recent tweetstorm, for a company trying to stay nimble and have the flexibility to run a lot of rapid experiments, the very existence and power of the community may reduce degrees of freedom during the search for product-market fit.
We typically advise our portfolio companies to avoid taking on strategic investors at an early stage for this very reason. Entrepreneurs who embark on ICOs may similarly want to be careful before empowering their community of supporters too early.
In a world where startups can raise over $1 billion in proceeds in token offerings and avoid later stage financings, how should we think about the investor’s role in the governance of the corporation and the community?
Governance of the corporation is a bit easier—Delaware Law has long-practiced guiding principals for things like fiduciary duties such as duty of care and duty of loyalty—but what are the governance requirements and obligations with respect to the token economy and the related community?
Albert Wenger wrote a terrific blog post on this topic where he points out that the governance over the ICO proceeds requires new thinking in order to avoid self-dealing. There may be additional governance issues that need to be thought through with respect to the selling of tokens that companies retain in treasury (often 25% of the ICO proceeds).
Who sets the policy for token sales—management or the board of directors? What happens if the company has raised money in the form of a convertible note and has not yet formed a board of directors? What are the ramifications and conflicts of interest that may exist, particularly if executives and employees have tokens as incentives or have bought tokens (or have friends and family who have bought tokens) in private transactions?
Should early investors be allowed to participate in token sales and pre-sales and how should they treat their investors in those transactions? Our guidance at this nascent stage is to follow the mantra that sunlight is the most effective of disinfectants.
Transparency and open communication is key to establish trust—both between entrepreneurs and investors as well as between entrepreneurs and the community.
Another consideration investors need to think through in this brave new world of ICOs is the impact on liquidity. If a portfolio company can raise money in an ICO and retain tokens that then rise in value, it dramatically reduces the company’s incentive to seek an exit.
If the management team and employees receive tokens as part of their compensation plan and those tokens are highly liquid — as they should be after an ICO thanks to the meteoric rise of exchanges and crypto hedge funds — then the value of their compensation may be more through token value than equity value.
How does that impact the management team’s incentive to create equity value and liquidity for the equity holders? Should investors be negotiating with management teams post-ICO to exchange some or all of their equity for tokens to generate liquidity?
Are investors and management as aligned as they are in a company that does not raise money in an ICO or do token sales create more opportunities for misalignment—which gets back to the issue of governance. Our advice on this point is for investors and entrepreneurs to try to talk through as many of the anticipated issues as possible before they come to pass.
In other words, determine precisely before the initial seed round how to ensure as much alignment as possible. The standard seed tools that investors are familiar with, like SAFEs and convertible notes, need to be modified to anticipate token sales (e.g., SAFT agreements and perhaps even SAFTE agreements).
If early stage investors can develop more options for achieving full or partial liquidity in a private company, all the better.
The territory we are all entering is exciting and revealing of the extraordinary potential that cryptocurrencies and the blockchain represent for the economy—yet it is also fraught with complex issues. And there’s much more ground that I haven’t even covered, such as:
We and our peers are wrestling with all these issues alongside our entrepreneurs and, clearly, one group that is going to benefit are the lawyers who are in the middle of it all!
This article originally appeared on Medium. Thanks to Deanna Rampton fromStartup Grind for her help in editing.
Flybridge is pleased to announce the creation of XFactor Ventures, a $3m women-focused micro-seed fund. You can read more about it here:
If you are interested in submitting a business plan, send us an email at https://www.xfactor.ventures/
To stay in touch with our work, follow us on twitter.
(BTW: my blog has moved to www.seeingbothsides.com)
I am thrilled to welcome Jesse Middleton to the Flybridge family. Jesse is joining us as a General Partner to help lead our NYC office. This hire is a big deal for us. Jesse is the first General Partner we’ve hired in over a decade. Jesse is a tremendous entrepreneur and executive, having for over the last five years been a part of the creation of one of the most successful start ups in history – WeWork – and serving as an active angel investor in NYC. Here’s his blog post announcing his arrival:
Also, a reminder, my blog has now moved to www.SeeingBothSides.com
I have a new post on my newly designed blog: Growth vs. Profitability and Venture Returns. A reporter from BostInno tweeted that the blog post should have been titled:
Profitability isn't cool. You know what's cool? Venture returns. seeingbothsides.com/2016/05/16/gro… via @bussgang
I've moved out of the dark ages and (finally) shifted from Typepad to WordPress.
I will keep this blog site up, but all new posts can be found at Seeing Both Sides. Enjoy!
Around this time of year, many students are focused on finding a job in Startup Land and building their careers. If you have your own idea and no one can talk you out of it, that's awesome. But for most undergraduates and graduate students, they have no idea how to get plugged in to the startup community. I gave some advice in my post, Seeking a Job in Startup Land, on the process for selecting a startup that is a good fit, but I didn't name specific companies who I think are emerging winners and thus good places to begin your career.
For many years, I have been keeping an updated list of interesting, scaling start ups that are well-regarded and hiring (private or recently public) to share with the students in my HBS class to point them in the direction of high quality, fast growing companies worth exploring. Andy Rachleff at Stanford / Wealthfront does the same in the fall (here's their Oct 2015 list), although it is lighter on East Coast companies. Last year, I open sourced the list and with graduation season coming, I thought I would share an updated version, again organized by geography. Note that this is my own imperfect point of view with imperfect data (also informed with a sprinkling of Mattermark data and CB Insights; here is the latter's full list of the, as of this writing, 154 unicorns, which is another interesting filter).
Full disclosure: Flybridge portfolio companies are hyperlinked. Feedback welcome! I'm sure I made many mistakes and omissions.
Boston:
NYC:
SF/SValley:
Israel (often with HQ or business operations in the US - either BOS, NY or SF):
London: Bla bla car, CityMapper, Duedil, FarFetch, Funding Circle, GoCardless, King, Purple Bricks, Shazam, TransferWise, Vouched For
LA: AirPush, Auction.com, Cornerstone on Demand, Dollar Shave Club, Honest Company, JustFab, Network of One, OpenX, Ring, Riot Games, Rubicon Project, SnapChat, SpaceX, Telesign, Tinder/Match.com, TrueCar, Zefr, ZestFinance, ZipRecruiter
SEA: Apptio, Avalara, Julep, Juno, Koru, Peach, Porch, Pro, Refin
CO: LogRhythm, Rally, Sympoz, Webroot, Welltok
UT: AtTask, Domo, Health Catalyst, Hirevue, Inside Sales, Instructure, Plurasight, Qualtrics
CHI: AvantCredit, BucketFeet, Fooda, Groupon, Iris Mobile, Narrative Sciences, Raise, SpotHero, SproutSocial
DC: 2U, Cvent, Opower, Optoro, Sonatype, Vox Media, WeddingWire
ATL: Kabbage, MailChimp, Yik Yak
(this post was originally published in Harvard Business Review and is co-authored with Nadav Benbarak of Okta.)
Growing revenue and profits is a core objective of most companies, and it is the responsibility of every function to contribute to the pursuit of this goal. Yet, in recent years technology startups have embraced a new role, Growth Manager — alternatively Growth Hacker, Growth PM, or Head of Growth — that focuses on it exclusively. By viewing product development and marketing as integrated functions, not silos, leading tech companies like Facebook and Pinterest are rethinking their approach to driving growth and achieving breakthrough results.
Yet, the Growth Manager role remains poorly understood, especially outside Silicon Valley. As part of an entrepreneurial research effort for Harvard Business School, we interviewed more than a dozen Growth Managers at fast-growing startups and explored what they are doing to design a growth function within an organization.
The Growth Manager function typically lives at the intersection of marketing and product development, and is focused on customer and user acquisition, activation, retention, and upsell. The Growth Manager usually reports either to the CEO, the vice president of Product Management, or the vice president of Marketing. They work cross-functionally with engineering, design, analytics, product management, operations, and marketing to design and execute growth initiatives.
As for responsibilities, the Growth Manager’s job has three core components: first, to define the company’s growth plan, second, to coordinate and execute growth programs, and third, to optimize the revenue funnel.
But before any of these things can take place, the Growth Manager needs to make sure the right data infrastructure is in place.
Data is the fuel of the growth function and growth teams invest a significant share of their resources to create the infrastructure that enables analysis of user behavior, scientific experimentation, and targeted promotions. While many growth teams have special requirements that compel them to build their own custom data infrastructure, many choose to work with commercially available SaaS products. These include everything from analytics tools like Adobe Analytics and Google Analytics, to A/B testing tools like Oracle’s Maxymiser and Optimizely.
Growth Managers are typically responsible for selecting and integrating these products into the company’s analytics framework and working either on their own or in partnership with the analytics team to provide dashboards and testing tools as services across the organization.
Once data is available, the Growth Manager must help the company define its growth objective, typically by answering two core questions. First, at which layers of the funnel should growth initiatives be focused? For instance, should resources go to user acquisition or to combatting churn? Second, the Growth Manager needs to help the company to quantify and understand progress against goals. This task is accomplished through the selection of key performance indicators, and the development of reports on these metrics for consumption across the organization.
Growth Managers also provide customer insight, by blending data with a deep understanding of user needs, habits, and perceptions developed through targeted interviews, usability studies, and customer feedback. Growth Managers utilize the data they have to answer some of the troubling “whys” that a company may have. For instance: Why are users dropping out of the sign up experience? Why don’t users come back to the application after the initial download? Why aren’t users responding to special offers? These insights are then fed back into the product team to help prioritize product priorities, which impacts the product roadmap, as discussed below.
Furthermore, the Growth Manager is responsible for prioritizing growth initiatives and product changes. Ideas for initiatives to create growth originate in virtually all functions in the organization. The Growth Manager is the catcher and champion for product requests from outside the growth team. Further, the Growth Manager must implement a framework for prioritizing growth-specific product improvements, and organizing the testing rhythm.
Sean Ellis, founder of Growthhackers.com and former vice president of marketing at LogMeIn, proposes a simple framework for prioritizing project ideas via ranking on three core dimensions:
Taken together, these three elements can help to negotiate priority across the pool of ideas.
With a clearly defined growth objective, and a prioritized roadmap of ideas to test, a Growth Manager turns their attention to designing and implementing tests. If the test is to be conducted within the product, the Growth Manager leads a product development process to implement the change. The process often begins with a Product Requirements Document (PRD) or a summary slide presentation that articulates the product changes needed. Next, the Growth Manager works with a cross functional team including engineering, analytics, design, marketing, and product marketing to execute the test.
So what makes a good Growth Manager?
If data is the fuel of growth, then analytics is its engine. The Growth Manager must master statistical reasoning, understand how to design effective experiments, and develop a quantitative intuition for interpreting user experience data. Effective Growth Managers are conversant with data analysis and the best tools for retrieving, manipulating, and visualizing data including tools like MySQL, Excel, R, and Tableau.
Growth Managers also need to be fluent in the full spectrum of acquisition channels at their disposal. James Currier, founder of Ooga Labs, identifies three general types of acquisition channels:
Each channel has its own advantages, trade-offs, and idiosyncrasies. An intimate and specific knowledge of the channels that are most effective in reaching a product’s target audience is critical.
The Growth Manager also needs creativity, strategic thinking, and of course leadership. The latter is particularly important since the Growth Manager must align all market-facing functions to a shared growth objective without direct authority, and must build a growth team whose culture is suited to the challenging and experimental nature of the work.
Experience at numerous growing tech firms confirms that Growth Managers are getting results across all parts of the user journey and at all levels of the funnel.
By comparing behavior of retained users versus those users who churned, the early Facebook growth team determined that a key driver of new user retention was finding and connecting with at least 10 friends within the first two weeks after signup. With this insight in hand, Facebook developed features to allow users to quickly see and connect with friends who were already using the service.
The growth team at Pinterest was able to increase new user activation by more than 20% with an improved flow for new users. By changing the on-boarding experience — from a text-intensive explanation of the service, followed by a generic feed of the most popular content, to a visual explanation and personalized content feed based on a survey of user interests — the team was able to better explain the value proposition and train the user, which ultimately led to better conversion.
Expect the Growth Manager to become a standard function in the coming years. As with many organizational innovations, what begins in startups migrates to larger organizations that wish to operate in an entrepreneurial fashion.
As a former entrepreneur, I have always viewed venture capital as a service business. That’s a funny line for many because, historically, VCs are viewed (and at times reviled) as judges or overlords. When we started Flybridge over thirteen years ago, we developed a firm mission statement that we would treat early stage founders as our valued customers and have lived by this mission throughout our history.
With our fourth fund, launched last year, we are thrilled to continue pursuing our mission of serving brilliant founders during the critical, formative stages of creating their world-changing startups. As part of our work leading into the new fund, we went on a listening tour - talking to founders about what they want and need from their venture capital partners. We heard a consistent set of themes: treat them with respect, bring real expertise to the table, and have an investment approach that is consistent with the new world of the capital-efficient startup.
Over the last few years, the needs of founders have changed dramatically. The advent of the cloud, open source development tools and lean startup practices have led to a different evolutionary pattern for startups. They need very little capital to get started and run value-creating experiments, yet require a lot of capital to scale. That’s great news for early stage investors such as ourselves, because it means our entrepreneurs can get more runway with our early stage dollars. It also means they love our approach as an activist seed investor - supportive throughout the company's entire lifecycle and fully engaged despite the small dollars - not a “spray and pray” passive investor.
What has not changed is that the best founders want experienced guidance, support and value-add, but not interference from their investor partners. And with all the blogs, books, courses and case studies out there about entrepreneurship, the bar for delivering value-add has gotten even higher. In our experience, great entrepreneurs don’t want to be hatched, incubated, promoted or optioned. They want a VC to be a company-building partner to coach them throughout all the stages of growth and an investment partner who has a deep understanding of the market opportunity they are targeting. That’s the firm we have tried to build at Flybridge, and we’re proud of what we’ve created and the amazing entrepreneurs we’ve had the opportunity to work with to build large, valuable companies.
So what opportunities are we focused on with our new fund? A number of years ago, we identified a few core investment themes which we still love, including:
A few emerging themes that we are excited about going forward include:
The new fund is smaller and more focused. We expect to partner with 20-25 companies, as compared to the 45 in our third fund. Our average commitment per company is now in the $4-8m range, when allocating enough in reserves to support companies during their growth years. Our geographical focus continues to be centered around our offices in New York City and Boston. Our team is small and senior - David and Victoria in NY and Chip with me in Boston, our new venture partner David Galper in Tel Aviv, alongside a group of over a dozen advisors who provide subject matter expertise and value add for our companies. Matt is leaving us to join Wellington Management Company and enter the world of late stage investing. We wish him well in his new endeavors.
We had an exciting 2015 - we made eight new investments out of the new fund and have a ninth that is closing this month (see our fun Year in Review): Jibo, NS1, Omni Storage, Raden, Redox, SmackHigh and two stealth companies. Based on the inspiring people we are privileged to invest in, 2016 is already shaping up to be another exciting year!
Human progress is often the result of multi-disciplinarian efforts. I am optimistic that the trends Paul Graham points to - and is in the midst of helping accelerate - are going to ultimately have a very positive impact on society at all levels. But it will take some inspired entrepreneurs to get us there.
A few years ago, I did an analysis on the Boston-based companies that were worth more than $500 million in value, which I called Boston Unicorns. One of the (somewhat depressing) conclusions I made at the time was "there have been no multi-billion dollar valued tech companies founded in Boston in the last 13 years."
With the news that Hubspot has hit $2 billion in market capitalization, I figured it was time to update the analysis. Happily, I found a more encouraging picture, both in terms of the performance of some of the Boston-based public companies and the pipeline of candidates that might elevate into this level of extraordinary value creation.
I felt compelled to move away from the oft-used unicorn label and I really just wanted to focus on multi-billion dollar companies because these represent the future anchor companies that Boston so desperately needs, as identified by this recent MIT study on Growing Innovative Companies to Scale that I participated in. Because it is the holiday season, and because I was able to find nine of them, I'll coin a new label: Reindeer (pop quiz for my readers: can you name all nine of Santa's reindeer? I'm Jewish, so I confess that I had to look that one up). By my definition, Reindeer are tech companies founded since 2000 that have created more than $2 billion in market value. They're mythical creatures, just like unicorns, but very special when found.
Public Reindeer: Nine
To get a sense of the future anchor companies in the Boston region, let's first look at the public companies. Two years ago, I pointed out that there were only three companies that had achieved > $1 billion in value in the tech sector founded since 2000 (i.e., excluding life science companies). Happily, there are now five companies founded since 2000 that have achieved > $2 billion in value and another four founded since 1990. Those companies can be seen in the chart below (complete with Christmas colors that would make Starbucks proud), reading left to right in terms of total market capitalization: Demandware, Fleetmatics, Hubspot, Vistaprint, Wayfair, athenahealth, Nuance, Akamai and the new king of the Boston tech scene (with EMC's demise), TripAdvisor.
Contrary to popular myth, big business to consumer (B2C) companies can be created in Boston as four of the nine Reindeers are B2C. It is also encouraging to note that 2015 was a pretty good performance year for these companies. Seven of the nine companies saw price gains (as of 12/15) ranging from 6% (athenahealth) to 134% (Wayfair). Only two of the nine companies saw their value decrease: Demandware (11% decline) and Akamai (18% decline). Pretty good performance as a whole compared to other tech stocks that have gotten pretty beat up (e.g., Yelp is down 49% YTD, Box is down 41%, Hortonworks is down 24%).
Reindeer Pipleline: Ninety-Nine
The next piece of analysis is to look at the high-flying private companies and examine the pipeline of companies that could become reindeer in the coming few years.
In order to do this, I used data from my friends at Mattermark (my firm, Flybridge, is an investor) to look at all the companies that have raised over $25 million in total capital in the last 10 years and whose last round was greater than $10 million (thereby filtering out down rounds/sideways situations). I was pleased to find a robust 99 companies that met those criteria in Boston. Of those 99 future reindeer candidates, 53 are from the tech sector, including 11 companies that have raised over $100 million in private capital:
Of those 11 companies, only one is a B2C company: DraftKings. The others are all B2B, including a few perennial IPO watch list companies who are believed to be unicorns (i.e., private valuations > $1 billion) like Acquia, Actifio, Affirmed, Veracode and Simplivity. Amazingly, three tech companies who have raised > $100 million were founded since 2011: the stealthy Altiostar Networks, DraftKings and OnShape.
Bottom Line
The conclusion of this analysis: the Boston ecosystem is looking pretty robust, with nine solid anchor tech companies who seem to be performing well and over 50 private companies that have a shot at becoming future anchor companies in the years ahead. So keep your eyes on the skies this Christmas Eve and you may see a few Boston reindeer overhead (meanwhile, I'll be at the movies and eating Chinese Food).
Thanks to Nicholas Shanman for his help with this analysis.
I was speaking at an event last night and met a young woman at a large public tech company that was thinking of moving into startup land. She wanted to know whether her skills would be valued in a smaller, growth company. I asked her what role she was currently playing and my eyes widened when she replied, "sales operations". "Holy crap!" I exclaimed, "You'll be the most valuable hire a growth stage company could ever make." When the people around us looked puzzled, I realized that not everyone appreciates that sales operations is the secret weapon to scaling start ups.
One of the largest friction points to rapid scaling is the sales force. Very few companies have a business model that enables frictionless revenue growth because of their successful implementation of a freemium model - e.g., Bettercloud, Cloudflare, Dropbox, MongoDB - and even those that do eventually hire a sales team to move up the ladder on deal size and improve upsell, cross-sell and renewal rates. When you begin to scale a sales force, you desperately need to create a sales operations function. Here's why:
The best sales operations leaders allow the sales team to spend more time selling and less time worrying about reporting, cross-functional coordination and operational management. Sometimes known as the Chief Revenue Officer's chief of staff, the mole for the CEO to figure out what's really going on in sales, the executive who prepares all the board reports on sales - whatever you want to call it, that role is the absolute secret weapon that every company needs to rapidly scale sales.
As an aside, here are a few job descriptions recently posted for directors of sales operations at rapidly scaling startups that I liked on LinkedIn to help bring the position to life:
There has been a lot of good stuff written over the years on the topic of calculating customer lifetime value (LTV). Thus, it amazes me how many times I discover faulty thinking when I talk to entrepreneurs regarding their LTV math. One portfolio company executive confessed to me last week that he knows he is doing it wrong but he just didn't have the time to research the best way to do the LTV calculation.
Since I see a few common patterns of mistakes, I thought I'd add to the LTV literature and point out the top three reasons many investors roll their eyes when they see entrepreneurs present inflated, poorly constructed LTVs:
1) Your churn rate is understated
One important component to an LTV calculation is the churn rate or cancellation rate. Many blogs suggest you simply divide 1 by your monthly churn rate to get to a number of months of duration that you can expect to collect revenues from your customer. Thus, if your average monthly churn rate is "c", the number of months of revenue you will receive over the lifetime of a customer is 1/c.
The problem is that many early-stage companies have no idea what their average, long-term churn rate really is because they are simply too young. When they have 6 month or 12 month or even 18 month cohorts, they extrapolate from those cohorts and come up with an absurd time period for their customers to stick around generating revenue. For example, if you have a 2% monthly churn rate in your first year, then some folks will extrapolate their monthly revenues out 50 months. A monthly churn rate of 1%? Then multiply that monthly revenue by 100.
As Jason Cohen points out, it's just not realistic that in a wildly competitive, dynamic technology market, a company can expect to hold on to its customer on average for 8-10 years. And, in my experience, you are so hyper-focused on satisfying and servicing your early customers that extrapolating your early churn rate just isn't going to be accurate.
To fix this potential issue, I recommend you pick a fixed cap number of months - conservatively 36, or three years - and recalibrate your LTV math accordingly. Your new expected months of revenue (N) would now = [1-(1-c)^36]/c. For example, if your churn rate is 1%/month, instead of assuming 100 months of revenue, you calculate 30 months. Anything beyond 36 months just doesn't seem credible - and shouldn't even matter that much when you think about the next issue - a start-up's cost of capital.
2) Your cost of capital is too low
Ask an entrepreneur about their cost of capital and you'll likely get a blank stare. Cost of capital is the rate of return that an investor who provides capital expects from investing that capital. Today, the United States government has a cost of capital of nearly zero - for example, it can borrow money for 10 years and pay only 2% interest. 2% per year is the expected return that an investor in US treasuries requires because the risk of holding an IOU from the US government is so low.
For a start-up to raise capital, it must sell equity to venture capitalists or other investors that expect an annual return more like 30-40% in exchange for the high risk that the company will never be able to pay back the investor and the investment will be written down to zero. Thus, the cost of capital for a start-up (and the dilution a founder faces in exchange for that capital) is very high. Therefore, back end loaded cash flows are not nearly as valuable for a start-up as front end loaded cash flows.
That's a bit of context as to why start-ups need to highly discount future cash flows when calculating their LTV. I suggest 3%/month which results in a roughly 30% annual cost of capital. Thus, if you are receiving $100 in recurring revenue, you should value next month's $100 in revenue as $97 and month 2 as $94. In practice, combining this point with the one above, take your number of months of revenue (say, 30) and use the 3%/month discount rate to calculate the value of the months of revenue = [1-(1-3%)^30]/3% = 20 months of revenue - 1/5th what you would have calculated if you had simply used 1%/month churn rate with no time limit and no discount rate!
3) You forgot about Gross Margin - and you're probably overstating them.
I recently received a board deck from one of my portfolio companies which treated revenue as the numerator in their LTV calculation. Entrepreneurs sometimes forget that a dollar of revenue isn't worth a dollar in incremental contribution. Instead, there is real cost to produce this revenue: a cost of service, processing, data, storage, media, overhead whatever.
Many early stage companies don't yet have experienced CFOs who can help them with precise gross margin calculations, so they assume a gross margin that is too high. SaaS companies think "mature SaaS company margins are 80%" so I'll just use that. But you are not mature. Your executive team spends more time selling and servicing than you account for. Your engineers spend more time servicing customers over time and addressing issues and bugs and feature requests than you account for. Thus, your COGS (cost of goods) are understated and your gross margin is overstated. Salesforce.com has a gross margin of 75% with their scale of $6 billion in annual revenue. Can yours really be the same or even 5-10 percentage points better? And are you sure your gross margin calculation is factoring in all variable costs not related to customer acquisition or are some costs sneaking "below the line" into, say, SG&A?
To fix this one, the rule of thumb I suggest you use is to discount an additional 10% points beyond whatever your finance head says your gross margin is. Thus, if you think your gross margin is 70%, assume for LTV calculation purposes 60%. So, in the example above, instead of summing up $100 revenue over 20 months (factoring in a shorter time horizon and a higher cost of capital), you would sum up $60 over 20 months. Add all three factors together, and instead of multiplying $100 in monthly revenue by 100x for an LTV of $10,000, you would be multiplying $60 in monthly contribution margin by 20x for an LTV of $1,200.
Conclusion
All of these factors - time realism, appropriate cost of capital and accurate gross margins - discount your LTV as compared to simpler methods. Sorry, but that is the reality of LTV math. If you have a business with strong network effects, there can be a reason to believe that your metrics will meaningfully improve over time. But another reality of LTV math is that absent strong network effects or other large benefits of scale, many times your metrics get worse with scale. I cover this phenomenon in another blog post and so will simply say: make sure you don't overstate early metrics with rosy extrapolations.
A mentor of mine is fond of saying that every business plan contains the same word in relation to its forecasts: "conservative". It is better to be truly conservative - or, dare I say, accurate - rather than letting a savvy, cynical investor do it for you.
This past week was the Jewish holiday of Yom Kippur, also known as the Day of Atonement where you fast and pray in synagogue all day and atone for all your sins over the past year. Our rabbi delivered a powerful sermon that took a page from David Brooks' "The Road to Character", emphasizing the importance of "eulogy virtues" (e.g., character) as compared to "resume virtues" (e.g., competence). Rabbis have the opportunity to go to a lot of funerals where they deliver - and listen to - many, many eulogies and so his message was particularly poignant. One of those eulogy virtues that he emphasized was that of humility, defined by Dictionary.com as: "having a modest opinion of one's own importance or rank".
There is great power in humility, something I have observed in many entrepreneurial leaders. In fact, I find that the entrepreneurs I enjoy working with the most are those that are authentically humble. The day before Yom Kippur, I had two board meetings with two of my most humble CEOs. Both are running startups that are growing, profitable and on a track to make their investors and employees a lot of money. Neither thumped their chest in the board meetings. Just the opposite. Here is how many of their sentences started: "It took me too long to figure this out, but..." or "I'm struggling with the issue of how to...". Rather than cover up mistakes or weaknesses, the humble leader draws attention to them and rallies the group to problem solve together.
Sometimes executives who lack a deep self confidence try to over-compensate with bravado and promotion. As I get older, I find I have less tolerance for this style of operation. That's not to say that there aren't plenty of amazingly successful leaders who are pretentious and overbearing. But for my money, I'll take the humble leader any day. Yes, they need to be exceedingly competent and skilled, but when they can blend competence with character and humility, it is a potent combination.
Jim Collins describes this potent combination in his famous book, Good to Great. Collins frames the five levels of leadership (see pyramid above), which culminate in "Level 5 Leaders" who are humble but have a huge amount of will to succeed.
Thinking about this style of leadership reminds me of a famous speech by General Norman Schwartzkopf, delivered to the graduating class at West Point. I was introduced to this speech by HBS leadership professor Scott Snook (himself a West Point grad). Start at minute 3:08, where Schwartkopf declares: "To be a 21st century leader, you must have two things: competence and character."
Schwartkopf could deliver the Yom Kippur speech at my synagogue any day.
Every fall, I deliver a presentation at Harvard's iLab, open to the community, on what makes the Boston startup scene so special. It has become a nice opportunity to step back and appreciate all the rich resources entrepreneurs have at their fingertips in the Boston community. Here is this year's version (which I'm delivering this afternoon), complete with a lot of updated content and data on our local tech hub:
This post was co-authored with Omri Stern and originally appeared in Harvard Business Review.
Israel has been branded the “startup nation.” For good reason: A tiny country of only 8 million people — 0.1% of the world’s population — has more companies listed on the NASDAQ than any country in the world save the United States and China. Frequently cited as one of the world’s most vibrant innovation hubs, Israel boasts more startups per capita than any other country in the world.
That’s the good news. The bad news is that Israeli startups are struggling to scale. Only a handful of so-called unicorns — companies that have achieved a valuation of over $1 billion in the last 10 years — come from Israel, and only one Israeli firm, Teva, ranks in the world’s 500 largest companies by market capitalization. As a result, tech-sector employment has declined as a percent of the workforce, from 11% in 2006–2008 to 9% in 2013. That’s disappointing for a country with so much potential. But is all of that changing? Are Israeli companies on the verge of developing a repeatable playbook to scale their companies and become market leaders, not just acquisition fodder for the Silicon Valley giants?
We think so.
Decades ago, the thesis of Yossi Vardi, a prolific technology entrepreneur who has invested in 75 Israeli startups, was that Israeli entrepreneurs should seek quick exit opportunities through global corporations interested in buying a window into Israeli talent and technology. Today, this thesis is less relevant. For the first time in history there are Israeli companies scaling up successfully as global market leaders, and the ecosystem is evolving to support them. Indeed, the pattern of scaling seems to be changing meaningfully in recent years. In 2014, for example, 18 IPOs raised a record-breaking $9.8 billion, compared to just $1.2 billion in 2013.
So how do Israeli ventures scale up? What are the challenges and lessons of scaling up? To answer these questions, we built a database of 112 Israeli companies founded between 1996 and 2013 that have met or exceeded $20 million in revenue. We selected this benchmark because it reflects the phase in which companies have proven product viability, achieved initial product/market fit, and are now expanding sales and growing more complex operations. We also interviewed over two dozen Israeli entrepreneurs and the investors from these companies — the leading thinkers in the region — to determine the playbook that these startups are executing in order to scale.
Here's what the data say about Israeli startups:
This evolving model is being supported and encouraged by the local Israeli VCs. According to Izhar Shay, a general partner at Canaan Partners, “The investment community has matured to recognize they need to plan for scale. They are seeking to build companies so that they are attractive to late-stage funds.” And the late-stage global funds are swarming in, from Accel to KKR to Li Kai-Shing’s Horizon Ventures.
This post outlines some of these patterns, seeks to characterize them, and draws out patterns in the data.
Despite hosting a rich startup ecosystem, Israel is simply too small a country for entrepreneurs seeking to build big companies. As a result, Israeli entrepreneurs need to begin immediately thinking outside of Israel since their primary market is often the U.S. The common approach is to incubate the business locally in Israel with a small development team, prove early product/market fit, and then build a sales and marketing organization abroad, usually in the U.S. In the old model of Israeli startups, many Israeli executive teams would hire a vice president of sales in the U.S. to assist with the local go-to-market approach. More recently, Israeli founders are themselves moving to the U.S. to build the satellite office and to personally oversee the recruitment and management of American executives who can lead the sales and marketing efforts.
However, waiting to move to the U.S. until the late-stage go-to-market phase may be too late. All of the risks inherent in launching a startup are exacerbated by the geographic distance between Israel and the U.S. Hiring talent and gathering customer feedback are even harder when teams are so physically far apart, and this separation can make it harder to build culture, forge partnerships, and raise capital.
So how early should the founders pack their bags and ship out to the U.S.? Our analysis and interviews suggest the prevailing wisdom has shifted toward a simple answer: as early as possible. Although the technical team often remains in Israel, many of the executives interviewed recommend departing for the U.S. as early as a year or two after founding. A move allows the business to get close to the customer, learn their pain points, and adapt accordingly. Understanding the market and establishing product/market fit is a critical seed-stage milestone.
When Udi Mokady and Alon Cohen launched CyberArk — the darling of the cybersecurity industry, with a market capitalization of nearly $2 billion — the founders abandoned the local strategy early on. “We began selling to local Israeli companies but had a strong feeling we were developing a product and go-to-market strategy that was missing the larger opportunity,” said Mokady. As soon as CyberArk raised Series A funding, they set up a U.S. headquarters, in Massachusetts, to immerse the team in the American market. “At the time, moving close to the market was not a given, and venture capitalists did not have a clear playbook. Nowadays the argument is very clear.”
Similarly, when Yaron Samid launched BillGuard, his team debated whether to build an enterprise or a consumer company. One-and-a-half years after founding the company, Yaron moved to New York and discovered that consumers, rather than banks, were the primary customer of BillGuard’s service, which helps customers identify fraudulent credit card charges. With the development team based in Israel, Samid shuttles between New York and Tel Aviv, where he shares weekly insights garnered from conversations with partners, consumers, and investors in the market. Viewing this as the typical challenge of running a global company, Samid believes there is no substitute for the learning that comes from being close to the market.
The second reason to move early is to hire the absolute best sales and marketing talent. Again and again, the most challenging issue we heard about from entrepreneurs and investors is finding and retaining exceptional talent, a problem exacerbated by geographical and cultural distance. According to Modi Rosen, general partner of Magma Ventures, “The challenge of scaling is primarily in hiring for the sales and marketing front. Having the founder [locally] present for this process can be the difference between success and failure.” Companies should strengthen the Israeli management team with local talent who understand how to define the market, how to sell into it, and how to gather feedback. Furthermore, companies need particular executives to serve as the primary liaison between the sales and marketing team in the U.S. and the development team in Israel. There are many Israeli professionals who have worked in the U.S. and have gained management experience at large organizations such as Google, Microsoft, and Amazon. There are also American executives who have experience working with startups with R&D in India, China, and Israel. Both cohorts can bridge cultural and geographical gaps.
In CyberArk’s case, Mokady admits the team faced major challenges in hiring talented and seasoned American executives. “We had a rough start,” he says. “As an unknown Israeli company breaking in to the U.S. market, we were not able to attract A-rated sales and marketing professionals. It took some time to gain momentum and learn how to attract local talent.”
One of the key lessons CyberArk learned is to partner with VCs in order to source top talent. Mokady believes that partnering with a Boston-based VC would have helped CyberArk address its talent problems more effectively because the VC would have vouched for the company. With that said, the founding team had big dreams of becoming a global company from the beginning. Although their investors were not local, CyberArk still benefitted by partnering with foreign VCs that helped them make the leap from Israel to the U.S.
This takeaway surprised us. After all, Israeli entrepreneurs are known to be tenacious and eager to tackle complex technological and entrepreneurial challenges. However, in our interviews with Israeli venture capitalists, we learned that around the board room, Israeli entrepreneurs tend to become overly preoccupied with the product and core technology. This fixation generates a short-term view on the potential of the venture to expand beyond the immediate product line. Of course, almost all entrepreneurs are preoccupied with near-term priorities, but our interviews uncovered a pattern of Israeli companies putting too much focus on the product at the expense of building a broad vision for growth, even after achieving product/market fit.
Scaling up begins with thinking about how you build a bigger story and a bigger vision once the company is expanding. Alan Feld, cofounder and managing partner of Vintage Partners, cautions Israeli entrepreneurs not to define their product category too narrowly. “The big idea is to think as a potential industry leader rather than a one-product company. Think of where you want to be in five years and begin building a product pipeline to get there.” For Netanel Oded, of Israel’s National Economic Council, the critique is more poignant: “In Israel, nobody is saying ‘I’m going to completely disrupt transportation.’ Israeli entrepreneurs are first and foremost focused on applying technology to create a business, not necessarily on disrupting big markets through the use of technology.” This subtle difference risks limiting the scope of the opportunities Israeli entrepreneurs are chasing.
Once startups begin to scale up, founders need to ask long-term strategic questions such as: How do I support growth in human capital? How do I strengthen my market position through acquisitions and innovation? How do I prove the unit economics to justify raising a growth round that will let me expand more rapidly? These are also questions that will concern late-stage investors who provide the companies the opportunities to scale and, eventually, go public.
Israeli entrepreneurs are becoming more focused on getting foreign (mostly American) VC partners in the early stages to help them pursue these opportunities from the onset. American VCs have a significantly wider network and have a capability to access management talent, data, partners, and customers to help a company scale. American VCs think about scale from the start, because their large fund sizes necessitate bigger returns. They spend more time on strategy, go-to-market, business development, and financing.
The data reveal how dramatically foreign investors impact the growth of Israeli companies, as measured by annual sales and number of employees. Israeli companies funded solely by foreign investors generated more growth than those funded by both Israeli and foreign VCs and significantly more growth than companies funded by Israeli investors alone. (One caveat: This may not point to causation, as some investors are better than others at picking rapidly-growing companies.)
But American VC partners might not always be the right choice, especially in the earliest stages. Many entrepreneurs and investors argue that Israeli VCs are more frugal and that this discipline is an important early attribute for startups. According to Ori Israely, investor and former general partner of Giza Venture Capital, “There is more fit between [an] Israeli entrepreneur and [an] Israeli investor in the seed stages. Israeli funds often know how to work better with the early stage companies because they provide efficient capital, not necessarily more capital.” Israeli VCs seek to invest relatively smaller amounts—not to squeeze out the entrepreneurs, but to help them be more efficient in the early stages.
The extra runway from an American VC can come with strings attached. Once entrepreneurs bring in an American VC that typically invests at higher valuations, there is greater pressure to hit bigger milestones, move to the U.S., and pursue larger outcomes. So the decision on when to bring on an American VC is an important and strategic one.
A decade ago, the traditional model for building up Israeli companies was to hire an American CEO. Our interviews and analysis suggest that this model failed. Today, companies reaching scale are run by Israeli founders and/or Israeli CEOs. Studying the liquidity events of Israeli firms valued over $150 million, Vintage Partners found that 81% were run by Israeli founders, while half of the remaining 19% were run by professional CEOs who were Israeli. In short, Israeli entrepreneurs are leading their companies to scale.
This conclusion is an interesting one. On one hand, Israelis need to continue to lead their companies to scale effectively. On the other hand, they need to attract foreign VCs to help them do so — typically by moving to the U.S. and recruiting a U.S.-based executive team.
So how can Israeli entrepreneurs effectively lead their organization to scale? Our interviews suggest Israeli founders have worked hard to mitigate the risks associated with a move to the U.S., developing techniques to effectively manage distributed teams and cut through cultural barriers:
Israeli entrepreneurs are influenced by the success stories of their past. From 1995–2010, the Israeli startup ecosystem was not focused on creating big companies. Things have changed dramatically in the past two decades. What was once the story of ICQ’s $287 million exit to AOL is now the story of MobileEye’s NYSE IPO and $12 billion market capitalization. Years from now, Waze’s $1 billion sale to Google may look like merely a solid outcome, rather than the canonical case study of Israeli entrepreneurship that it is today.
It is time for more Israeli entrepreneurs to swing for the fences. Building big companies means Israeli entrepreneurs should pack their bags and move to a large market early, partner with American VCs, continue to lead the company through the mid-to-late stages, and focus on building a culture.
In our data set, we found over 100 companies that have the potential to become unicorns and decacorns. We look forward to watching that list grow and evolve.
Many thanks to all those interviewed as well as Walter Frick for his help in editing.
I have been wanting to read Give and Take since the New York Times article a few years ago described the author, Wharton Professor Adam Grant, and his research on "givers", "takers" and "matchers". I finally got a chance to do so this last week while on vacation and was not disappointed. I'd rank the book up there with Drive and Thinking Fast and Slow as one of my favorite popular business books written by academics.
Grant's basic thesis is that being a giver - being motivated solely by your desire to give back, independent of a payback, without keeping score or expecting anything in return - can correlate with professional success. While this conclusion may seem surprising in the self-centered, materialistic, dog-eat-dog world that many think is emblematic of the business world (cue Elizabeth Warren), I thought Grant's conclusions reflected what I have seen as a somewhat recent cultural change in the world of entrepreneurship - a cultural change I am hoping will continue.
I have written in the past that there is a religion of entrepreneurship, with its shared beliefs and cultural mores. One of those shared beliefs that has emerged in recent years in Startup Land is to be a giver, not a taker. Recently, even venture capitalists are competing now on who is more entrepreneur friendly, who contributes more to the ecosystem (e.g., disseminating free knowledge and insights, launching diversity initiatives) and who can be most meaningfully "pay it forward".
Some VCs and entrepreneurs are clearly taking these actions out of pure self interest - in Grant's language, they are "matchers": they give with the expectation that they will get something in return. But many VCs and entrepreneurs that I work with day in day out have adjusted their behavior to becoming pure givers. Giving their time, their resources and their networks without expecting anything in return. And many of these "givers" are very successful professionals - building or investing in the best companies. Yesterday's news that one of these explars, Sundar Pichai, is becoming CEO of Google, one of the world's most powerful and valuable companies, is touch point in this trend.
Sure, "givers" in Startup Land have to make sure they're not being taken advantage of - they could spend 12 hours a day helping people and not getting their work done - but I like what I am seeing as "nice guys/gals" are emerging in our ecosystem that are not just nice, but also wildly successful. I suspect that this is one of the factors inspiring others to model this positive behavior.
There was an overwhelming torrent of news last week. The two Supreme Court decisions and the response to the tragic church shooting in South Carolina are among the most indelible events of our time and all three will be memorialized in history books and discussed for decades to come.
Last week, a CEO friend (Jen Medbery of Kickboard) asked me a series of great questions that I've been thinking about these last few days:
How do I address current events within my own company? Do I bring it up at all? How do I invite dialog with my employees? How are other companies talking about this, especially ones that struggle to build a diverse team, and certainly don't have [the appropriate training and] practice discussing very sensitive topics like prejudice and institutional racism?
In the wake of Ferguson, Baltimore, South Carolina, ground-breaking SCOTUS decisions and much more, I imagine she is not the only business leader struggling with these questions and so I thought I would share a few thoughts to address them.
Context: Facing History and Ourselves
Before addressing these questions, I have to provide a little context. In addition to my venture capital and teaching activities, I co-chair the board of trustees at Facing History and Ourselves, an educational non-profit that trains educators how to teach pivotal moments in history (e.g., the Holocaust, Civil Rights, Apartheid) and connect these histories to the lives of their students in order to improve civic discourse and create a more humane society. The organization provides teachers with valuable pedagogical resources, such as how to teach To Kill a Mockingbird and talk about the Little Rock Nine. They also have a blog that provides pointers on topics like how to talk about race with your kids. I took a Civil Rights history trip with my family last year using an itinerary that was modeled after a series of board trips that the organization has led. So, my advice to business leaders will draw on Facing History's nearly 40 years of work with teachers and adolescents.
Careful, Your Politics Are Showing
More than ever, business leaders are engaging in current events. They are natural leaders and role models and thus their opinions are sought after. I have been an advocate of this for years, particularly having innovation community leaders engage in civic work, and so have been thrilled to see business leaders take public stances and lead public discourse. Many CEOs do this by being active on Twitter and Facebook, playing the role of mini-celebrities or media personalities. Business leaders are cautiously engaging in this new role as they don't want to seem overly political and spark controversies, but when some current events - such as this week's - loom so large in the minds of their employees, business partners and customers, they naturally feel compelled to address them.
Business leaders see many of their colleagues who run the country's most admired companies take corporate action or make statements in response to current events. After the South Carolina shooting, Amazon, eBay and WalMart loudly announced they would stop selling the Confederate Flag. Shortly afterwards, Apple announced that they would ban all apps that contain the Confederate Flag. Tim Cook tweeted the following:
My thoughts are with the victim's families in SC.Let us honor their lives by eradicating racism & removing the symbols & words that feed it.
— Tim Cook (@tim_cook) June 21, 2015
When the Indiana state legislature passed the controversial Religious Freedom Restoration Act last March, there was an uproar in the business community. Some tech CEOs, such as SalesForce.com's Marc Benioff and Angie's List's Bill Oesterle spoke out publicly and declared that they would be reducing their investment in the state. Others communicated more privately to their employees. One of the CEOs I admire greatly, Kronos' Aron Ain, sent out an email to his entire 4200 person staff stating plainly,
We fully support freedom of religious beliefs. At the same time, Kronos will always treat every employee and every customer in a welcoming, respectful and understanding manner, regardless of where they come from, how they worship, or who they love.
Suggested Strategies to Approach the Issue
Tim Cook and Aron Ain run large companies with billions in sales, thousands of employees and high profiles. How should other business leaders, less heralded, approach these events, particularly (as Jen cited) issues of racism in a diverse workforce environment? I suggest using the following framework as a starting point, inspired by decades of research that Facing History has done to help teachers address these issues in the classroom (known as the "Scope and Sequence" framework). In effect, it puts the business leader in the role of teacher and educator - a natural role that they are finding themselves playing.
What I have found in my decades of work with Facing History is that people crave dialog on these topics. CEOs are making a mistake if they don't create a work environment that encourages it. And if they remain silent, they are sending a message that these topics are not important. Further, they are missing the opportunity to create community and loyalty, never mind speak out and provide leadership on matters that are important to them. In the end, the "leader" portion of "business leader" must receive equal weight and attention. Times like these require it.
There is a bias against solo founders in Startup Land. The conventional wisdom is that being an entrepreneur is so difficult that you shouldn't embark on it alone. Many of the top accelerators, like Techstars and Y Combinator, won't accept founding teams that have solo founders. Jessica Livingston, the lesser-known co-founder of Y Combinator, put it well in a Wall Street Journal article a few years ago:
“We believe being a single founder is one factor that makes it more difficult to succeed… [because] there is just so much to do at a startup. Also, the moral weight of starting a company can be very hard to bear alone.”
I was at an entrepreneur event the other night talking with a friend (Mark Lurie of Lofty) who is a solo founder. He coined a phrase that I love, and so will repeat here (with his permission), which is that having a co-founder to help get stuff done (the first part of Jessica's statement) is less important than her second point: having, in effect, an emotional co-founder.
The emotional co-founder may or may not be in the company - in fact it can be better if they're not - but they are the sounding board, therapist and support system that the founder needs to get through all the painful ups and downs.
The emotional co-founder can be a spouse, a classmate, a best friend, even an investor if there is a high degree of trust (usually established with one of the earliest investor - i.e., one of the leads behind the seed round or the Series A). One of my portfolio company founders lives with his co-founder and the two serve as very strong emotional co-founders for each other. Admittedly, that's a little extreme.
But if you find yourself a solo founder, don't despair. Just make sure you find an emotional co-founder to help you get through the roller coaster ride.
Our immigration reform system is broken. That isn't new news.
There is now a fix for high-skilled, immigration entrepreneurs that can be implemented TODAY with no legislation required. That is new news. And it has the potential to break through the political logjam.
Only 85,000 H1-B visas are normally issued each year to immigration entrepreneurs and high-skilled technology workers. This year, there were 233,000 applicants. Countless others don't bother applying and simply leave the country after collecting their MBAs and PhDs because the odds are so stacked against them.
With the Global EIR program, pioneered by Massachusetts and Colorado, a model has been developed for companies to partner with universities to allow entrepreneurs to become exempt from the stifling H1-B visa cap. Yesterday, the Massachusetts state legislature reaffirmed their support for the program, which was originally proposed by former Governor Deval Patrick and now has been endorsed by Governor Charlie Baker.
Today, my friend Brad Feld and I are announcing the Global EIR Coalition, a scrappy startup non-profit that will work across the country to help other states implement the program as well. We are going to "open source" our learnings from Massachusetts and Colorado in the coming months. Our hope is that by publishing the program's playbook, we can encourage other states to implement the program as well. Massachusetts and Colorado have been pioneers in such areas as health care reform, gay marriage and the legalization of marijuana. It is natural that these two states would lead the way in this important area as well. You can read Brad's post here.
If you're interested in joining the cause, let us know. We know of many states that are working on this. The formula is simple: pull together leaders from the business sector, a university and (ideally but not necessarily required) the local government. Add a good immigration lawyer into the mix and contact us. We'll help show you the way.
I participated on a panel at the First Growth Venture Network yesterday on product-market fit and customer acquisition. Lowenstein's Ed Zimmerman, our host, asked me to cram a semester's worth of content (related to my HBS class) in 10 minutes and below are the slides I pulled together:
Around this time of year, many students are focused on finding a job in Startup Land and building their careers. If you have your own idea and no one can talk you out of it, that's awesome. But for most undergraduates and graduate students, they have no idea how to get plugged in to the startup community. I gave some advice in my post, Seeking a Job in Startup Land, but I didn't give specific pointers to companies who I think are emerging winners and thus good places to begin your startup career.
For many years, I have been keeping an updated list of interesting, scaling start ups (private or recently public) to share with the students in my HBS class to point them in the direction of good, fast growing companies worth exploring. I recently learned that Andy Rachleff at Stanford does the same, although it is lighter on East Coast companies. Now that graduation season is coming, I thought I would "open source" and share my current list, organized by geography. Note that this is my own imperfect point of view with imperfect data (full disclosure: Flybridge portfolio companies are hyperlinked). Feedback welcome!
Boston:
There are a number of founder leadership models that can work well as a startup evolves. I have lived a few as an entrepreneur and worked with many as a board member. Getting the founder model right is critical because the founder is the soul of a company. If you can navigate a leadership model that keeps the founder involved and engaged in the business as it scales, it meaningfully improves your odds that startup magic will happen.
Putting aside the complexities of multiple founders (as I talked about in my post, The Other Founder), the founder leadership model tends to fall into a few buckets:
I have implemented each of these models in my portfolio. The right model varies based on the circumstances, obviously, and most importantly based on the makeup of the founder and what they are good at and what they love to do. Good founders realize early on that there is a Start Up Law of Comparative Advantage and that they need to quickly figure out what they are uniquely awesome at and hire the right complimentary team around them.
I find the old school model of shoving the founder aside happens only in rare situations. More typically, early investors focus on employing one of these three models to keep the founder(s) close to the business and put the right team in place around them to allow the company to successfully evolve and grow.
Conventional wisdom suggests that the most important metrics for a startup - such as unit economics, cost of acquisition, lifetime value, churn rates - typically get better with time. I hear this asserted frequently by entrepreneurs who confidently project their businesses with increasingly improving metrics as they scale into the future.
The topic of scaling startups is one that I enjoy thinking, living and writing about (most recently, Scaling the Chasm). In the class I teach at Harvard Business School, the first module of the course is dedicated to examining startups when they are pre-product market and struggling to find product-market fit while the second module is dedicated to what the challenges of scale post product-market fit.
One of the themes I explore in the class is the tough reality that many metrics can actually get worse over time for a startup. Take growth rate as a simple one. The law of large numbers suggests it is easier to double in size when you are doing $1 million in revenue as compared to when you are doing $10 million, never mind $100 million. Thus, more mature companies naturally have slower growth rates than younger ones. Here are a few other key metrics that are hard to scale:
Customer acquisition. Most of the marketing techniques that look good in the early days cannot be scaled 10x, never mind 100x. For example, PR doesn’t scale. It seems like such an amazingly efficient source of customers, yet ask any marketing communications or PR professional to acquire 10x the number of customers that they did last year and they’ll look at you as if you have 10 heads. Search engine marketing (SEM) and app store optimization (ASO) exploit arbitrage opportunities in keywords and placement, but those arbitrage opportunities are effective only for a moment in time and for a certain level of spend. When you spend more, you risk losing that edge. Similarly, if you try to scale email too much, you quickly risk fatiguing your list and spending money acquiring less valuable customers when compared to your core segment.
Customer acquisition is like drilling for oil. A particularly successful tactic allows you to find a gusher, which you can take advantage of for a while, but eventually the well dries out and you have to find another well. One of my CEOs pointed out to me at a board meeting last week:
“Our average customer acquisition cost (CAC) is irrelevant for the future. It is the marginal CAC that matters the most – that is, what does it cost to acquire the next incremental set of customers?”
Word of mouth, referrals, virality – these are all amazingly powerful customer acquisition techniques that hold the promise of scale, but they require you to have a great product, not just a great marketing plan, and a product that is elegantly design for virality.
Churn rates are another metric that can get harder with scale. When you expand your market, the next market segment may not be as perfect a “bullseye” market fit as the early segments and early customers. Even as the product matures, the customers that are recently acquired that represent newer segments can be less dedicated. A new battle for product-market fit must be waged – something that never ends - particularly as you expand into new customer segments and verticals.
Monetization can get harder with scale as well. Monetizing the initial user base – who is your most dedicated and often organically acquired – is easier than the more marginal users who you are spending incrementally more money to acquire from indirect channels that may not produce as loyal customers as the initial channels. Even a company as amazing and well run as TripAdvisor (who I once claimed had a better business model than anyone outside the mob) has seen average revenue per user (ARPU) decline over the years, from $14.10 in 2009 to $11.80 in 2012. During that period of time, their monthly uniques grew over 2.5x, from 25m to 65m. More recently, with the shift to mobile and the growth in emerging markets, this ARPU decline has become even more dramatic as mobile visitors and international visitors monetize at a lower rate than their earlier segments of online, US visitors.
The trick to keeping your metrics steady during growth, if not improving over time, is to find a series of techniques and keep improving on them as you go. That’s why so many great entrepreneurs obsess over the details of landing page wording, button placement and color on a page, creative copy, etc. They know that being able to scale 10x from where they are has no silver bullet, but rather a series of tactics that need to be executed against. And they recognize that often times, as you are scaling 10x and 100x, your metrics may erode on the margin.
If your core metrics only erode 10-20% while you are scaling fast, like TripAdvisor’s ARPU, you are in pretty good shape. If they erode 50-75%, you are in deep trouble. Just remember, don’t project to investors that every metric is going to get better over time. Otherwise, you will be dismissed as naïve, out of touch, overly optimistic, insane or all of the above. Never a good combination.
One of my favorite business books of all time is Crossing the Chasm by Geoffrey Moore. It is a classic. My boss and mentor from Open Market, Gary Eichhorn, made the entire management team read it in the 1990s to hammer home its important lessons as we stumbled through the chasm on our way to scaling from zero to nearly $100 million in revenue in a few years.
I have been thinking about the challenges of crossing the chasm - that is, taking a cutting-edge product and selling it successfully to the mainstream, not just early adopters who are more tolerant of less complete solutions - and the challenges of scaling in general as many of my portfolio companies are dealing with these issues. A few years ago, I wrote a few case studies on how some big players achieved scale - like Akamai, TripAdvisor and athenahealth - to help crystalize my thinking on the topic, but I thought it might be appropriate to write a more general blog post on the challenges that companies face at different points in the scaling process.
Scaling up is becoming a hot topic lately, from non-profit Endeavor and the World Economic Forum focusing attention on the importance of scaling up companies in the Global Scale Up Declaration to The Economist pointing out that Israel's miraculous start up economy is seeking to transition from "Start Up" to "Scale Up". I coined 2014 as the Year of Results, where the lofty promises would finally translate into real, tangible outcomes (and it was for us). 2015 may be the year of the Scale Up.
Dealing with scale up challenges is particularly important to me because of our firm's investment strategy. We pride ourselves on being lifecycle investors, which means we invest very early on (typically at the seed or Series A stage) and then stick with a company through exit. Some VCs prefer investing at the earliest stages and then cycle off the board of directors. Others prefer to come in at the later stages, post product-market fit, and not have to deal with the risk and roller coaster of the early stages. Gluttons for punishment, we prefer to start early, take the risk and stick around through the end. As a result, I get to work with companies both during the search for product market fit and after they hit product market fit, and race headlong into the chasm.
For quick context, I sit on the board of eleven Flybridge portfolio companies and am an observer on two. Each of us typically makes one or two new investments per year (I made one new investment in 2014). With that rhythm, if things are going according to plan, I should have a spread of companies across a wide range of scaling stages, as measured by annual revenue.
If I plot my portfolio companies across a few broad revenue buckets, looking at 2014 figures, below is a chart. They spread fairly evenly, although slightly more in the earlier stages as few companies achieve the kind of success that $> 50m in revenue entails.
At each stage, there are different problems. Here are the patterns of issues I typically see at each stage - maybe you will recognize a few of them in your own companies:
$0-1 million
$1-10 million
$10-50 million
$50-100 million
>$100 million
One of the things I've learned from my two decades in startup land is that it doesn't get any easier as you scale - the problems just evolve, but there are still problems. And opportunities. But I guess that is what makes the startup game so fun.
One of my favorite childhood books was SE Hinton's The Outsiders. For whatever reason, I always related to this tough group of teenagers who felt like societal outcasts just because they were born on the wrong side of town.
I was reminded of the book the other day when attending the Unconference. The Unconference is a Boston-based technology conference put on by the MassTLC that has no agenda. Instead, the agenda is created dynamically the day of the conference by the attendees. Sessions are created on the fly, led by whoever wants to lead a session.
At many conferences, there is a sense of "insiders" and "outsiders". Insiders have attended the conference in past years, speak on panels, walk around with great confidence and poise because they "know everyone" and are sought after during the course of the conference. They are the popular kids at the conference. Outsiders come to the conference knowing no one else, are often lingering awkwardly on the periphery during networking time and struggle to gracefully secure air time with the very people they came to the conference to meet.
The Uncoference tries to break this paradigm with a more dynamic sesssion format alongside structured one on one sessions between well-known insiders with eager outsiders. I try to sign up for these one on ones every year, which are essentially an extension of the offce hours concept that many VCs (including Flybridge) have been championing as a way to provide more accessibility and transparency between insiders and outsiders. A few years ago, I was matched with a very tall, eager entrepreneur who shared with me his passion for private coaches for sports. His name was Jordan Fliegel and, although his 6 foot 7 inches frame stood out amongst the crowd of nerds and middle aged investors, he was an anonymous outsider that day.
Since then, Jordan's company, CoachUp, has secured venture capital funding from a local big name firm (General Catalyst) and grown into a local success story. In a few short years, Jordan has become the definition of an insider - he's now one of the best known figures at any conference and has even started an angel fund, Bridge Boys, with one of his childhood friends.
A few years ago, I met a student during office hours at HBS, who was embarking on a new company. He was new to Boston, having grown up in Iowa, attended Brown and then worked in Chicago. I was with him at a lunch at a conference and, sensing his discomfort as an outsider, started to introduce him around - endorsing him with the insiders around me, like reporter Scott Kirsner and serial entrepreneur Walt Doyle. Before long, Brent Grinna (CEO/founder of EverTrue), blossomed into one of the local innovation community's strongest leaders and insiders, sought after as a mentor by others for his success with the company (backed by big time, insider firm Bain Capital) and within the community. Brent reminded me of this story with this recent tweet.
Francis Ford Coppola turned SE Hinton's book into a move, released in 1983. The movie starred a slew of young Hollywood outsiders - a remarkable number of whom became the ultimate Hollywood insiders, including Tom Cruise, Rob Lowe, Patrick Swayze, Emilio Estevez and Ralph Macchio. That's the magic of a dyanmic, entrepreneurial environment - today's outsiders can become tomorrow's insiders. That's why immigrants, students and other outsiders are such valuable members of the entrepreneurial ecosystem - and why we should be doing everything we can to encourage and support them.
Becoming an entrepreneur is illogical. If you were to calculate the expected value (i.e., the probability-weighted average of all possible outcomes) of being an entrepreneur as compared to living the safe life of a traditional executive, it wouldn't even be close. On a purely rational, probablistic basis, the math for entrepreneurship doesn't add up.
Despite this, entrepreneurship is on the rise. For those of us who live in that world, we know that entrepreneurship is about passion more than rational thinking. It inspires those who are crazy enough to believe that they can change beat the odds and succeed in changing the world, or at least their little corner of it.
That's why I love Linda Rottenberg's new book, Crazy is a Compliment. First, I should admit a bias. I deeply admire Linda and her non-profit organization dedicated to global entrepreneurship, Endeavor. We first met in college when we volunteered together in an inner-city high school in Roxbury. Although I don't get to see her as often as I would like, I've had such respect for Endeavor that I decided to donate the proceeds from my book to it. Thus, I was positively inclined when I cracked open the binder.
But I still loved it. It gives entrepreneurs a roadmap, plenty of fun war stories and (in typical Linda fashion) a very human angle. For example, perhaps the most powerful part of the book is when she shares how her husband's bone cancer diagnosis forced her to be more vulnerable at work and let go of her perfectionist zeal. She even dedicates a section of the book - "Go Home" - to addressing the importance of trying to "Go Big AND Go Home", i.e., pursue an ambitious career with passion AND at the same time live a balanced life (charmingly, she writes this section directly to her daughters - as if the reader is a bystander in the dialog).
Here were a few of my other favorite sections/lessons:
The book is chock-full of funny, engaging stories and case studies as well - some familiar, but most unfamiliar and not your typical entrepreneur yarns (e.g., I never knew the story behind Maidenform Brands).
If you're looking for a good read this fall, I highly recommend it.
Last week's successful IPO of e-commerce giant Wayfair (market cap $3B) and this week's impending IPO of Hubspot (if it prices in the range, market cap $600m) has many in the Boston tech community celebrating. They are not alone. 2013 was the best year for IPOs since the tech bubble of the 90s and 2014 looks to wrap up even stronger this quarter.
I was an executive at a hot IPO company during the last big tech boom (NASDAQ: OMKT) and, like many who lived through that cycle, I gleaned a few important lessons. After the IPO party is over (and we had a great IPO party) and the euphoria wears off, you actually have to run a company and live up to the big expectations that you have just publicly set. Your venture capital investors and many early employees head for the door and you are left holding the bag. Here are a few things I learned after my 16 quarters as an executive post-IPO:
1) The Mission Continues. On average, it takes 8-10 years for a start-up to go public. After a lot of ups and downs, twists and turns, it feels like a massive victory (aka "Mission Accomplished", as George Bush famously declared regarding Iraq in 2003). By that time, your team will be exhausted. Naturally, a huge let-down ensues, particularly after the first hiccup - and there will always be a hiccup: a missed quarter, a departing executive or major customer, something. Recruiters and venture capitalists salivate over picking off executives at recently public companies with the siren song of "don't you want to do that again?". If the stock price flags, all the better. Executive teams need to focus their staff post-IPO on a new mission. Be clear that the end goal was never an IPO - that is merely a financing event, a means to an end. The end goal is industry transformation, customer satisfaction, etc. Find that new mission - and make sure you get your team behind it. Give them more stock options, more incentives and more inspiration to go at it hard for another 8-10 years.
2) Don't Let The Turkeys Get You Down. When Ronald Reagan left office, he provided a final note with words of wisdom for incoming president Geroge HW Bush: "Don't let the turkeys get you down." And, believe me, when you're a newly public company executive, there are a lot of turkeys out there. Not only is there a risk that your company mood ebbs and flows with the daily stock price (your stock is down 10% thanks to Vladimir Putin - deal with it), but you are suddenly publicly castigated for every move. Investing an extra $1m in R&D in order to accelerate your game-changing new product? Pre-IPO, your board would have applauded. Post-IPO, you will get hammered. And if any insiders dare to divest of their shares, even in programmed trading batches, it will kill you. I remember delivering a (compelling, I thought) company presentation at a Goldman Sachs conference and, afterwards, the first question was, "Mr Bussgang. If your company is so great and the future so bright, why is your CEO selling stock?" Many Wall Street analysts are total turkeys. They build their reputation by tearing yours down. Be tenacious and true to your strategy and prepare your team to ignore the noise. Gail Goodman is one of the most tenacious, skilled public company CEOs I know. Many analysts hammered Constant Contact shortly after the IPO, complaining about churn rates and missing the social marketing window. The stock waxed and waned and Gail just kept executing. A few years later, the stock has nearly tripled these last two years and the market cap is near $1 billion. Watch her public presentations over the years and you'll see Gail kept telling the same story - making small improvements every quarter and showing the turkeys the value of the business. Care.com CEO Sheila Marcelo is in the midst of a similar situation. Her stock is down 3x from its post-IPO high with a market cap of a paltry $250 million. I'm rooting for her to prove the turkeys wrong, just like Gail did, but it requires a tremendous amount of patience and tenacity.
3) Wall Street Is Annoying...But Sometimes Right. OK, I know this sounds like a contradiction to point 2, but it's the unfortunate truth. Wall Street analysts and hedge fund managers can be annoying, short-term minded turkeys, but they're smart and often right. Carl Ichan's recent battle with eBay/PayPal is a great example. The trick is to ignore the noise, but don't walk around with an arrogant attitude that you are always right and the critics are always wrong because they just "don't get it." Make sure you listen carefully to the smart Wall Street analysts and incorporate their feedback where appropriate. Make sure you have board members who make you a little uncomfortable because they hold you accountable. The cozy days of the VC-led board where everyone is trying to blow smoke and get you to help them with their next fund is over. Wall Street doesn't care about a long-term relationship. They demand results. And sometimes their cool, analytical distance can be very valuable. It can be painful and distracting, but sometimes very enlightening and helpful.
Ben Horowitz's book, the Hard Thing About Hard Things, is one of my favorite business books of the year. The best parts, in my opinion, describe Ben's struggles as a public company CEO trying to refocus and motivate his team, make hard pivots and hard decisions, while dealing with internal and external challenges. His case study is precious, because in my experience it plays out again and again and Ben's candor and authenticity allow us to peer into the raw emotions and feelings of riding through those ups and downs. Executives of these newly public companies should take heed. Linger on the champagne for a moment, but then quickly clean up and get everyone focused on what's next.
After the IPO bell has rung is when the hard work really begins.
Every September, I give a presentation at Harvard's i-Lab to provide a guide to the Boston start-up scene. Students from around the world descend on Boston every fall to attend the amazing universities, but often fail to venture outside the ivory tower and explore the local start-up scene. This guide is an attempt to inspire students to do just that. This year, I added a number of updates and resources. Enjoy!
According to Webster’s Dictionary, the word “programmatic” was first used in the late 19th century. Despite its long tenure in our lexicon, the word was an obscure one until recently. If you aren’t familiar with it yet, if it hasn’t permeated your corner of the business universe, just wait. Programmatic thinking might soon join the pantheon of 21st century buzz words, alongside big data and cloud.
The current industry being transformed by programmatic thinking is the advertising industry. A few years ago, software entrepreneurs began to realize that as advertising started to go digital, there was an opportunity to apply algorithms to media buying decisions. Instead of having a 27 year old neophyte designing your media plan over a three martini lunch, have the world’s most powerful machines do it for you “auto-magically”, leveraging all your best data – and streams of other’s best data – to inform the decisions. And the best part? The machines learn how to make better and better decisions with every purchase.
The speed with which programmatic advertising has taken over the industry has been breath-taking. From nowhere a few years ago, $12 billion of advertising was purchased programmatically in 2013 and the forecast for 2017 is $33 billion (Magna Global report). 86% of advertising executives and 76% of brand marketers are using programmatic techniques to buy ads and 90% of them indicate they intend to increase their usage by half in the next 6 months (AOL survey). Companies like AppNexus, DataXu (a Flybridge portfolio company), MediaMath, RocketFuel and Turn are among the leaders in the field.
The next industry to be transformed by programmatic thinking is financial services. Decisions to underwrite loans have historically been based on a few simple data points such as the lender’s zip code, credit score and job history. With the application of big data techniques and sophisticated machine learning algorithms, underwriting decisions are becoming programmatic. For example, Flybridge portfolio company ZestFinance evaluates thousands of data points in credit applications (even trivial ones, such as whether the applicant uses capitalization properly) to make loan underwriting decisions programmatically. Like other programmatic-based businesses, ZestFinance sees a powerful network effect: the more data they inhale and the more decisions they make, the smarter their decisioning algorithms become.
What other industries might see programmatic thinking ripple through? Once I put the programmatic lenses on, I can see dozens of industries being affected. Just think about all the decisions consumers and businesses make, and whether programmatic thinking could automate and enhance those decisions. For example:
Some might object that all this automation and machine learning designed to replace human judgment is going to be bad for society - making humans less relevant and eliminating jobs. But in fact, many researchers believe the advent of machine learning will generate new kinds of jobs - where a hybrid of automation and common sense is applied. MIT's David Autor presented a paper a few weeks ago that argued:
Many of the middle-skill jobs that persist in the future will combine routine technical tasks with the set of non-routine tasks in which workers hold comparative advantage — interpersonal interaction, flexibility, adaptability and problem-solving.”
So don't be afraid to put those programmatic glasses on. I think they're pretty rose-colored.
In 1998, Yom Kippur fell on September 30th. For most of the Jewish community, the date of the most important holiday of the year was no different than in other years. For me and my Jewish CEO boss, though, as officers of a public software company, September 30 was a tough day to be out of the office, sitting in synagogue atoning for a year full of sins. It was the last day of the third quarter of the year and we had more deals we needed to close to finish the quarter strong and report numbers to Wall Street that justified our high-flying profile as a recently public Internet commerce software company. By sundown September 29th, when we left the office for the onset of the holiday's traditions and presumably focused on higher order matters, we had not yet made the quarter. Going offline without knowing our fate resulted in one of the most miserable 24 hours in synagogue I can remember (and I am somone who usually enjoys being in synagogue!).
When my CEO and I got back online after sundown September 30th, it became evident that the final handful of deals that we needed to close to make the quarter had slipped out. A few weeks later, we "pre-announced" that we were going to miss the quarter - one of the worst speeches I ever remember being a part of. Our stock naturally plummeted.
We were victims of a lot of problems, many of our own doing, and I can hardly blame Yom Kippur and the holiday's inopportune timing on our missing the quarter. But many years later, I began to appreciate that one of our core flaws was our business model.
We priced our enterprise software in the form of a perpetual license. As a result, the full revenue for each deal was recognized in that quarter as soon as the software was shipped. This allowed our revenue to skyrocket from $1.8 million to $22.5 million in one year, the year we went public at a billion dollar valuation (ok, it was 1996; everyone went public in 1996 with a billion dollar valuation), and then $61 million the following year. But the downside to our business model was that we did not have hardly any recurring revenue.
I later came to realize that recurring revenue is magic.
Since my harrowing experience, I have become a zealot about recurring revenue. When I discuss business models with entrepreneurs and investors, there is a varying appreciation for why recurring revenue is so special. Recurring revenue business models are not a little bit better than non-recurring models. They are 10x better. At Flybridge, we have added "business model", with a particularly weighting towards recurring models with high gross margins, as one of the important evaluation criteria when we make investment decisions alongside market and team, which are the two canonical criteria for all venture capital firms.
Before explaining why they are so magical, let me define a few types of recurring revenue models. Many jump to the assumption that SaaS (software as a service) is the only recurring revenue model, but there are actually a few you can choose from when designing your business model:
Here's why recurring revenue is so magical:
To be clear, recurring revenue models are not perfect. It is harder to ramp to 10x year over year growth. You do get plenty of lumpiness in bookings of new business, which translates into higher or slower growth rates over time, depending on performance.
But despite these downsides, it is clear to me why there is such magic in recurring revenue models. It looks like Yom Kippur once again falls on the last day of the quarter in 2017. With the majority of my portfolio companies having recurring revenue business models, I am not going to sweat it.
My friend, Ed Zimmerman, wrote a terrific post for his WSJ blog - "Help Me Help You" - on soliciting him (and others like him) for investor introductions.
I wanted to add to Ed's post and observe that not all introductions are created equal. The source of the introduction matters a lot. As a result, when the introduction comes in to the investor, judgment is applied based on the source. Most investors apply a simple ranking algorithm against introductions which determines how they react to them in terms of prioritizing their time and the seriousness with which they approach the opportunity. Here’s how it works in my experience:
Entrepreneurs in their personal portfolio. VC investors may have 8-12 actives investments at any time. Each of those portfolio companies may have 6-8 executives that are senior enough to have board visibility. These 50-100 executive represent the next rung in the ranking ladder. Active angels might have twice this number. Investors will take these introductions seriously, although may be more judicious depending on what they think of the executive making the introduction, how their company is performing and what their assessment is of the opportunity (all factors in the ranking algorithm).
Entrepreneurs they respect. Generally, accomplished entrepreneurs are like soothsayers - if they're a part of a successful company, then it is assumed that they have great insight into how to build other successful companies. Thus, if an entrepreneur I respect sends me something, I always take a close look.
Service providers they respect (lawyers, bankers, accountants, headhunters). Some service providers have very close relationships with investors and when an introduction is made, a rapid response and close look is taken. Other service providers claim to have close investor relationships, but in truth merely are "friendly" with some VCs who may not think much of their investment judgment and sourcing suggestions. Be careful with this category. It can be gold (e.g., one of our best deals came from an introduction from a banker whom we respect greatly) and others are disregarded (e.g., the random investment banker / broker semi-cold emails).
Cold emails / LinkedIn messages. Seriously? This is the worst way to approach an investor. In today's transparent, super-connected era, if you can't find a way to get to an investor through one of the methods above, you have failed a basic test. This will result in a low ranking, for sure.
Other investors who are not investing. After turning down an opportunity, I sometimes hear back from an entrepreneur a request to make an introduction to another investor. Here's why that's a bad idea. Imagine the conversation...VC1 to VC2: "Can I intro you to this great entrepreneur raising money?"
VC2 to VC1: "Sure! Are you investing?"
VC1 to VC2: "No."
VC2 to VC1: "Oh. Well have you worked with the entrepreneur before in another setting?"
VC1 to VC2: "No."
VC2 to VC1: "Well if it's not good enough for you to invest and you've never worked with the entrepreneur, why should I bother spending time with them?"
I'm sure there are plenty of other permutations of the ranking algorithm, but you get the picture. Think carefully not only about how you approach the introduction (as Ed recommends) but who you approach to affect it.
It is graduation season at colleges and universities around the world. This time of year brings stirring commencement speeches from famous (and sometimes controversial) leaders and thoughtful reflections from students on the considerable time and money they spent in academia.
Two of our students at Harvard Business School wrote a beautiful blog post, with some great visual data, about what they did NOT learn at Harvard that I thought was worth sharing. The post was written by Ben Faw (a West Point and Ranger School Graduate who worked at Tesla and LinkedIn) and Momchil Filev (a Stanford graduate who worked at Google and was a student in my class at HBS).
While there are many things that we learned during our two years at Harvard Business School, here are a few that we did NOT learn.
The only way to make an impact is to go to Wall Street.
As you can see from the interactive chart below, more HBS MBA graduates are heading out to the West Coast, taking positions in product management, marketing, sales, and general management. In a dramatic shift versus a decade ago, technology jobs are just as sought as roles in finance. MBA’s are proving that they can make a difference as leaders in many different industries and fields. Classes, such as Launching Technology Ventures and Product Management 101, are encouraging this trend - preparing students for these jobs.
Money matters more than people.
Prior to attending business school, we were warned that HBS was filled with people willing to do anything to make inordinate amounts of money and that it is not the place to meet or build true friendships. Having kept an open mind, we will graduate from Harvard Business School in a few days with many authentic relationships that have already been incredibly rewarding and made us a better version of ourselves. These amazing bonds are priceless and define our experience here, helping us learn that people matter far more than money.
Experiences are expendable.
The MBA critic will say that most of what you learn in the class can be obtained more cheaply and more effectively by buying the books, studying on your own, and watching classes online. In reality, no case study, framework, or amazing guest speaker can match the experience of learning from your peers, both inside and outside of the classroom. You can learn material many ways, but the most meaningful learning opportunities require in-person experiences and shared time together. The full-time in-class HBS MBA experience provides both.
More is better.
HBS teaches us that we can’t have everything. From day one, we are inundated with endless mixers, social gatherings, and recruiting events. We are also exposed to hundreds of classmates who each have an incredible story to tell and would be incredible additions to our network. However, we can’t pretend to really get to know them all, just like we can’t prepare well for every single interview. We have to make tough decisions. We have to invest - fully and deeply - in the few people and things that make us the happiest. Only then can we make a truly meaningful impact as future business leaders.
Seeking out and receiving feedback is a waste.
No one is perfect, regardless of how impressive their resume. Everyone can improve if they put effort in and use their friends and peers in the process. After a semester of cases and guest lectures one theme became clear: success post business school depends less on your IQ and more on your ability to work with others. Can you motivate a team and accomplish a common task that is impossible to achieve alone? We would say no if you cannot accept and give the honest feedback that allows a team to function at an optimal level. As uncomfortable as it is to give and receive feedback, the MBA class contains people who have a vested interest in your success and want to see you “Be all that you can be”. Seeking out these people and letting them play a direct role in your development creates the potential for amazing growth.
Learning stops when class ends.
While the classroom was incredibly valuable to my development and education (both here and as an undergrad), we found our experience outside the classroom to be equally, if not more, valuable. Ranging from debates over equity investments, deep conversations on business models, or discussions around how to create a sustainable competitive advantage, outside the classroom learning never stopped. Our interactions with professors, peers, and mentors beyond the teaching halls contributed the most to our personal and professional growth.
Try everything.
Focus on your strategy, on your goals, and on what you are uniquely good at and love. The rest is noise. If you are terrible at modeling financials or hate using Excel, learn the basic competency, and then follow your passions. There will be something that makes your eyes sparkle and your face light up. Find out what that is - you have two years to do just that - and then run after it without looking back.
A special thanks to Harvard Business School for making entrepreneurship and technology a key focus for the school in the last few years. Classes such as Launching Technology Ventures and the incredible resources of the Rock Center for Entrepreneurship and the Harvard Innovation Lab have made the MBA experience incredibly fulfilling, and we are incredibly grateful for having the opportunity to take advantage of them during our time here.
To Ajmal Sheikh, Heidi Kim, Julia Yoo and Walter Haas: You have each been wonderful co-authors and co-editors in this writing process and more importantly dear friends, thanks for making an idea become reality. To the Professors, staff, and faculty of Harvard Business School, thanks for making this an experience unlike any other – one chapter ends, the pages turn, and another begins!
The trade association for the venture capital industry, the NVCA, gathered yesterday in San Francisco to talk about the state of the industry and some of the key policy issues we are facing. The short list is an obvious one for anyone who has been reading the news lately: Net Neutrality, Immigration Reform and Patent Reform are all hot topics in our industry. More inward-looking topics like the rise of corporate VC and new emerging managers also were batted about.
But one panel stood out for me yesterday, and not just because I was on it: "Women in VC". Maria Cirino of 406 Ventures led a discussion regarding the stubborn reality of the massive, pernicious gender gap that exists in our industry. Because the numbers are so stunningly bad - Dan Primack did some analysis a few months ago that showed that only 4% of all senior VC partners are women and NVCA statistics show that 11% of all VC professionals are women - I wanted to spend some time sharing the observations and discussions that came out of the panel in the hopes that it will spur further discussion in the community.
The panel was an awesome group led by Maria and included Kate Mitchell of Scale Ventures, Diana Frazier of FLAG, author Vivek Wadhwa and Veracode CEO Bob Brennan. I don't know exactly why I was on the panel, to be honest, but it probably had something to do with a blog post I wrote four years ago titled "The VC Gender Gap: Are VCs Sexist"? It may also be that at Flybridge, after founding the firm with all men, we have hired a majority of women (5 out of 9 investment professional team members). That said, the four general partners are still men - more on that shortly.
Wadhwa kicked things off with a recitation of some research in the area. Specifically:
With the data on the table, the real discussion began. Everyone agreed there is a pervasive bias in the industry. Not everyone agreed what to do about it. A few observations were interesting to me:
As with any hard problem, there is no silver bullet. But asking hard questions is what VCs are supposed to be good at, and this is an area where some really hard questions need to be asked. More to come, I hope.
